Data, Finally

Some precise data are finally starting to emerge on the Omicron variant. A study by the UK Health Security Agency on 581 symptomatic cases confirmed that the usual regimen of two vaccine shots provides little protection against the variant. However, it also suggests that a third dose would be effective, albeit less so than with the Delta variant. The latter is good news because it means that there is an alternative to merely waiting for a re-engineering of the vaccines: accelerating the booster programmes. They are already going relatively quickly in most western European countries – much more so than in the US – but the persistence of a not insignificant minority of adults who are not vaccinated at all, as well as the incompressible time needed to get the third jab to all those who are already vaccinated, probably means that some additional sanitary restrictions will be on their way, with some impact on economic activity. True, there are tentative signs that the infections brought about by the Omicron variant are less severe than in the historical versions, but governments are unlikely to take risks. However, while the variant is of course a setback on the recovery trajectory, the potential for a fairly quick rebound looks decent. We are not back to square one on the pandemic.

Amid this still incomplete information on the sanitary front, some central banks need to make some big decisions this week. The Fed seems to partake to the generally higher tolerance to sanitary risk which has been prevailing in the US since the start of the pandemic and looks set to announce an acceleration of its taper which would now end at the beginning of Q2 2022, thus leaving lots of space for pre-emptive hikes if need be. The Bank of England needs to compose with the additional sanitary restrictions from this week onward. While we accept that the UK is a good candidate for a persistent inflation drift, we fail to see the urgency in hiking given the level of uncertainty. Yet, for pure reasons of credibility, after last month’s flip-flopping, the MPC may still decide to hike anyway.  When it comes to the ECB, we have refined the “two stage approach” we developed last week. We expect Christine Lagarde to announce a continuation of APP until the end of 2022, but the quantum of the up-scaling designed to cushion the market impact of terminating PEPP in March – we expect EUR 40bn per month for the new target – would be fixed only for Q2, with a rendez-vous clause in June and September coinciding with the new forecasts. More than the quantum itself, we expect the market to focus on the flexibility the ECB will still give itself to deal with potential market fragmentation. We think the PEPP reinvestments – for now due to continue until 2023 at least – will be a key instrument.