(Reuters). -How disruptive is the Omicron COVID version for the global economy? Markets are asking themselves this question.

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 reckons “transitory” is no longer accurate to describe high inflation and that the Fed could in December debate speeding up its bond buying taper https://www.reuters.com/world/us/feds-powell-wages-are-not-moving-up-troubling-rate-that-would-spark-inflation-2021-12-01.

Another strong inflation print could bolster expectations of a more aggressive Fed, weighing on markets already spooked by Omicron https://www.reuters.com/business/change-suite/ready-pounce-investors-prepare-swings-opportunities-omicron-variant-spreads-2021-11-30.

U.S. consumer prices rose 6.2% in October, which was their highest annual gain for 31 years. They could remain uncomfortably higher into 2022 because supply chains are snarled.

The Fed’s latest “Beige Book” survey shows firms grappling https://www.reuters.com/markets/us/us-companies-battle-rising-prices-labor-shortages-fed-survey-shows-2021-12-01 with rising inflation and scrambling to fill jobs amid labour shortages. The Fed is changing its tone, it’s not surprising.

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.

The emergence of Omicron and a Fed now clearly inching https://www.reuters.com/markets/us/powell-yellen-head-congress-inflation-variant-risks-rise-2021-11-30 to raise U.S. rates are dampening https://www.reuters.com/markets/europe/global-markets-graphic-2021-11-30 festive spirits.

Wall Street’s has notched a positive return in December 74% of the time since 1928 https://www.reuters.com/markets/europe/history-says-expect-strong-december-us-stocks-despite-omicron-fed-worries-2021-12-01 data shows, more than in any other month. However, it is now frozen along with MSCI’s 50 countries world index.

This leaves only the volatility index (the so-called “fear gauge” of world markets) to do any rallying.

3 ROLLING THE DICE

Most China observers expect a conservative target for economic growth that drives President Xi Jinping’s ‘common prosperity” agenda in 2022. They may be surprised by the forthcoming data dump.

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. Policy advisers expect the growth target to be a modest https://www.reuters.com/markets/asia/china-advisers-recommend-lower-2022-gdp-target-headwinds-grow-sources-2021-12-02 5%-5.5% – versus the near-8% pace in 2021.

Rolling the dice on the economy is proving easier than on regulation, where more property developer defaults https://www.reuters.com/markets/rates-bonds/chinas-kaisa-struggles-relief-bond-holders-default-risk-looms-2021-12-02 loom, Macau’s casinos are under siege https://www.reuters.com/world/asia-pacific/macau-gambling-group-suncitys-shares-hit-record-low-after-chairman-arrested-2021-11-30 and there’s little sense of who’s next in the firing line.

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.

2021 was another year of annus horribilis for emerging markets. The dollar gained 7% in the past 12 months, tightening financial terms and increasing commodity importer costs.

As U.S. rate-rise bets pull ahead https://www.reuters.com/markets/europe/trillion-dollar-wager-that-interest-rates-wont-rise-far-2021-12-01 of most developed peers, the dollar’s flexed its muscles again. The premium between the U.S. dollar and German “real”, or inflation-adjusted, 10-year yields is shown in the following chart.

The December greenback rush has boosted the currency’s value in swaps markets by foreign entities that have dollar liabilities. It is possible that this trend will continue into the new year.

If the Fed raises rates https://www.reuters.com/world/us/feds-powell-wages-are-not-moving-up-troubling-rate-that-would-spark-inflation-2021-12-01 next year, the dollar may weaken as it often does as a tightening cycle begins. Bearish predictions are rare, considering the potential for surprise in relation to the dollar.

5./ FIRE BAPTISM

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 is immediately in fire fighting mode.

Germany is battling soaring COVID infections https://www.reuters.com/business/healthcare-pharmaceuticals/german-state-reports-four-fully-vaccinated-people-infected-with-omicron-2021-12-01 in a fourth wave, inflation is running at record high levels https://www.reuters.com/markets/stocks/german-inflation-hits-highest-decades-increasing-pressure-ecb-2021-11-29, Europe faces an energy crunch and a Russian troop build-up near the Ukraine border has triggered alarm in 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.

Meanwhile who Scholz nominates as the next Bundesbank President https://www.reuters.com/markets/europe/who-will-be-bundesbanks-next-chief-2021-11-23 will also be watched closely as the ECB’s hawks and doves battle it out. A press report claims Joachim Nagel is now the BIS’s top official.