Thanksgiving week was going quite well until markets were spooked on Friday by the rise of a new Covid variant in Africa, Omicron. There are fears that the existing vaccines and treatments might be less effective against this mutation. The first three trading days of the week reflected the continued string of better than expected economic data, with the Atlanta Fed's estimate of U.S. fourth-quarter GDP growth increasing to an 8.6% annualized rate. While the actual growth rate is likely to be in the mid-single digits, it would still be at a very robust pace.
While growth and technology stocks were lower before the news, the announcement of the new variant is the prime reason for the sharp decline in stocks on Friday. Value stocks and banks, which tend to be more economically sensitive, performed well before the Omicron news. In addition, airline-related stocks were down over 7% on Friday, while Stay At Home stocks were higher.
It appears that Omicron is more transmissible than the Delta variant, but little is known about disease severity or how it will act in a more heavily vaccinated population. According to Bloomberg News, Angelique Coetzee, chair of the South African Medical Association, described the symptoms of Omicron as "different and so mild" relative to earlier infections. While this could change since it is still early in the infections, early indications regarding the severity of symptoms and hospitalization rate are encouraging. Markets will be watching for any additional information this week. If the severity of symptoms and hospitalization rates from Omicron remain low, markets should react positively.
So far, the high frequency and non-traditional economic data are not reflecting a change in behavior in the U.S. that would significantly change the economic outlook. For example, there were five days last week with more than 2 million people passing through TSA checkpoints. One would expect air travel to be an early indicator if people were becoming uncomfortable again, but the Omicron news broke after most of that data.
The trend of higher Covid infections in Europe was first flagged as a risk back at the end of October and continued last week.
While the U.S. has seen a significant decrease in the pace of Covid infections since the September peak, the rate of change moved lower last week. The Thanksgiving holiday may have delayed some reporting, so care should be taken with the data this week.
While Omicron watching will steal the spotlight from the November monthly jobs report, it should still be closely watched as a gauge of recovery in the labor market. Nonfarm payrolls are expected to increase by 535,000 for November, and the unemployment rate should improve to 4.5%. The health of the labor market has implications for economic growth and the possible acceleration in reducing asset purchases by the Federal Reserve. There are many communications from Federal Reserve officials on the calendar, with Chair Powell speaking on Monday afternoon. In addition, Powell and Treasury Secretary Yellen talk to the Senate on Tuesday and the House on Wednesday.
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