• Asia-Pac stocks traded mixed following the choppy session in the US where major indices eked mild gains
• European futures are indicative of a flat open with the Eurostoxx 50 Mar'22 contract near the unchanged mark
• In FX, the DXY heads into the European open a touch softer and in close proximity to the 95.00 mark
• Fed's Bullard has said that four rate hikes in 2022 now appear likely
• Looking ahead, highlights include US IJC, PPI, ECB's de Guindos, Hakkarainen, Elderson, Fed's Harker, Brainard, Barkin, Evans, supply from Italy, US. Earnings from M&S, Tesco, and Delta Airlines

CORONAVIRUS UPDATE

Tokyo government confirmed that it is increasing its coronavirus alert level to the second-highest level, while it was also reported that Tokyo is to seek COVID measures if hospitalisations reach 20%, according to NHK. (Newswires/NHK)

China's Dalian city detected one Omicron infection in a person that arrived from Tianjin. (Newswires)

ASIA

Asia-Pac stocks traded mixed following the choppy session in the US where major indices eked mild gains as markets digested CPI data in which headline annual inflation printed at 7.0%. ASX 200 (+0.5%) was underpinned as the energy and mining related sectors continued to benefit from the recent upside in underlying commodity prices, while Crown Resorts shares outperformed after Blackstone raised its cash proposal for Crown Resorts following due diligence inquiries. Nikkei 225 (-1.0%) declined with the index hampered by unfavourable currency flows and with Tokyo raising its COVID-19 alert to the second-highest level. Hang Seng (-0.3%) and Shanghai Comp. (-0.9%) were subdued after the slight miss on loans and aggregate financing data, while there is a slew of upcoming key releases from China in the days ahead including trade figures tomorrow, as well as GDP and activity data on Monday. In addition, the biggest movers were headline driven including developer Sunac China which dropped by a double-digit percentage after it priced a 452mln-share sale at a 15% discount to repay loans and cruise operator Genting Hong Kong wiped out around half its value on resumption of trade after it warned of defaults due to insolvency of its German shipbuilding business. Finally, 10yr JGBs traded rangebound and were stuck near the 151.00 level following the indecisive mood in T-notes which was not helped by an uninspiring 10yr auction stateside, while the lack of BoJ purchases in the market also added to the humdrum tone.

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 6.3542 vs exp. 6.3465 (prev. 6.3658)

US House lawmakers are reportedly assembling a China competition compromise bill. In other news, US DoT spokesperson said the Biden administration has criticized China for cancelling some US-bound flights over COVID cases and said it retains the right to take regulatory measures as appropriate. (Newswires)

Shipping congestion is increasing at the world's largest shipping port in Shanghai due to ships re-routing from Ningbo to avoid delays after some trucking services were suspended due to the COVID-19 outbreak. (Newswires)

UK/EU

UK Foreign Secretary Truss is set to resume talks with the EU over the Northern Ireland protocol today. (CityAM) Elsewhere, the UK is set to launch negotiations with India today for a post-Brexit trade deal. (CityAM)

UK House of Lords lawmakers said a digital GBP for retail use could harm financial stability, increase credit costs and erode privacy, while they added that central bank digital currency for wholesale use should be examined in further detail. (Newswires)

FX

In FX markets, the DXY languished after the prior day’s declines in which it gave up the 95.00 status as focus centered on the latest US inflation metrics. There was also more commentary from Fed officials including Bullard who said four rate hikes in 2022 now appear likely which was a more hawkish view than the three hikes he pencilled in at the December SEPs, while Fed's Brainard noted in her prepared remarks for the Vice-Chair hearing that inflation is too high and that policy is focused on getting inflation back down while sustaining a recovery that includes everyone which is their most important task. EUR/USD benefitted from the greenback’s weakness to lift the single currency to the 1.1450 level where it has since met resistance, although technicians were encouraged by a rise above a 50% fib retracement level at 1.1439 and now eye 1.1500 to the upside. GBP/USD extended north of 1.3700 as a counterparty to the dollar downfall and with politics in the spotlight amid the Downing Street lockdown party scandal with UK PM Johnson facing calls to resign despite his apology where he claimed he thought it was a work event, while the latest Times/YouGov poll showed the opposition Labour party’s biggest lead since 2013. USD/JPY was despondent following a retreat beneath the 115.00 handle and antipodeans were uneventful overnight amid a lack of key data releases and as currencies took a breather from the post-CPI advances against the USD, although Morgan Stanley anticipates further gains in AUD/NZD citing a possible repricing in the front-end of the NZ curve.

Czech Central Bank Governor Rusnok said the main interest rate must increase further but should not exceed 5% and noted that CZK could mildly appreciate further, according to a magazine interview conducted on January 7th. (Ekonom Weekly)

COMMODITIES

Commodities were mixed as WTI crude futures faded some of its recent advances after hitting resistance around the USD 83/bbl level but held on to most of yesterday's gains, having benefitted from a weaker greenback and with the latest EIA inventory data showing a larger than expected drawdown for headline crude inventories. There were also bullish comments from JPMorgan which expects OPEC spare capacity to decline and it reiterated its call that oil prices could increase to USD 125/bbl in 2022 and USD 150/bbl in 2023, while it was also reported that the DoE approved a fourth exchange from the SPR although this failed to influence prices due to the somewhat inconsequential amount and given that this was part of the previously announced measures. Gold was steady post-CPI data with a softer greenback providing a floor for the precious metal, while copper prices eased gradually overnight amid the mixed risk tone.

US DoE approved a fourth exchange of 870k bbls of crude oil for release to Shell (RDSA LN) US from the SPR. (Newswires)

JPMorgan expects OPEC spare capacity to fall through 2022 and to drive a higher risk premium to oil prices, while it sees oil rising to highs of USD 125/bbl this year and USD 150/bbl in 2023. (Newswires)

GEOPOLITICAL

US is reportedly piling the pressure in the South China Sea as it sent an aircraft carrier strike group and a landing helicopter dock group to the region where they are expected to conduct joint drills. (SCMP)

US Secretary of State Blinken earlier announced that the US is sanctioning individuals and entities that support North Korea's weapons programs and the US is committed to preventing North Korea from accessing tech and resources that advance these destabilizing programs. It was also reported that the US proposed more UN Security Council sanctions on North Korea regarding missile launches, according to US Ambassador to the UN. (Newswires/Twitter)

Russian Deputy Foreign Minister Grushko said Russia is ready to talk with NATO regarding strike weapons and that they need to move forward on all fronts proposed by Russia, while he added they are not talking about any compromises and that Russia will use military measures if political measures are not enough to neutralize threats. (Newswires/Interfax)

US

Treasuries were bid for a few bps in the belly with the wings flat as shorts covered after CPI came in more-or-less inline expectations; the lacklustre 10yr auction saw little reaction. 2s +0.8bps at 0.907%, 3s -0.8bps at 1.213%, 5s -1.5bps at 1.493%, 7s -2.4bps at 1.666%, 10s -2.1bps at 1.725%, 20s +0.1bps at 2.126%, 30s +0.1bps at 2.073%. 5yr BEI -5.1bps at 2.869%, 10yr BEI -5.7bps at 2.507%, 30yr BEI -4.4bps at 2.285%. Treasuries entered the NY session little changed (cash 10s 1.74%) on light volumes overnight as participants held fire ahead of CPI and supply; cooling Chinese inflation had little spillover. The inflation prints came in more-or-less as expected, and as the dust settled, T-Notes extended to session highs of 128-22+, with touted short-covering. Given the big downside seen recently in bonds, there had already been some questions about whether the high CPI prints had already been priced in, and the price action after the data would support that. T-Notes then spent the rest of the session rather choppy, but firmer still, with little reaction seen after the 10yr auction ahead of Thursday's 30yr offering. T-note (H2) futures settled 6 ticks higher at 128-18+.

Fed's Brainard (voter) in prepared remarks at her Vice-Chair hearing, said inflation is too high and that policy is focused on getting inflation back down while sustaining a recovery that includes everyone which is their most important task. Brainard also stated the economy is making "welcome progress" and the pandemic continues to pose challenges, while she added priority is to protect the gains they've made and support a full recovery. Furthermore, she is committed to pursuing the Fed's dual mandate of price stability and maximum employment. (Newswires)

Fed's Bullard (2022 voter, hawk) said four rate hikes in 2022 now appear likely and a March hike is very likely amid high inflation. Bullard added the Fed will need to move more aggressively on rate rises this year as it seeks to stem an inflation surge, amid a job market that could see the unemployment rate fall below 3% by the end of the year. Furthermore, they want to bring inflation under control in a way that does not disrupt the real economy, but they are also firm in the desire to get inflation to return to 2% over the medium term. (WSJ)

Fed's Daly (2024 voter) said inflation is uncomfortably high and it is time to begin removing some accommodation, while she expects prices to moderate as they get past COVID and the Fed withdraws accommodation, according to a PBS NewsHour interview. Daly added that she doesn't want to get too far ahead on calling the number of rate hikes but is very bullish about the economy and definitely sees rate increases as early as March. Furthermore, she stated policy is in a good place and they are not behind or ahead of the curve, as well as noted that it will take most of 2022 to get supply and demand back in balance. (Newswires)

Fed's Harker (2023 voter) says he currently sees three hikes this year and is open to beginning in March, while he is open to more than three hikes if that is required and would support further tightening if "very bad" inflation worsens. (FT)

Fed Beige Book stated similar themes regarding supply chain issues and labour shortages, but some signs of easing inflation and that Omicron began to hit activity, while it noted that economic activity expanded at a modest pace in the final weeks of 2021 and contacts from many Districts indicated growth continued to be constrained by ongoing supply chain disruptions and labour shortages. Furthermore, stated that employment grew modestly in recent weeks, but contacts from most Districts reported that demand for additional workers remains strong and that contacts from most Federal Reserve Districts reported solid growth in prices charged to customers, but some also noted that price increases had decelerated a bit from the robust pace experienced in recent months. (Newswires)

Some Senate Republicans are reportedly open to voting on Brainard for Vice Chair but have sounded more wary regarding Raskin as Fed's top bank regulator. (Axios)

US NEC Director Deese called on Congress to pass "money for semiconductors" and expects an easing of price pressures in 2022. Deese said forecasters expect prices to moderate of the year which is consistent with their view and that they are working closely with Congressional leaders to finalise additional Fed nominees. Furthermore, he said supply chain difficulties manifested themselves more than anticipated and that they will take additional action this month on ports. (Newswires)

US Congressional Democrats are moving to pave the way for a Senate debate on voting-rights bill over GOP objections, according to a memo. In relevant news, CNN's Manu Raju tweeted that a source stated there have been "intense" discussions with Manchin and Sinema over changing filibuster rules and passing the voting bill, while Sinema has reiterated to her colleagues she wants to maintain the 60-vote threshold and Manchin opposes going nuclear. (Newswires/Twitter)

US Deputy Trade Representative White expressed concern about Canada's proposed digital service tax and stressed the importance of Canada meeting its USMCA trade deal commitments including dairy tariff rates during talks with his Canadian counterpart. (Newswires)