25 January 2022: Omicron effect to be less than 1%

Omicron effect to be less than 1%

25th January: Highlights

  • Services Activity points to modest Omicron hit
  • Activity slows to a virtual standstill
  • Services stumble in January.

As omicron fades, other headwinds to drag activity lower

Data released yesterday for economic activity in January showed that the effect on the economy from the Omicron variant will be moderate. It is predicted that the imposition of Plan B of the Government’s strategy will cost less than 1% of GDP.

The report also showed that costs continue to rise at near record levels. This reinforces the view that the Bank of England will again hike rates at its meeting next week.

One piece of good news is that pressure on supply chains appears to be past its worst. While headline inflation is expected to continue to increase in the first quarter, the report reinforces the view that price pressures will begin to slow from April onwards.

Prime Minister Boris Johnson has adopted a business-as-usual approach while he anxiously awaits the outcome of the investigation into activity in Downing Street during the first lockdown.

Yesterday, it appeared that there was a gathering to celebrate Johnson’s birthday, held in June 2020. It is apparent that the event was attended by around thirty staffers and lasted up to an hour.

While the Government managed to hold off further criticism of Johnson in the House of Commons by insisting that MPs await the outcome of the investigation, the fact that it could be published this week means that the pressure on Johnson to resign is about to intensify.

It is hard to imagine the Prime Minister will be left with many options, as his support among Backbenchers has fallen to unprecedented levels. The fact that the ruling Conservative Party trails the Opposition Labour Party by ten points in opinion polls is of little consequence, with a General Election still more than two years away.

However, it is incredible how far Johnson’s stock has fallen within his own Party, given the fact that he was credited with winning the 2019 election by a landslide almost single-handedly.

The market got off to a lively start as traders positioned themselves for tomorrow’s FOMC meeting. The pound fell to a low of 1.3440, closing at 1.3486 as expectations grew that Jerome Powell will further emphasize the need for the Central bank to come down hard on inflation.

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Supply chain disruption remains a significant factor

The level of supply chain disruption is still a major factor in the economic recovery of the U.S. from the Coronavirus Pandemic and, in particular, its Omicron variant.

Vaccination levels in the country have not kept pace with the onset of Omicron and, as such, the supply chain issues have been worsened by continued tightness in the labour market.

There is still a degree of confidence in employment that has allowed record numbers of workers to quit their jobs in search of something better.

It is also clear that workers are in no hurry to re-enter employment, safe in the knowledge that there will be a suitable position available when support no longer exists.

Yesterday’s flash estimate of economic activity showed that growth fell away to be almost flat in the month.

Manufacturing output fell to 55 from 57.7 this month, while services fell from a whopping 57.6 to a paltry 50.9. The composite index fell to 50.8 from 57.

This data will weigh heavily on the discussions concerning a rate hike that will take place at the FOMC, which begins today.

Jerome Powell was far more aggressive about tackling inflation at the most recent meeting than he had been for some time, as the pace of withdrawal of support was doubled.

This month, he will face the dilemma of a slowdown in the economy as he tries to be more hawkish.

Central Bankers tend to all agree that they look at trends in data rather than individual numbers and given that there are several factors affecting the economy, it is likely that Powell will place his faith in his data being something of an anomaly when he comes to speak tomorrow evening.

The dollar index rose to a two-week-high yesterday as long positions were created. It hit a high of 96.12 but as weaker longs exited at the close, it fell back to 95.85.

Growth to remain elusive

Finnish Central bank Head Olli Rehn, a member of the frugal five, commented yesterday that he expects inflation pressures to remain within the Eurozone for up to two years more.

He expects a gradual subsidence in the factors that are driving inflation higher this year, but once the core is reached, prices could remain stubbornly high in 2023.

He went on to say that his expectations over the economy to be met in the next few months despite the lingering effect of the Omicron variant, which appears to be more stubborn in the Eurozone than in other areas of the global economy.

There are still significant concerns in Europe over the continued build-up of Russian troops on its border with Ukraine, with the obvious effect on the stability of the region, as both the EU and NATO leave the negotiations to the U.S.

One less obvious issue is the threat that Vladimir Putin could decide to weaponize gas supplies to Europe, adding to an already demanding situation. The threat of armed conflict still exists, but a reduction or complete withdrawal of gas would be equally devastating in economic terms.

Data released yesterday for economic activity showed that while the economy slowed, it stays comfortably above the fifty level, which denotes expansion or contraction.

Supply chain issues are beginning to improve, which led the composite index to fall, but by less than had been expected.

As in the UK, the effect of the Omicron variant will be less than first expected, but this may lead to recriminations about several nations being seen as hasty in locking down their economies before they had the full picture of Omicron’s potential.

The euro fell below the 1.1300 level versus the dollar yesterday but recovered to close at 1.1320. Despite the slight recovery late in the day, traders now appear to be targeting a test of 1.1250, possibly in the aftermath of the FOMC meeting.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”