(Reuters.) – What disruptive impact will Omicron COVID be on the world economy? This is a topic that markets are trying to answer.

Jerome Powell of the Federal Reserve no longer believes that “transitory” describes surging inflation pressures. However, future inflation numbers could prove Powell wrong.

China provides data, while Germany prepares to end the Merkel era.

This is your market week in New York. Vidya Ranganathan, Sujata Raho, Marc Jones and Dhara Ranasinghe are in London. Dhara Ranasinghe compiles.

1/ ADIOS TRANSITORY

Omicron and a hawkish Federal Reserve shift increase the attention to Friday’s U.S. Inflation data.

Fed chief Jerome Powell says “transitory” no longer describes high inflation. He believes the Fed should debate in December accelerating its bond-buying taper.

A strong inflation print may increase expectations for a Fed that is more aggressive, which could weigh on already scared markets by Omicron.

U.S. consumer prices rose 6.2% in October — their highest annual gain for 31 years. They could remain uncomfortably higher into 2022, due to tight supply chains.

According to the Fed’s “Beige Book”, the latest survey showed that firms are struggling with rising inflation, and trying desperately to find jobs in a time of labour shortages. The Fed is changing its tone, it’s no surprise.

Graphic: US inflation in the spotlight, https://fingfx.thomsonreuters.com/gfx/mkt/egpbkokoyvq/Pasted%20image%201638388413718.png 2/WHERE’S SANTA?

Stock market traders are used to enjoying a Santa rally in December when investors buy gifts for the coming year. However, this time it isn’t looking so positive.

Omicron, as well as a Fed that is clearly determined to raise U.S. rate are dampening Christmas spirit.

Wall Street’s December 2007 return was 74%, which is more than the average monthly gain since 1928. However, it and MSCI’s 50-country global index are still frozen.

This leaves only the volatility index (the so-called “fear gauge” of world markets) able to rally. Graphic: Volatility spikes, https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnlnkevq/Pasted%20image%201638461852697.png

3. ROLLING THE DICE

China’s 2022 forecast is based on a conservative goal for economic growth, which pushes President Xi Jinping’s common prosperity’ agenda. The coming data dump might not be surprising to them.

Beijing has the flexibility to target monetary easing even though other economies are tightening. Inflation is not a problem. Exports are showing strength, and may be stronger if Omicron causes disruptions to supply chains and raises global electronics demand.

In mid-December, the focus will shift to important Communist Party meetings. They set growth and policy goals that won’t be revealed until next year. According to policy advisers, the target for growth will be between 5% and 5.5% in 2020, compared with the close-to-8% pace of 2021.

It’s easier to roll the dice with the economy than it is on regulation. Macau’s casino are being attacked and no one knows who will be next.

Graphic: China’s external trade, https://fingfx.thomsonreuters.com/gfx/mkt/gkplglgjbvb/Pasted%20image%201638407879825.png 4/ THE DOLLAR PROBLEM

A former Treasury Secretary said that the US currency is called the “dollar” but it can also be the problem of the entire world.

The dollar’s year-to-date gain of 7% has made 2021 another “annus horribilis” for emerging markets, tightening financial conditions for traders and increasing costs for importers.

Dollar’s muscles are being used again, as U.S. rate-rise wagers move ahead of many developed peers. Comparison of German real – or inflation adjusted – 10 year yields shows the U.S. premium is the largest since March.

Foreign companies with dollar debts have begun their December greenback rush. This has increased the currency’s premium in swaps market. It is possible that this trend will continue into the new year.

As it does when the Fed raises interest rates, the dollar might weaken. Bearish forecasts, however, are very rare given the possibility of surprise for the dollar.

Graphic: Dollar index, https://fingfx.thomsonreuters.com/gfx/mkt/zjvqkykbkvx/Pasted%20image%201638451343707.png 5/ BAPTISM OF FIRE

Olaf Scholz will officially take over as German chancellor within days. This ends Angela Merkel’s sixteen-year tenure in charge Europe’s largest economy. He immediately goes into firefighting mode.

Germany has been hit hard by rising COVID rates in its fourth wave. Inflation is at an all-time high, Europe is in energy trouble, and Russia’s troop build-up close to the Ukraine border is alarming the West.

Scholz heads a trio of parties and will supervise the introduction tougher COVID-19 anti-virus measures in the wake of Omicron’s discovery.

As the ECB’s hawks vs. doves compete for power, Scholz will nominate the next Bundesbank President. One press release claims that Joachim Nagel has reached pole, an important BIS official. Graphic: Challenges ahead for Germany’s new Chancellor, https://fingfx.thomsonreuters.com/gfx/mkt/movanqngqpa/themedec3.PNG