25 January 2022
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Omicron impact on economic activity mixed

By Edward Bell

  • Early readings of economic activity in the Eurozone economy showed a mixed impact of the spread of the Omicron variant of Covid-19. Composite PMI numbers for France showed a deceleration in activity in January compared with a month earlier, mainly driven by a steep drop in services activity with the index hitting 53.1 compared with 57 a month ago. Manufacturing held relatively stable. In Germany though the composite PMI figure actually accelerated, up to 54.3 from less than 50 in December thanks to a fast pick up in manufacturing (up to 60.5 from 57.4) and decent rebound in services (52.2 from 48). For the Eurozone as a whole the composite PMI fell to 52.4 in January from 53.3 a month earlier.
  • In the UK, early data for January also suggests that the Omicron variant has disrupted activity with the composite PMI falling to 53.4 from 53.6 a month earlier. Services accounted for all of the decline as restrictions on activity have been in place for much of the month. Manufacturing also slowed but still reported a decent print of 56.9 in January compared with 57.9 a month earlier. There have been early signs that supply chain conditions are improving with input prices for manufacturing moving lower although the UK is facing down a potentially disruptive cost of living adjustment over the next several months.
  • For the US PMI numbers in January showed activity almost came to a standstill with the composite PMI sliding to 50.8. The services component fell to 50.9 from 57.6 in December, representing the slowest pace of activity since July 2020. Output prices in the services sector ticked up to 67, representing their highest level on record even as input prices dipped lower. Manufacturing fared better, falling to 55 from 57.7 in December with input prices falling to their lowest level in May 2021. While the headline numbers indicate an expected softening in activity thanks to Omicron we doubt that they will provide much caution to the Fed as it plans to signal a path of rate hikes ahead.
  • The Monetary Authority of Singapore raised the “rate of appreciation” of the Singapore dollar, its main monetary policy instrument, in order to manage the impact of imported inflation. The tightening of monetary policy came as a surprise and was the first time its taken action outside of a scheduled meeting since 2015. Inflation in Singapore rose to 4% y/y in December, its highest level since 2013, as higher food and fuel costs weigh on consumers.

Today’s Economic Data and Events

  • 13:00 GE IFO Business climate January
  • 19:00 US Conf. Board consumer confidence: forecast 111.1

Fixed Income

  • Market volatility was in full swing overnight as dramatic early selling in equity markets helped to pull yields lower in the early part of the US session. On the 2yr UST, yields fell to less than 0.94% at one point, down almost 10bps before recovering and ending the day down 3bps at 0.9710%. In the 10yr UST yields fell to almost 1.7% before bouncing back and managing to tick slightly higher at the close, settling at 1.7706%, up a bit more than 1bps.
  • European bond markets though rode to the rescue of equities with both bunds and gilts rising. Yields on 10yr bunds fell 4bps to -0.109% yesterday while the 10yr gilt yield fell more than 4bps to settle at 1.125%. Geopolitical risks from a conflict between Russia and Ukraine will likely be felt more acutely in European markets given their regional energy dependency.
  • Emerging market bonds recorded a moderately quiet day overnight even as markets generally were selling off sharply. Yields gained in both Indian and South African bonds, up 3bps and 6bps respectively, while Turkish yields were lower to the tune of 4bps, settling at 21.38%.


  • Currency markets were a case of get out of risk overnight as the rapid sell off in equities added to elevated geopolitical tensions. The DXY index ticked up by 0.29% to 95.918 as investors moved to the safety of the dollar, even as yields were choppy overnight. Among peers EURUSD stood out in terms of weathering the storm the best overnight with EURUSD closing down just 0.16% at 1.1326. USDJPY rallied to 113.95, up 0.24% even as risk havens received a bid.
  • Higher-risk FX, including GBP, were the most vulnerable overnight. GBPUSD sank almost 0.5% to 1.3488 while USDCAD rose by 0.45%, extending the loonie’s losses for a second day to 1.2638. Both AUD and NZD fell, by 0.56% to 0.7145 and 0.25% to 0.67 respectively.


  • There were sharp swings in US equity markets yesterday, but while the major indices were down by as much as 4% earlier in the session, by the close all three were up on Monday’s levels. The NASDAQ closed up 0.6%, while both the Dow Jones and the S&P 500 ended the day up 0.3%. Nevertheless, the challenges to equity markets remain acute and the S&P 500 had dipped into correction territory yesterday, and is still down -7.5% ytd, while the NASDAQ almost entered a bear market, and is currently down -11.4% ytd.
  • There is growing concern over valuations amongst investors as the Federal Reserve looks set to start tightening policy. More speculative growth stocks, especially in the technology space have been heavily hit, and alongside the NASDAQ, more tech-heavy indices in Asia have also been struggling. South Korea’s KOSPI dropped -1.5% yesterday, and is down a further -2.4% so far this morning.
  • The sell-off has also hit European equities and local markets. In Europe, the FTSE 100 lost -2.6% while the CAC (4.0%) and the DAX (-3.8%) dropped even further. In the UAE, the DFM lost -2.0% yesterday while the ADX lost a more muted -0.1%.


  • Oil prices fell for a third day running overnight with Brent futures down 1.8% to USD 86.27/b while WTI fell more than 2% to USD 83.31/b as investors generally pulled away from risk assets in the context of pending rate hikes and elevated geopolitical tension. Gas prices, particularly in Europe and Asia, ticked considerably higher overnight as fear of a crisis in Eastern Europe could threaten security of supply in the near term.
  • Metals markets generally were lower with copper and iron ore both sinking. Gold prices did nudge higher, up by 0.4% to USD 1,843/troy oz, still largely failing to recover some of its recent losses.

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Written By

Edward Bell Head of Market Economics

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