Goodbye rally. Hello, fear.
Stocks plunged this morning following the release of a dismal Producer Price Index (PPI) print. In November, the PPI rose 9.6% year-over-year (YoY), blowing away the consensus estimate of +9.2%. Month-over-month (MoM), the index climbed 0.8% vs. +0.5% expected.
The red-hot producer inflation reading got traders off to a rough start this morning that only became worse following a statement out of the World Health Organization (WHO).
“Omicron is spreading at a rate we have not seen with any previous variant,” said WHO Director-General Tedros Adhanom Ghebreyesus in a morning Covid update from Geneva.
“Seventy-seven countries have now reported cases of Omicron. And the reality is that Omicron is probably in most countries, even if it hasn’t been detected yet.”
Tedros continued, adding:
“We have learned by now that we underestimate this virus at our peril,” he said.
“Even if Omicron does cause less severe disease, the sheer number of cases could once again overwhelm unprepared health systems.”
Tedros then laid out a self-defense plan to fight Omicron.
“It’s not vaccines instead of masks. It’s not vaccines instead of distancing. It’s not vaccines instead of ventilation or hand hygiene. Do it all. Do it consistently. Do it well,” he said.
Ironically, the countries that are the best at adhering to these preventative measures have endured some of the worst infection totals over the last few weeks. What’s more, many fully vaccinated (and recently boosted) individuals were among the first to have contracted Omicron in the US.
Thankfully, if the WHO’s recommendations don’t work out, Omicron seems to be less lethal than the other variants as Tedros suggested, which may not have a profound impact on hospitalizations despite the WHO’s speculation that hospitalizations will increase due to a higher infection rate.
Also, the CDC believes that 2.9% of the current Covid cases in the US are Omicron. That number should rise over time as the new variant replaces the older ones, potentially cutting mortality. Most importantly, the CDC also reported this morning that no US deaths have been attributed to the Omicron variant. This may help calm Covid-related fears moving forward.
But that doesn’t mean short-term sentiment will improve any time soon. The Fed’s two-day meeting began this morning. Tomorrow afternoon, Powell is expected to announce an accelerated taper after it’s finished. Many Wall Street banks believe the rate of the taper will double, rising from $15 billion to $30 billion in reduced monthly asset purchases.
“Fed Chair Powell has a very difficult communication job ahead of him tomorrow afternoon. We’re in line with consensus and expect the Fed to end its tapering program in March/April and start hiking in May,” read a note from Wolfe Research strategist Chris Senyek.
“If Fed Chair Powell emphasizes that the FOMC remains flexible, the ‘Fed put’ should remain in place. However, if his tone is overly hawkish, it could turn into a disaster like December 2018.”
As has been the case for several weeks, the market looks like an absolute powderkeg, ready to either explode higher or collapse lower in response to Powell’s remarks. Right now, things aren’t looking so bullish.
But Powell has provided traders with dovish surprises in the past. Is another one in store for tomorrow afternoon in his post-FOMC meeting comments?
It’s possible, and for bulls, a near necessity should the rise of Omicron continue to dominate the news cycle.