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[PODCAST] European Open Rundown 14th January 2022

  • Asian equity markets weakened amid headwinds from the US where all major indices declined
  • Losses in the US were led by tech and consumer discretionary names amid a slew of hawkish Fed speak
  • European futures are indicative of a softer open with the Eurostoxx 50 future lower by 0.8%
  • Chinese trade figures showed weaker than expected Imports although Exports topped estimates
  • Bank of Korea hiked rates by 25bps for a third time in the current tightening cycle to 1.25%
  • The DXY remains on a softer footing and a 94.00 handle, USD/JPY is back below 114.00
  • Looking ahead, highlights include UK GDP, US Retail Sales, Import & Export Prices, Industrial Production, Uni. of Michigan, ECB's Lagarde, Fed's Williams. Earnings from Blackrock, Citi, JPMorgan and Wells Fargo


US Supreme Court granted the Biden administration a request to enforce vaccine mandates for health care workers but blocked President Biden's workplace vaccine or test rule. (Newswires)

US CDC's COVID-19 guidance for cruise ships will be optional beginning on Saturday when the current framework expires as the CDC will switch to a voluntary risk mitigation program for cruise lines in US seas, according to Axios. In other news, NYC Mayor Adams is to consider 'temporary' remote option for schools. (Newswires)

UK is expected to end COVID-19 passes later this month, according to The Times. (The Times)

Norway PM said they can ease a lot of COVID restrictions but not all and they must still have contact-reducing measures in place, while alcohol can again be served in bars and restaurants but only until 11pm. Furthermore, they will make a new evaluation of COVID restrictions in early February and are to replace many quarantines with tests. (Newswires)


Asian equity markets weakened amid headwinds from the US where all major indices declined led by losses in tech and consumer discretionary amid a slew of hawkish Fed speak, while mixed Chinese trade data added to the cautiousness in the region. ASX 200 (-1.1%) traded lower as tech and consumer stocks mirrored the underperformance of stateside peers and with nearly all industries on the back foot aside from utilities and gold miners. Nikkei 225 (-1.4%) briefly gave up the 28k level amid a firmer currency and source reports that BoJ policy makers are said to debate how soon they can begin signalling a rate hike. In terms of the notable movers, Fast Retailing was the biggest gainer after it reported a record Q1 net, followed by Seven & I Holdings which also benefitted post-earnings, while Hitachi Construction was at the other end of the spectrum after news that parent Hitachi will offload half its majority stake. KOSPI (-1.5%) eventually underperformed after the Bank of Korea hiked rates by 25bps for a third time in the current tightening cycle to 1.25%, as expected. BoK also noted that CPI is to stay in the 3% range for a while and BoK Governor Lee made it clear that rates will continue to be adjusted which has fuelled speculation of similar action at next month’s meeting. Hang Seng (-0.5%) and Shanghai Comp. (-0.6%) were also pressured with participants digesting the latest trade figures which showed weaker than expected Imports although Exports topped estimates. Nonetheless, the downside was somewhat limited amid ongoing expectations for PBoC easing to support the economy as the Fed moves closer towards a rate lift off and with some encouragement after Evergrande averted its first onshore debt default whereby bondholders approved a six-month postponement of bond redemption and coupon payments. Finally, 10yr JGBs retreated beneath the 151.00 level following the source report that suggested debate within the BoJ on how soon a rate increase can be signalled which could occur ahead of the 2% price target, while this coincided with an increase in the 5yr yield to a 6-year high and a weaker than previous 20yr JGB auction.

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 6.3677 vs exp. 6.3611 (prev. 6.3542)

  • Chinese Trade Balance (USD)(Dec) 94.46B vs. Exp. 74.5B (Prev. 71.72B)
  • Chinese Exports YY (USD)(Dec) 20.9% vs. Exp. 20.0% (Prev. 22.0%)
  • Chinese Imports YY (USD)(Dec) 19.5% vs. Exp. 26.3% (Prev. 31.7%)
  • Chinese Trade Balance (CNY)(Dec) 604.7B vs. Exp. 453.7B (Prev. 460.7B)
  • Chinese Exports (CNY)(Dec) 17.3% vs. Exp. 16.3% (Prev. 16.6%)
  • Chinese Imports (CNY)(Dec) 16.0% vs. Exp. 23.6% (Prev. 26.0%)

BoJ policymakers are said to be debating how soon they can begin telegraphing a rate increase which could occur before the central bank reaches the 2% target although an actual hike may not occur until late 2023, according to Reuters sources. (Newswires)

Bank of Korea raised the 7-Day Repo Rate by 25bps to 1.25%, as expected, with the decision not unanimous as board member Joo Sang-Yong dissented. BoK said South Korea's economic growth path is inline with its projection, exports growth will sustain favourable momentum and that private consumption improvement will strengthen. Furthermore, it is to monitor policy changes abroad, the build up of financial imbalances, COVID developments, as well as pace of growth and inflation, while it added that consumer inflation is to exceed the previously expected path for some time and will run above mid-2% this year with CPI to stay in the 3% range for a while. There were also comments from BoK Governor Lee that the current policy rate is still accommodative which still needs to be further adjusted and that reaching a 1.5% policy rate still cannot be viewed as tightened. (Newswires)


UK police said they will not investigate any Downing Street parties unless the Sue Gray inquiry finds evidence of potential criminal offences, while it was later reported that the Sue Gray inquiry will say that the Downing Street lockdown parties were not criminal. (The Mirror/The Times)

UK Tory MP and prominent Brexiteer Andrew Bridgen became the fifth Tory MP to submit a no confidence letter against PM Johnson this week and called for the PM to resign amid the Downing Street lockdown party scandal. Furthermore, reports suggest that as many as 30 letters of no confidence have been submitted by Conservatives, while 15% of the party's lawmakers (54 MPs) are needed to submit letters for a vote on the leadership. (Telegraph)

EU Commission will, very shortly, be sending a letter to Poland that it is set to withhold over EUR 100mln of funds from EU payments in order to cover unpaid fines. (FT)


In FX, the DXY weakened further beneath the 95.00 level which had acted as resistance during US trade with a plethora of hawkish Fed commentary failing to support the currency. This included comments from Fed’s Brainard who gave a nod to a potential hike in March and Harker suggested to probably expect a 25bp rate hike after asset purchases finish in March. Furthermore, the usually dovish-leaning Evans noted that three hikes is a good opening bid for 2022 but it could be four if inflation doesn’t improve quickly, while Fed’s Waller was somewhat balanced as he stated that he sees three hikes as a good baseline but the case could be made for 4 or 5 hikes if high inflation persists, but also suggested that if inflation goes down, it could mean fewer than three hikes. Waller also stressed that policy will depend on inflation and although he favours a rate lift-off in March, he does not expect this to be a 50bps hike. EUR/USD held on to its gains against the USD with the 1.1450 level providing a platform for the single currency and GBP/USD was kept afloat by support at 1.3700 with attention in the UK remaining on the current political waves as Tory MP and prominent Brexiteer Andrew Bridgen became the fifth MP within the party to submit a no confidence letter against PM Johnson this week. Note, the total number of no confidence letters that have been submitted by Conservatives against PM Johnson is seen at 30 which is short of the 54 MPs needed for a vote on the leadership. It was also reported that the Sue Gray inquiry will state that the Downing Street lockdown parties were not criminal. USD/JPY and JPY-crosses were pressured by haven flows and a hawkish BoJ source report, while antipodeans were rangebound with price action constrained by the risk averse mood and mixed Chinese trade figures.


Commodities were mixed with WTI crude futures marginally extending on the prior day's pullback to slightly beneath the USD 82/bbl amid the risk aversion and plethora of hawkish Fed speakers favouring a March rate hike. In terms of the pertinent newsflow, Iraq reduced the premium of Basrah medium crude for Asia to USD 0.50/bbl from a previous premium of USD 1.40/bbl over the Oman/Dubai average and it was also reported that the DoE sold 18.1mln bbls to US producers from the SPR although this had little impact as it had been previously announced. Elsewhere, gold was kept afloat by a subdued greenback and copper was uninspired as price action reflected the cautious mood and following weaker than expected Chinese Imports data.

US DoE said it sold 18.1mln bbls of crude to Valero (VLO), Phillips 66 (PSX), Motiva, Marathon Petroleum (MPC), Gunvor USA and Exxon Mobil (XOM) from the SPR which was a previously announced sale. (Department of Energy)


US Senate bill to impose sanctions on Nord Stream 2 was unsuccessful in getting enough support to pass. (Newswires)

US National Security Adviser Sullivan said the US will remain engaged with Russians and allies on the next steps in diplomacy over the coming days, while he added that reports signalling the US will reduce troop levels in Europe are not accurate. Furthermore, he added they have not definitely determined that Russians have decided to take military action forward and noted it is still true that the threat of military invasion remains high. (Newswires)

North Korea stated that its missile developments are a legitimate right to self-defence and its recent weapons development was not targeting a specific nation or did not threaten its neighbours. North Korea also stated that US is intentionally escalating the situation with sanctions and that US accusations regarding weapons are evident provocation and gangster-like logic, while it warned it will be forced to take stronger action if US adopts a confrontational stance. Furthermore, it was reported that the US urged North Korea to refrain from provocation after earlier North Korean warning, while North Korea was later reported to have fired another projectile eastward. (KCNA/Yonhap)

At least two rockets have been fired at the US embassy station in Baghdad in which both have been shot down and was said to cause no casualties or damage, according to Iraqi Military officials. However, it was later reported that two were wounded in the Iraq rocket attack, according to AFP citing a security source. (AFP)


Treasuries were little changed on Thursday after recovering APAC session losses, but managed to settle firmer; 30yr auction was decent. At settlement, 2s -1.6bps at 0.891%, 3s -2.3bps at 1.192%, 5s -2.1bps at 1.471%, 7s -2.4bps at 1.642%, 10s -2.1bps at 1.704%, 20s -1.7bps at 2.110%, 30s -2.1bps at 2.051%. 5yr TIPS -6.2bps at -1.334%, 10yr TIPS -2.9bps at -0.767%, 30yr TIPS -1.2bps at -0.170%, 5yr BEI -3.9bps at 2.810%, 10yr BEI -4.2bps at 2.447%, 30yr BEI -2.9bps at 2.238%. Treasuries entered into the NY handover a few bps cheaper with the belly weakest while futures volumes had been average out of the APAC/Europe morning. Following Brainard's prepared remarks, in which she noted getting inflation controlled was a top priority, we also heard from Harker (2023 voter) saying he would be in favour of four hikes this year if the inflation problem worsened; that followed Bullard (2022 voter) on Wednesday saying he would be in favour of four hikes this year, up from his Dec SEP of three hikes, in addition to Mester's calls to shrink the balance sheet as fast as possible. Thus, there had been a decent flurry of hawkish sentiment for traders to digest entering Thursday, keeping pressure on the belly. But, better bidding emerged after the PPI Dec data confirmed a slowing of inflation pressures on the supply side, albeit still elevated, and as hawkishness runs its course for the time being. The decent 30yr auction later on (details below) saw little market follow-through, similar to Wednesday's lacklustre 10yr offering, although note that some desks had attributed the weakness in USTs at the APAC opening on Thursday as a late reaction to the 10yr auction, so watch out for any warm reception to the 30yr as APAC arrives for the Friday session. Elsewhere on Friday, we will see some of the big bank earnings reports, while US retail sales will be the last major data point until the week after next. But more imminently, watch out for Fed's Waller who is speaking at 18:00EST Thursday, in what is the last opportunity to speak/signal before the blackout; there remains a small chance the Fed could conclude its asset purchases in their entirety at the January meeting, instead of the current plan for March. T-note (H2) futures settled 4+ ticks higher at 128-23.

Fed's Brainard (voter) said will be in a position to hike rates as soon as asset purchase taper is completed and sees the balance sheet shrinking some time "beyond" the first rate hike, while she noted that inflation will remain high through the first two quarters of 2022 and should all take projections with a fair amount of caution. Fed's Brainard said they have projected several rate hikes this year and expect to shrink the balance sheet, while she noted that labour force participation is not showing the improvements they had expected but still has confidence they will see it slowly improve and noted unemployment has come down rapidly but some jobs will come back slower. Brainard also stated she believes they will see inflation come back down to 2% while employment picture continues to clear and said as the Fed looks to end asset purchases, raise rates and shrink the balance sheet, it will do it in a transparent way. (Newswires)

Fed's Waller (voter) said he sees three hikes as a good baseline and the case could be made for 4 or 5 hikes if high inflation persists, although he suggested that if inflation goes down it could mean a pause and less than three hikes, while he added that they will have to see what inflation looks like. Waller commented that they could begin shrinking the balance sheet by summer but added that the Fed could additionally allow the balance sheet to run off earlier and stated that if they start running off the balance sheet and long-term rates increase, that could mean less need for raising short-term rates. Waller also noted that he favours a March hike but doesn't expect it to be a 50bps increase in March and noted that if inflation remains above 3%, they will need to do more and possibly rethink their strategy, but added that he sees inflation around 2.5% by year-end and that rapid rate hikes would no longer be needed once inflation is down to 2.5%. (Newswires)

Fed's Evans (2023 voter) said inflation is too high and that demand for goods has exploded but services demand is "woefully" below where it was, while the Fed strongly expects 2-4 rate hikes this year and will see how it plays out. Evans said prices of goods in really high demand and short supply have skyrocketed, as well as noted that monetary policy is not well positioned for this and that they need to be adjusting monetary policy to something closer to neutral. Evans also noted that he does not believe inflation will stay this high and said that inflation will come down due to supply chain improvements and demand will fall a little as the Fed raises rates. Evans later commented that three hikes is a good opening bid for 2022, but it could be four if inflation does not improve quickly enough, while he is reluctant to declare maximum employment and noted inflation is too high. Furthermore, he said the balance sheet is very large and the Fed will likely start shrinking it sooner rather than later following rate hikes with officials likely to think seriously about a March hike. (Newswires)

Fed's Harker (2023 voter) said the Fed should think about balance sheet normalisation after the interest rates are sufficiently above zero and he is not concerned the Fed is behind on inflation but action is required. Harker also reiterated that he pencilled in three hikes for 2022 although four is not out of the question, while he added the US economy is at maximum employment in his eyes and the balance sheet run off should be steeper than it was before but not dramatically so. (Newswires)

Fed's Barkin (2024 voter) said the closer that inflation returns to target the easier it will be to normalize rates at a measured pace, while timing and pace of hikes will depend on inflation whereby if it remains elevated and broad-based, the Fed needs to be aggressive. Barkin suggested they are not seeing price levels affect demand for the most part and said labour supply will remain short in 2022 due to slower immigration, an aging workforce and care responsibilities. Furthermore, he said a labour shortage may be a long-lasting phenomenon and that the participation rate is stagnant which they may need to just accept. (Newswires)

Fed's Daly (2024 voter) said raising rates in March is quite reasonable and it is misguided to call the number of hikes needed which will depend on data, while she added that ending bond buying earlier than planned would not be worth the potential market dislocations. Fed's Daly also stated that she doesn't want to raise rates while still buying bonds and that they could start reducing the balance sheet after one or two rate hikes and certainly by end of the year, while she noted that pace of balance sheet reduction can be faster than last time although should be predictable and not meeting by meeting. Furthermore, she expects inflation to remain high for most of the year but will moderate and said the labour market is roaring aside from labour force participation. (Newswires)

Outgoing Fed Vice-Chair Clarida said inflation is well above what he would consider a moderate overshoot of the Fed's goal and believes an unwelcome surge in inflation in 2021 will prove to be largely transitory under the appropriate monetary policy. Clarida noted that commencing policy normalisation in 2022 would be entirely consistent with new average inflation targeting framework. Furthermore, he stated that fully reopening the economy is essentially taking longer and has more cost than it did to shut it, while he continues to believe underlying rate of inflation in the US economy is hovering close to the Fed's 2% longer-run goal. (Newswires)

US President Biden reportedly nominates economists Lisa Cook and Philip Jefferson as Fed Governors, while he nominates Sarah Bloom Raskin as Fed Vice Chair for Supervision, according to Reuters sources. (Newswires)

US President Biden hopes that they can get voting rights done but he does not know if this is possible. In relevant news, Democratic Senator Manchin said Senate rules changes are needed to make the chamber work better, but he does not support getting rid of filibuster and it was also reported that Moderate Democratic Senator Sinema reiterated opposition to changes on the filibuster 60-vote threshold, while US Democrat Senators Manchin and Sinema later met with President Biden on voting rights. (Newswires/Fox/Washington Post)