The difference in reactions to Omicron has been stark between Canada’s provincial governments and governments in other countries. The financial markets have also tended to be far more sanguine as they process the economic and financial implications of the COVID variant.
Some Canadian provinces are reporting that hospitalizations from Omicron are at or near record levels and that their health-care staff are facing a crushing workload. Ontario and Quebec have re-enacted various strict lockdown measures such as curfews and closure of restaurants and gyms.
However, the financial markets quickly recovered from the onset of Omicron in late November. And economists and investors are indicating that they expect central banks to start raising interest rates soon instead of expecting them to provide more stimulus.
“Financial markets are looking through this [Omicron wave] a bit more optimistically than many governments are in the sense that they think we’re going to get over this fairly quickly and we should go back to normal,” Jean-Paul Lam, an economics professor at the University of Waterloo and a former Bank of Canada assistant chief economist, told The Epoch Times.
Stock markets have given their verdict on Omicron by pushing higher, indicating their belief that the worst of the pandemic is in the rear-view mirror. Their biggest concern has shifted to the risk that the U.S. Federal Reserve will raise rates more aggressively than once thought in order to tame inflation.
In a tweet as early as Nov. 28, American hedge fund manager Bill Ackman already said early signs were that the Omicron variant was more transmissible but less severe, adding that “if this turns out to be true, this is bullish not bearish for markets.”
Scientists in South Africa, where the first Omicron outbreak was recorded, have suggested that the variant has helped the population build up its natural immunity without killing millions. Thus, they said a decoupling of cases and deaths is likely.
Inflation a Bigger Concern Than Omicron
U.S. headline inflation hit 7 percent for December. And the release of the Fed’s December meeting minutes on Jan. 6 revealed an expectation for reducing monetary policy stimulus sooner than what markets were expecting, given Omicron.
“Many participants noted that the emergence of the Omicron variant made the economic outlook more uncertain; several remarked that they did not yet see the new variant as fundamentally altering the path of economic recovery in the United States,” according to the minutes of the Dec. 14-15 meeting.
According to a Jan. 11 Deutsche Bank commentary, markets were expecting an 89 percent chance of a Fed rate hike in March, up from 63 percent at the close of Dec. 31 and just 27 percent at the end of November when Omicron had just begun.
A day earlier, Deutsche Bank commented, “the holiday season provided more evidence that Omicron was notably milder, especially amongst the vaccinated, and the result has been that the market has looked through this more than they were willing to before Xmas.”
Lam points out that the Omicron-related risk to inflation is two-sided. There is a downside risk due to a slowdown in economic activity resulting from government-imposed restrictions, which financial markets think will be temporary. But supply-side issues like labour shortages are worsening and that puts upward pressure on prices.
