Westpac: Will Omicron See A New Trading Range Established?

Westpac note that “after threatening to break to a new 6-month high on Tuesday, by Friday the 10-Year yield was closer to the bottom of the recent trading range. So where to next? Risk aversion will remain elevated, however Westpac Economics revised its Fed outlook just ahead of the Omicron designation by the WHO. Given the surge in U.S. inflation and strong economic growth, Westpac now sees the 14-15 December FOMC meeting resulting in a faster reduction in bond purchases, now wrapping up in March ‘22. This would set the stage for rate hikes starting in June ‘22. In coming days though, the debate will rage over whether central banks regard Omicron as a game changer for the policy outlook. This adds extra focus on comment from Fed officials this week, especially Chair Powell’s testimony to Congress. In our view, until more is known, the recent ranges will hold, especially as there has already been a paring back of the most extreme policy expectation in both Australia and the U.S. So we are better tactical sellers into this rally.”