Year-end volatility

A week ago, Fed Chair Jerome Powell, recently reappointed to the position, told the Senate Banking Committee that the risks of more persistent inflation have increased. Until now, he had repeatedly said that the price increases, linked to transitory phenomena, would only be temporary. The Fed was expecting inflation to decline gradually as the economies recovered, but it must now reconsider its position. Many difficulties remain: in the supply chain, production, transport and the labour market. The emergence of the Omicron variant has also cast doubt on the economic recovery, which may contribute to inflation. To combat this, the US central bank has two tools at its disposal: reducing bond purchases and raising interest rates. On the former, Mr. Powell suggested that tapering could be sped up to end in April next year rather than in June at the current pace. Regarding rate hikes, the market expects them to start between May and July 2022. It expects four rate hikes by mid-2023. The next meeting of the Federal Open Market Committee is scheduled for 14-15 December.

Also in the US, the labour market posted some mixed figures: job creation fell last month with only 210,000 new jobs compared to a target of 525,000. But the unemployment rate still fell from 4.6% to 4.2%. The strength of the labour market is making it easier for the Fed to consider reducing its monetary support to the economy.

The prospect of a bond-buying taper coupled with the emergence of the Omicron variant has led to considerable nervousness in the financial markets. At the end of last week, as more and more countries announced new restrictions in response to the rise in case, the main stock markets were in the red, with a sharp fall in technology stocks and a rise in the VIX index. Money piled into safe havens and the Swiss franc fell below EUR 1.04. The US yield curve tended to flatten as long rates fell, a sign of uncertainty about the sustainability of the economic recovery. Over the weekend, the price of bitcoin plummeted $10,000 in less than 24 hours. Sentiment then reversed as some health experts suggested that the Omicron variant, contagious as it is, might less dangerous than feared. Stock market indices recovered from their losses in two days of gains on Monday and Tuesday.

In China, the central bank decided to lower the reserve requirement ratio that banks must keep on their balance sheets. By reducing the ratio from 12% to 11.5%, it should free up the equivalent of $188 billion in liquidity. This easing should allow banks to lend more and on better terms. The aim is to help the real estate sector and avoid a sharp slowdown in growth in 2022. The Chinese trade surplus in November was lower than expected. Over a year, exports (+22%) and imports (+32%) have increased sharply. China exports mainly to the United States, then to Europe and the ASEAN countries.

China is also the no. 1 importer of Australian products. It is noteworthy that when China announced support for its economy, the Australian dollar rose. In other news, the Reserve Bank of Australia has, as expected, held its interest rate at a record low of 0.1% for the 13^th consecutive month. The central bank believes that inflationary pressures are less strong than in other countries. It does not plan to tighten monetary policy until Australia’s real inflation is sustainably within the 2% to 3% target range. No tapering is planned at this time either. Finally, with regard to the new variant, RBA believes that it is unlikely that it will derail the economic recovery.

Moving on to other parts of the world, we note Fitch upgraded Italy’s sovereign rating from BBB- to BBB. The high vaccination rate and financial support from Europe should continue to underpin the strong performance of the Italian economy.

In Switzerland, the unemployment rate remains stable at 2.5%. The SNB seems to be comfortable with a stronger franc – for now. Whereas last year it defended the EUR/CHF threshold of 1.05, the amount of foreign currency reserves does not show such an effort on the 1.05 and 1.04 levels.

Oil had a bullish week. Saudi Arabia has raised the price of a barrel to Asia and the US, the Iranian nuclear talks are still at an impasse and the Omicron variant is losing its fear factor. This all explains why oil has risen from $65 to $72 in one week. In this context, it is not surprising to see that in addition to the aforementioned Australian dollar, the best performing G10 currencies of the week were the Norwegian krone and the Canadian dollar – all currencies linked to the price of crude.