• Asia-Pac equities succumbed to the downbeat handover from Wall Street after the FOMC minutes
• FOMC minutes said rate lift-off may be warranted sooner or at a faster pace than was earlier anticipated
• FOMC minutes noted that Fed balance sheet reduction could come relatively soon after rate lift-off
• Fed Fund futures see around a 70% chance of a Fed hike at the March meeting
• US equity futures drifted lower overnight (ES -0.5%) and EZ peers saw deeper losses (Dax Mar'22 -1.8%)
• DXY was contained, JPY outperformed and AUD lagged; US and APAC cash yields rose overnight
• Looking ahead, highlights include EZ Construction PMI, UK Composite/Services PMI (Final), German CPI (Prelim.), US IJC, Factory Orders, and supply from France

FOMC MINUTES:

• The minutes said participants generally noted it may become warranted to increase the FFR sooner or at a faster pace than was earlier anticipated (Note, the SEPs saw the median dot shift from 1 hike in 2022 to 3 hikes in 2022 at the December SEP). On lift off, some suggested there could be circumstances in which it would be appropriate for the Committee to raise rates before maximum employment had been fully achieved – several participants viewed labour market conditions as already largely consistent with maximum employment while most judged it could be met relatively soon if the recent pace of the labour market continues.
• A lot of focus was on the balance sheet. Some participants noted it could be appropriate to begin to reduce the size of the Federal Reserve's balance sheet relatively soon after beginning to raise the federal funds rate and many policymakers judged the pace of the balance sheet runoff would likely be faster than last time. They also judged that the appropriate timing of the runoff would also likely be closer to rate lift off than in previous times.
• There was little new added on asset purchases with the minutes reiterating the statement that it is to conclude mid-March, but it could be adjusted “if warranted by changes in the economic outlook”, although there were no specifics mentioned on what this may be.
• The minutes were deemed as hawkish with interest rate futures (shortly after the release) leaning towards a c.80% chance of a Fed hike at the March meeting. Markets reacted in a hawkish manner.

Click here for the summarised release.

CORONAVIRUS UPDATE

China has advised citizens to cut long-haul trips on the Lunar New Year (1st Feb). China's Xian Xinjiang International Airport suspends all international passenger flights until further notice amid COVID. (Newswires)

Japan has asked US to take COVID measures at its bases in Japan, including restrictions on leaving the base, Kyodo reports. (Newswires)

A new study raises significant doubts about whether at-home rapid antigen tests can detect the Omicron variant before infected people can transmit the virus to others, according to STAT News. (Newswires)

ASIA

Asia-Pac equities succumbed to the downbeat handover from Wall Street, which saw growth and tech stocks among the hardest hit by the hawkishly perceived FOMC minutes - with the Nasdaq closing lower by 3.3%. Markets were spooked by the prospect of an earlier Fed rate lift-off and closer balance sheet runoff trigger date. US equity futures resumed trade relatively flat with a downward bias around the prior day’s lows and drifted lower after the Chinese cash open. Eurozone equity futures experienced more pronounced losses with the DAX and Euro Stoxx 50 Mar'20 contracts down by over 1.5% each after the end of the Tokyo lunch break. In APAC, the ASX 200 (-2.7%) was pressured by its tech sector alongside its gold miners. The Nikkei 225 (-2.9%) also saw outflows from Tech and Electronics, whilst Services and Air Transportation were hit by the domestic COVID situation. The overnight JPY appreciation also provided headwinds for the Japanese exporters in the Index. The KOSPI (-1.0%) traded lower to a lesser extent following yesterday’s underperformance. The Hang Seng (-0.5%) and Shanghai Comp (-0.1%) saw with milder losses with the PBoC conducting another daily liquidity drain at half the size of the prior day's operation, whilst Chinese Services PMI also topped expectation with accompanying commentary highlighting lower inflationary pressure. In fixed income, US T-note futures initially clambered off lows amid potential early APAC demand as stocks sentiment remained sour, but this upside faded throughout the session and cash yields went back on the rise - with the US 10yr yield above 1.73% heading into the European open - the highest since March 2021. Meanwhile, the BoJ said it will inject JPY 2tln into the market via temporary bond purchases, a move that came after the Japanese 10yr yield hit 0.105% - levels seen last November - before tracking Treasury yields higher.

China will reportedly strengthen oversight on fiscal finance and spending, according to reports citing Xinhua. (Newswires)

CENTRAL BANKS

President Biden could announce the remaining Fed nominees as soon as this week, according to Reuters sources. Lisa Cook, Sarah Bloom Raskin, and Philip Jefferson are considered to be top candidates as Biden looks to diversify the Fed board. (Newswires)

BoJ could revise up its FY22 CPI forecast to the low 1% ranges (from the current 0.9% forecast), according to reports citing Nikkei. (Newswires)

BoJ offered to buy JPY 2tln in JGBs under temporary agreements. (Newswires)

EUROPE

UK British Chambers poll suggests 58% of firms expect to increase prices for goods and services, whilst 1% expect a reduction in prices; poll cites supply chain disruption and rise in raw material and energy costs, via The Times. (Times)

UK PM Johnson has been urged by leader of the Commons Rees-Mogg to abandon the GBP 12bln increase in national insurance amid concerns over the rising cost of living. (Times)

Millions of low income households in the UK could benefit from a higher discount on their energy bills, under plans being discussed by the government. (Telegraph)

FX

In FX, DXY printed a tight overnight range above 96.00 following a boost from the FOMC minutes ahead of Fed speakers and the US jobs report. EUR/USD was flat above 1.1300 after finding support near its 21 DMA at 1.1305. GBP/USD traded back under 1.3550 after dipping below its 100 DMA (1.3555), and EUR/GBP regained a footing above 0.8350. The JPY outperformed and USD/JPY fell back under 116.00 as risk remains on the backfoot, whilst Japanese bond yields tracked US yields higher. AUD/USD and NZD/USD tracked sentiment lower, with the former accelerating its losses after a downside breach of 0.7200.

COMMODITIES

WTI and Brent front-month futures were on a softer footing, partly amid risk aversion post-FOMC minutes, whilst the APAC COVID situation also remains a grey cloud over the complex. Japan expressed concern regarding the rising COVID cases, and China advised citizens to cut long-haul trips on the Lunar New Year - also known as the world's largest human migration. Nonetheless, the benchmarks drifted back to Wednesday’s APAC range, with WTI Feb just under USD 77/bbl and Brent Mar around USD 80/bbl. On the geopolitical front, Kazakhstan has gained more attention as reports suggested workers at the country's highest-producing oil field, Tengiz, have joined in protests over rising fuel prices - although there have been no reports of output disruption. Meanwhile, a Russian-led military alliance has been sent to try to regain control of the domestic unrest. For reference, Kazakhstan produces around 1.6mln BPD of crude oil. Elsewhere, spot gold found support near its 50 DMA (USD 1,804/oz), and LME copper was subdued by the risk tone.

GEOPOLITICS

North Korea said it test-fired a "hypersonic" missile Wednesday, according to Yonhap. (Newswires)

Saudi-led coalition said it received a distress signal from an oil tanker reporting "armed harassment" off Yemen's Hodeidah Port, according to state TV. (Newswires)

US Secretary of State Blinken said he discussed the status of Nord Stream 2 with Germany's Baerbock and agreed with Baerbock on the importance of transatlantic coordination in China. (Newswires)

A State of Emergency has been declared throughout Kazakhstan, according to RIA. (Newswires)

Police in Kazakh city of Almaty notes of tens of rioters being "eliminated", according to Ifax. (Newswires)

US

Another quiet and mild bull-flattener out of the Wednesday APAC/European session for T-Notes, trading in a rough 129-10 to 129-14 range up into the ADP Employment report; note there was some fleeting downside in sympathy to EGBs on the back of hawkish remarks from ECB's Kazaks about the potential for an early 2023 hike. One could take a look at the front-end of the curve which saw more sustained selling from ADP onward, pricing in a more aggressive Fed. That could of course also be due to positioning into the FOMC minutes, with desks noting likely closing of steepeners that had dominated earlier this week, also coming amid some speculation earlier this week over a sooner-than-anticipated Fed balance sheet runoff, and perhaps even a substitute for aggressive hiking. It is noteworthy the 7-10yr buyback today saw its largest ever offer-to-cover ratio in that bucket Wednesday, coming after that part of the curve saw heavy selling earlier this week. The rise in TIPS yields also chimes with the Fed hawkishness. T-Note (H2) Futures settled 14 ticks lower at 128-27.

Chinese Caixin Services PMI (Dec) 53.1 vs Exp. 51.7 (Prev. 52.1); Composite 53 (Prev. 51.2). *"The measures for input costs and the prices charged by service providers both dropped from the previous month, indicating lower inflationary pressure. But raw material and labor costs were still high."*

PBoC set USD/CNY mid-point at 6.3728 vs exp. 6.3702 (prev. 6.3779)

PBoC injected CNY 10bln via 7-day reverse repo at maintained rates of 2.20% for a net daily drain of CNY 100bln (vs prev. CNY 200bln drain)