So, ‘transitory’ is being retired. At last, you might say. It’s been clear for months that inflation would not prove as transitory as central banks told us. But how come so many of us in the market could see it and they couldn’t? And who knows how much damage has been done? Fed chair Jay Powell said it’s “a good time to retire that word”, whilst admitting that the economy is strong and inflation high. He also said the Fed would look to speed up the pace of its tapering of QE – cue expectations the Fed will raise rates sooner. The Fed fell behind the curve and is now in an invidious position where it’s going to need to tighten monetary policy during a slowdown. It should have acted far sooner. Bond yields are on the move and we are seeing a swift flattening of the curve 10s down on economic fears, 2s up on bets the Fed will tighten sooner. Not the prettiest picture for risk assets, so stocks fell. Higher short-term yields are also weighing on gold.

Markets have other things to worry about right now – omicron is a big concern, clearly. Powell’s comments did little to soothe market concerns; pointing to how this is very different to March 2020 in more ways than one: CBs don’t have the firepower to call on that they did back then. Just as well that omicron is barely comparable with the first wave. Stocks sold off further, oil retreated with WTI sinking below $65. Both are back up this morning, enjoying something of bounce in early trade on the first day of the new month – though risk appetite is clearly shaky. We need to see at least another sell-stop washout before the low is in. Volatility is high and will remain so until more is understood of omicron – my bet is that’s going to a passing concern and markets can rally. But omicron headlines will drive price action in both directions for a couple more weeks. European stock markets are broadly higher, the FTSE 100 seeing near-term resistance at 7,140, the 38.2% retracement area of the recent selloff. 

Indications from Israel suggest people who have had three doses are reasonably well protected from the new variant. Cue the UK and others ramping up their booster programmes. Meanwhile, all the evidence thus far (it can change) says the symptoms are relatively mild – at least not more severe than other variants. Cases in the UK are coming down, as are hospitalisations and deaths. But as we know it’s not so much about the actual impact of the disease as it is about the policy response, which once again has rested on a combination of authoritarianism and stoking fear.