After a rough day on the markets yesterday, we’re seeing both major North American markets surge back strongly today. Reports out of South Africa have raised hope that Omicron may not be as deadly as previous strains of Covid 19. The rapidly spreading variant of the virus has rattled stock markets around the world, triggering major sell-offs in the final month of the year. Concerns over the latest variant’s impact on a global economic recovery remain, but the news out of South Africa has encouraged investors to look at picking up some deals from the previous drop.

In economic news, Canadian trade was moving into the fast lane in October and November, before Omicron likely applied the brakes in December. Retail sales rose by 1.6% in October, well ahead of the 1.0% consensus and advance reading. On top of that, Statistics Canada's advance estimates for retail and wholesale sales suggested both saw further impressive gains in November. Were it not for the rise of Omicron and retightening of some restrictions across the country, we would probably be having to upgrade our Q4 GDP forecast even further following Thursday's monthly GDP print. As it is, something around 4.5% may still be appropriate factoring in a modest December pullback. The loonie looks to start the New Year with a whimper I’m afraid. It was already on a rollercoaster at the onset of the discovery of the omicron variant but has since come full circle, and is sitting marginally weaker. On the domestic front, the outperformance in Canada’s labour market shows that slack is rapidly vanishing, and inflation is well above target. While an omicron-stalled recovery stands in the way of a January Bank of Canada move, assuming a spring thaw in Covid, look for April to mark the start of a now well-telegraphed tightening cycle. Omicron is likely to see a setback in services employment and a weak Q1 GDP print, but demand will likely come roaring back once this wave passes. Labour market indicators could close in on pre-Covid levels by spring, even if real GDP is still falling well short of its prior trend line.

Down South, the outcome of the December FOMC meeting was decidedly hawkish. The Fed elected to accelerate its taper of asset purchases (from $15bln per month to $30bln), remove the reference to ‘transitory’ when referencing inflation in the statement, and acknowledge that the risks to price pressures were higher. Additionally, the latest round of dot projections show the Fed lifting off three times in 2022, as opposed to just once in the September projections. The USD slid after the FOMC, but that’s largely because the markets had anticipated most of the changes and priced them in beforehand. Looking ahead, we still see upside for the USD into next year. From an endogenous perspective, the USD can rally further as markets begin to price the implied terminal rate for the Fed higher. And there’s good reason to believe that this will happen considering that we’re expecting a sharp reacceleration inactivity following the winter Covid wave.

The latest ECB meeting detailed that the central bank will maintain bond purchases through 2022, albeit at a pace that will progressively decelerate, on a step-by-step basis. While the emergency PEPP programme will be allowed to expire at the end of Q1, the central bank will up its purchases under the Asset Purchase Programme from the current €20bn per month to €40bn per month in Q2, easing back to €30bn in Q3, and then reverting back to €20bn in Q4. Some analysts looking for up to €50bn in APP purchases were disappointed by what was announced, but the fact that the APP commitment is open-ended is significant; since the Governing Council only expects to raise rates after the end of net bond purchases. Moreover, PEPP proceeds will be reinvested until 2024, maintaining the balance sheet. Indeed, the ECB stands by to reinstitute the PEPP process should it prove necessary. Thus, despite the moderation in bond purchases, ongoing balance sheet expansion underlines that the doves remain in the ascendancy at the ECB.

Oil bounced today, gaining 3.72% or $2.55 a barrel to close at $71.14 in today’s trading. Gold continues its slide, slipping another $6.10 an ounce to $1788.50.

Finally, many clients have contacted us about random cheques they’ve been receiving in the mail. They are legit and they are being sent out to clients that held insurance policies with a blanket of providers under the Economical Insurance banner. I’ve attached a link to an article that goes into more detail if you’re interested: https://www.canadianunderwriter.ca/insurance/economical-demutualization-complete-ipo-raises-1-6-billion-1004214800/

As always, give us a call if you have any questions or if you’d like to book an appointment.

Stay safe,

 

Mike