The Market's Gaze, from Omicron to the Fed

Increased Likelihood of Fed Focusing on Inflation Amid Eased Omicron Concerns

On the 8th (local time), traders are working on the floor of the New York Stock Exchange (NYSE) in the United States.
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] As concerns over the new COVID-19 variant 'Omicron' gradually ease, domestic and international stock markets are recovering. The volatility index is also trending downward again. Analysts suggest that market attention will now shift back to inflation and the U.S. Federal Reserve (Fed).

On the 11th, Korea Investment & Securities made this forecast. Recently, concerns related to Omicron within the market appear to have been largely resolved. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which had surpassed 30 points earlier this month, has fallen back to the 20-point range. Travel and leisure stocks, which were directly hit by the news of the Omicron variant discovery, have also rebounded.

The initial Pfizer vaccine data released on the 9th was particularly positive. Pfizer announced that while the Omicron variant significantly reduced the neutralizing antibody efficacy in those who received two doses, a booster shot (additional vaccination) increased the number of neutralizing antibodies by 25 times compared to two doses. Furthermore, immune cells generated by the second dose still remain effective against the Omicron variant, potentially preventing severe progression.

Seonggeun Kim, a researcher at Korea Investment & Securities, said, "We need to observe the vaccine efficacy data based on actual patients, which is scheduled to be announced by the end of the year, but the worst-case scenario of existing vaccines being completely neutralized by this variant has been avoided. Of course, due to the high transmissibility, quarantine measures may be reinforced again, but if the booster shot proves effective, this issue will ultimately be resolved, and uncertainty has clearly decreased compared to the end of November."

Ultimately, the analysis suggests that it is now time to focus on inflation and the Fed. Despite U.S. consumer prices in November hitting the highest level in 39 years, the New York stock market rose. The U.S. Department of Labor announced the day before that the Consumer Price Index (CPI) for November rose 0.8% month-over-month and 6.8% year-over-year. The year-over-year inflation rate reached its highest level since June 1982.

Despite the CPI hitting a record high, the stock market showed an upward trend. On the 10th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 35,970.99, up 0.60% from the previous day. The S&P 500 index rose 0.95% to 4,712.02, and the tech-heavy Nasdaq index closed up 0.73% at 15,630.60. The market rose as fears over the Omicron variant significantly eased despite inflation concerns. Notably, the S&P 500 index recorded its highest closing level since November 18.

Since the Fed has expressed its intention to focus on inflation rather than being overly concerned about economic slowdown caused by the Omicron spread, the likelihood of a hawkish outcome at the Federal Open Market Committee (FOMC) meeting scheduled for the 15th has increased. The futures market has also priced in a larger rate hike next year following the Omicron announcement.

Researcher Kim said, "If the outcome is more hawkish than the market expects, concerns about early rate hikes will be highlighted, likely narrowing the yield curve between short- and long-term government bonds. Although some cyclical stocks have rebounded as Omicron concerns eased recently, the relative strength of growth styles such as IT, which benefit from a narrowing yield curve, may increase."