• Asian equities were subdued following on from the mostly negative lead from Wall St
• US stocks declined at the open, but then finished off lows and the Nasdaq fully recovered from a near-3% drop as yields wavered
• DXY is softer and back on a 95 handle as activity currencies gain and EUR/USD gains a firmer footing above 1.13
• Fed Chair Powell’s prepared remarks noted the economy has rapidly strengthened despite the ongoing pandemic
• Looking ahead, highlights include US NFIB Business Optimism Index, ECB's Lagarde, Fed's George, Powell, Bullard, supply from the UK, Germany and US

CORONAVIRUS UPDATE

US COVID-19 hospitalizations reached a record high on Monday in which it surpassed 132k, according to a Reuters tally. In relevant news, the US CDC is mulling recommending better masks for Omicron and is likely to say those who can consistently wear N95 masks and KN95 masks should do so, while it was also reported that the US CDC told Americans to avoid travel to Canada citing the COVID-19 statement. (Newswires/Washington Post)

Pfizer stated that an Omicron updated vaccine is the most likely outcome and they have already started producing an Omicron-specific variant which they are ready to file and launch in March. Pfizer is also considering a hybrid vaccine that includes Omicron targeted vaccine, while it added that the COVID-19 vaccine could be an annual shot and maybe more often for high-risk groups. (Newswires)

China's Tianjin imposed a partial lockdown and the Henan province capital of Zhenzhou tightened restrictions and shut down places. It was also reported that Hong Kong plans to ban transit passengers from 150 places for a month from January 15th except those travelling to the Beijing Olympics. Furthermore, Hong Kong will halt in-person kindergarten and primary school classes, while Chief Executive Carrie Lam said they will start vaccinating children aged 5-11 with the Sinovac (SVAC) vaccine and will launch a new anti-epidemic relief fund in which the government has at least HKD 4.0bln for new economic relief measures. (Newswires)

Mexican President AMLO tested positive for COVID-19. (Newswires)

ASIA

Asian equities were subdued following on from the mostly negative lead from Wall St where stocks declined at the open, but then finished off their lows and the Nasdaq fully recovered from a near-3% drop as yields wavered. ASX 200 (-0.8%) was pressured with the index dragged lower by underperformance in the top-weighted financials and consumer staples sectors amid expectations that the ongoing Omicron wave is to slow the economic recovery, with better-than-expected Retail Sales data doing little to lift sentiment. Nikkei 225 (-0.9%) underperformed on return from the holiday closure amid confirmation that border restrictions will be extended until end-February and after some prefectures recently entered into COVID-19 pre-emergency status, while KOSPI (-0.1%) was also cautious following a second suspected ballistic missile launch by North Korea in less than a week. Hang Seng (Unch.) and Shanghai Comp. (-0.4%) were choppy with price action rangebound amid a neutral PBoC liquidity operation and after China’s Cabinet reiterated to refrain from flood-like stimulus but will expand financial consumption. Furthermore, COVID-19 concerns persisted with Tianjin imposing a partial lockdown and Hong Kong suspending in-person kindergarten and primary school lessons, although Hong Kong Chief Executive Carrie Lam also announced to launch a new anti-epidemic relief fund. Finally, 10yr JGBs were initially flat as the risk averse mood in Tokyo stocks and presence of the BoJ in the market for over JPY 1tln of JGBs failed to spur demand, while prices were later pressured on return from the lunch break in a retreat beneath the 151.00 level.

PBoC injected CNY 10bln via 7-day reverse repos with the rate at 2.20% for a net neutral daily position. (Newswires) PBoC set USD/CNY mid-point at 6.3684 vs exp. 6.3698 (prev. 6.3653)

US Secretary of State Blinken said US is undeterred by China sanctions on US officials, while there were separate comments from US Agricultural Secretary Vilsack that the US is to push China to make up the USD 16bln deficit in the Phase One trade agreement. (Newswires)

South Korea January 1st-10th Trade Balance at provisional deficit of USD 4.95bln, Exports rose 24.4% Y/Y and Imports rose 57.1% Y/Y. (Newswires)

UK/EU

Economists believe the impact of Omicron on the UK economy will be modest with dips in December and January but a rebound thereafter as restrictions are lifted. (FT)

UK BRC Retail Sales YY (Dec) 0.6% (Prev. 1.8%), Total Retail Sales rose 2.1% (Prev. 5.0%)

Barclaycard UK December Consumer Spending rose 12.2% compared to December 2019. (Newswires)

French Finance Minister Le Maire said the fiscal surplus from higher growth than 6.25% previously announced will be used for reducing debt, while they will announce new measures to face surging energy prices by the end of the week. (Newswires)

Italian PM Draghi does not rule out additional fiscal stimulus but said it is not currently being considered. (Newswires)

European Parliament President David Sassoli has died, according to a spokesman. (AFP News Agency)

FX

In FX markets, the DXY languished after yesterday’s brief incursion into the 96.00 territory which it failed to sustain as yields pulled back and with participants remaining tentative ahead of the CPI data on Wednesday which is expected to print its highest reading in four decades. Prior to the inflation data, participants will be eyeing Fed Chair Powell’s grilling at the confirmation hearing later today although his prepared remarks were less than exciting as he noted the economy is growing at its fastest pace for many years and has rapidly strengthened despite the ongoing pandemic, giving rise to elevated inflation. It was also reported that Vice Chair Clarida is to resign on January 14th ahead of the expiry of his term which ends on January 31st. Price action in EUR/USD was predominantly at the whim of the fluctuations in the greenback with the single currency back at yesterday’s APAC levels at the 1.1300 handle and as news flow from the bloc remained relatively light. GBP/USD was uneventful as it continued to eye resistance at 1.3600 and USD/JPY nursed some of its recent losses after finding support near 115.00, while antipodeans were kept afloat with AUD/USD outperforming after better-than-expected Retail Sales, as well as a return to growth for monthly Exports and Imports.

• Australian Retail Sales MM Final (Nov) 7.3% vs. Exp. 3.9% (Prev. 4.9%)
• Australian Trade Balance (AUD)(Nov) 9.42B vs. Exp. 10.6B (Prev. 11.2B)
• Australian Exports MM (Nov) 2% (Prev. -3%)
• Australian Imports MM (Nov) 6% (Prev. -3%)

COMMODITIES

Commodities rebounded overnight in which WTI crude futures nursed the prior day’s losses that had been attributed to fluctuations in the greenback, the risk averse mood and ongoing Omicron concerns across the globe including in the US where COVID-19 hospitalisations surpassed 132k which was a new record, with the return of Libya supply also a headwind for prices. Nonetheless, crude has since clawed back its losses alongside gains across the commodities complex as the USD softened, while focus for oil shifts to the upcoming inventory reports beginning with the private sector data later today. Elsewhere, gold marginally extended above the USD 1800/oz level but with gains capped ahead of the upcoming US inflation data and copper continued to fade the prior day’s weakness despite the mostly downbeat risk tone.

Libya's El Feel oilfield resumes production, according to Mellitah Oil and Gas Company. (Newswires)

GEOPOLITICAL

North Korea fired what could be a ballistic missile which landed in the East Sea outside of Japan’s exclusive economic zone. Furthermore, it was later reported that North Korea's missile travelled more than 700km to an altitude of 60km and at Mach 10 speed, according to Yonhap. South Korea's National Security Council expressed strong regret over North Korea's missile test, while Japanese PM Kishida said North Korea's repeated launches are very regrettable and there were also comments from Japanese Chief Cabinet Secretary Matsuno that North Korea's actions threaten the status quo in the region and that Japan is very disappointed. (Newswires/Yonhap)

US said it does not expect breakthroughs with Russia on Wednesday or Thursday and noted this is the beginning of the diplomatic path. There were also separate reports that the Biden administration authorized an additional USD 200mln in security assistance to Ukraine in late December amid a Russian troop build-up along Ukraine’s borders, according to CNN citing sources. (Newswires/CNN)

US Deputy of State Sherman said they had a frank and forthright discussion with his Russian counterpart and that the US offered to meet Russia again soon with the US open to discussing ways they can set reciprocal limits on size and scope of military exercises. US and Russia agreed that nuclear war can never be won and should never be fought, while US was clear that they would welcome genuine progress in diplomacy which can only take place in a climate of de-escalation. Furthermore, Russia said they do not intend to invade Ukraine and its troop build-up is typical manoeuvring although the US does not know if Russia is willing to de-escalate. (Newswires)

Russian Deputy Foreign Minister Ryabkov said the US side approached Russian concerns very seriously and he told the US that without progress in three main areas, work in other areas would be under question. Russia explained its concerns about NATO expansion in detail and Russia told US there was no need to fear escalation, while US complained about Russian troops near Ukraine and made specific threats. Ryabkov stated they will decide on future talks based on the outcome of other talks this week in Brussels and Vienna and they advised the US not to underestimate the risk of confrontation but added there is a basis for an agreement with the US and that they have no intention to invade Ukraine. Furthermore, he stated it is absolutely essential Ukraine does not join NATO and the situation is now dangerous in which they cannot afford more delays in resolution to Ukraine joining NATO, while further progress in US talks hinges on this issue. (Newswires)

The Senate is set to vote this week on a bill which would impose fresh sanctions on the Nord Stream 2 pipeline. (Newswires)

Kazakhstan President Tokayev said the CSTO mission in the country was completed and a withdrawal will begin in two days. (Sputnik)

Yemeni forces backed by UAE said they took full control of the energy producing Shabwa province from pro-Iranian Houthi movement, according to a statement. (Newswires)

US

Treasuries were choppy Monday amid risk aversion, corporate supply, and impending auctions, with last week's heavy losses fresh on the mind. At settlement, 2s +3.6bps at 0.906%, 3s +4.4bps at 1.199%, 5s +3.0bps at 1.535%, 7s +1.5bps at 1.717%, 10s +0.4bps at 1.773%, 20s -0.9bps at 2.148%, 30s -1.4bps at 2.102%. 5yr TIPS +2.2bps at -1.277%, 10yr TIPS +0.5bps at -0.745%, 30yr TIPS -1.0bps at -0.166%. There hadn't been anything too pivotal over the weekend, although we did hear from more Fed speakers (Barkin) giving credence for a March rate hike, while in Washington, Senator Manchin reportedly no longer supports a USD 1.8tln Build Back Better counterproposal (WaPo). T-Notes hit session lows of 127-30 (1.80%) in the European morning before recovering into the NY handover. But once the session's slate of IG supply started to build, a flurry of rate-lock related flows saw Treasuries better offered again, leading to T-Notes retesting their lows into the NYSE before recovering gradually back to flat in the NY afternoon. Participants are now looking ahead to this week's 3s, 10s, and 30s auctions on Tues, Wed, and Thurs, respectively. Some dealers may have utilized the NY Fed's 7-10yr buyback Monday, which saw a chunky 2.96x O/C, to offload some inventory ahead of the mini-refunding. Otherwise, Wednesday's CPI print will be the pinnacle of attention this week, with analysts expecting a sizable rise, again. T-note (H2) futures settled 5 ticks lower at 128-04+.

Fed Chair Powell said the economy is growing at its fastest pace for many years and the labour market is strong in prepared remarks for reappointment hearing. Powell added that the economy has rapidly strengthened despite ongoing pandemic, giving rise to elevated inflation, and he is strongly committed to reaching maximum employment and price stability. Furthermore, he said the Fed will use tools to support the economy and a strong labour market, while he added the economy will be different after the pandemic and Fed must adapt to the changes. (Newswires)

Fed Vice Chair Clarida is to resign on January 14th ahead of the expiry of his term which ends on January 31st. (Newswires)

White House said US President Biden will continue to press to get the Build Back Better bill done. (Newswires)