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Omicron Variant May Not Fuel Inflation as Some Federal Reserve Officials Expect

Good day. Just as it seemed that supply chains were getting a little relief, along comes the Omicron variant to worry Federal Reserve officials. But while they are concerned the variant might lead to a new round of supply-chain disruptions that push prices even higher, something else could be in store for the U.S. economy. Further afield, the Reserve Bank of Australia left its official cash rate steady at 0.10% at its monthly policy meeting earlier today, indicating it will be some time before the required conditions for an increase will be in place and addressing concerns about the Omicron variant of the Covid-19 virus.

Now on to today's news and analysis.

Top News

Omicron Will Cause Problems, But Inflation May Not Be One

Federal Reserve policy makers worry that the Omicron variant could exacerbate companies' supply-chain and hiring problems, pushing up prices as a result. The actual outcome could be different, Justin Lahart writes. Omicron could make people less willing to spend than they were during earlier Covid-19 waves. Demand for big-ticket items, in particular, such as cars, appliances and furniture -- some of the biggest contributors to the rise in inflation -- could soften.

RBA Says Omicron Won't Derail Economic Recovery

In reassessing its quantitative easing program, the Reserve Bank of Australia will consider the actions of other central banks; how the Australian bond market is functioning; and progress toward full employment and inflation consistent with its target, writes James Glynn.

U.S. Economy

Junk-Bond Investors Fear Bumpy 2022 After November Slump

Want to know how a jump in interest rates next year could hit markets in unexpected ways? Look at the recent selloff in junk bonds, writes The Wall Street Journal's Matt Wirz. The downturn began in early November when new inflation data stoked fears of interest-rate increases, then accelerated when the Omicron coronavirus variant shook stock markets. While prices of the below-investment-grade corporate bonds stabilized last week, investors continued to pull cash from funds that buy the debt.

Key Developments Around the World

China Increasingly Obscures True State of Its Economy to Outsiders

China's Communist Party has long maintained tight control over information, and the effort has intensified under leader Xi Jinping. The country has become increasingly opaque over the past year, even as its presence on the world stage grows.

Tax Revenues Held Up Even as Economies Crashed During Pandemic

Government tax revenues rose in rich countries as a share of economic output in 2020, as job losses were concentrated in low-wage employment and high-income jobs were hit less hard, underlining the novel nature of the contraction with the first Covid-19 surge.

Europe Tops China in Spawning $1 Billion Tech Startups

Europe has overtaken China in creating billion-dollar tech startups, according to a new analysis that points to Europe's rising status in the field and the effect of Beijing's crackdown on capitalist entrepreneurialism.

Financial Regulation Roundup

Stacey Cunningham, First Female NYSE President, to Step Down

New York Stock Exchange President Stacey Cunningham will leave her job at the end of the year, the NYSE's parent company said Monday. She is being succeeded by Lynn Martin, an executive at NYSE parent Intercontinental Exchange Inc., known as ICE.

Biden Administration Unveils Plans to Fight Corruption

The Biden administration on Monday unveiled steps to combat corruption globally, including assistance to foreign governments to increase financial transparency and new regulations on U.S. real-estate purchases to prevent money laundering.

Forward Guidance

Tuesday (all times ET)

8:30 a.m.: U.S. Commerce Department releases October international trade data

3 p.m.: Federal Reserve releases October U.S. consumer-credit data

Wednesday

Time N/A: National Bank of Poland releases policy statement; Central Bank of Brazil releases policy statement

3:15 a.m.: European Central Bank's Lagarde gives prerecorded address at European Systemic Risk Board conference

3:30 a.m.: European Central Bank's de Guindos gives speech at Banking Forum and Fintech Expo

6:30 a.m.: European Central Bank's de Guindos speaks on panel at European Systemic Risk Board conference

8:10 a.m.: European Central Bank's Enria, Schnabel speak on panel at European Systemic Risk Board conference

10 a.m.: U.S. Labor Department releases October Job Openings and Labor Turnover Survey

Research

Reverse Repo Use Still Hot Despite Money Market Rate Uptick

A rise in key money market rates hasn't been enough to pry cash out of the Federal Reserve's reverse repo facility, says Scott Skyrm, who leads short-term market trading firm Curvature Securities. Mr. Skyrm notes that money market rates now match or exceed the 0.05% money managers and banks get paid to park cash at the Fed, but that isn't drawing money out of the reverse repo facility. It pulled in $1.5 trillion on Monday, about as much as it has attracted in recent days. "Maybe that means [general collateral] rates need to get to .08% or .09% before significant [reverse repo] cash comes back into the market," he writes in a note to clients, adding that "as more [reverse repo] cash comes into the market, it puts downward pressure on rates. That means, when rates start moving higher, [reverse repo] cash will act like an anchor, keeping repo rates lower for longer."

-- Michael S. Derby

Updated Paper on Treasury Payment Disruptions Released

The Treasury Market Practices Group, which is comprised of private market participants and sponsored by the Federal Reserve Bank of New York, on Monday released a revised version of a 2013 paper that games out various contingencies in case of a disruption in U.S. Treasury debt payments. The paper arrives with the government at risk of not being able to pay for past borrowing tied to the debt ceiling to accommodate already authorized spending plans. Congress must raise the debt limit by around midmonth. The paper doesn't allude directly to the debt ceiling issue, but it notes that its authors "hope that this document will provide a sharper focus on some of the relevant issues and, at a minimum, serve as a useful starting point for any future discussions."

-- Michael S. Derby

Commentary

Evergrande's Haircut and Some Help for Chinese Banks

A timely cut to Chinese banks' reserve-requirement ratios, announced Monday evening, may be partly aimed at soothing markets ahead of any further Evergrande-related turbulence, Jacky Wong writes.

Basis Points

The Conference Board Employment Trends Index rose to 114.49 in November from a revised 113.03 in October, The Conference Board said, suggesting the U.S. labor market's recovery gathered pace over the month. (Dow Jones Newswires)

Brazilian economists' expectations for inflation this year and next year grew slightly worse over the past week, according to the weekly survey by the country's central bank. The median forecast by 135 economists surveyed was for 12-month inflation of 10.18% this month, up from 10.15% in the previous survey. For 2022, the median forecast rose from 5.0% to 5.02%. (DJN)

Brazilian auto sales and output slumped in November from a year earlier the country's National Association of Automotive Vehicle Manufacturers said. Motor vehicle sales fell 23.1% to 172,964 from November 2020, while vehicle output dropped 13.5% from a year earlier to 206,042, the group said. Sales and output both increased from October, by 6.5% and 15.1% respectively. (DJN)

Mexican production of cars and light trucks fell 20% in November from a year earlier to 249,000 units, and decreased 0.7% in the January-November period to just under 2.8 million, statistics institute Inegi said. (DJN)

China's exports beat market expectations in November, though the growth rate decelerated from October due to a higher base compared with the same period a year earlier. Outbound shipments rose 22% from a year earlier in November, slowing from a 27% increase in October, the General Administration of Customs said Tuesday. The result surpassed the 16.1% growth rate expected by economists polled by The Wall Street Journal. (DJN)

China's foreign-exchange reserves rose by $4.77 billion to $3.222 trillion in November thanks to the dollar's appreciation, the People's Bank of China said Tuesday. The result was the opposite of a consensus $10 billion decrease expected by economists polled by The Wall Street Journal, marking a second consecutive monthly rise for reserves. (DJN)

The eurozone economy expanded at a strong pace in the third quarter, almost fully recovering the gap from the Covid-19-induced recession, but growth is expected to slow sharply in the months ahead as the boost from the reopening fades. The eurozone's gross domestic product expanded by 2.2% from July to September compared with the prior three-month period, according to the final GDP release of the European Union's statistics agency, confirming the second estimate released on Nov. 16. (DJN)

German industrial production rose in October, although supply-chain bottlenecks continue. Total industrial output--comprising production in manufacturing, energy and construction--increased 2.8% on month in October in calendar-adjusted terms, statistics office Destatis said Tuesday. Economists polled by The Wall Street Journal had forecast a 1.0% increase. (DJN)

 

(END) Dow Jones Newswires

December 07, 2021 09:10 ET (14:10 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.