Key Highlights

• Divergent outcomes in surplus economies as rates continue decline
• Support needed for retail flow in Chinese equities
• Short utilization staying vigilant on stagflation risk

View chart pack

European funders not finding value interest as APAC peers

EXHIBIT #1:  LOW-YIELDING CURRENCIES (BENCHMARK RATE AT OR BELOW 2.0%, NON-PEGGED), HOLDINGS VS. FLOW

_{Source: BNY, as of 8/15/25}

Our take

As global central bankers gather in Jackson Hole this week, stagflation will be front of mind, at least within monetary-policy related topics. Yet, we stress that stagflation is not a universal phenomenon and affected countries will need to address idiosyncratic supply factors, especially in their labor markets. In Western Europe and across much of Asia, the debate has shifted toward whether to continue easing due to disappointing inflation outcomes and a rather difficult trade picture up ahead. Although we believe deploying high levels of savings to support fiscal efforts is the way forward in these economies – and the likes of Germany and China are indeed moving more forcefully in this direction – monetary policy still needs to complement the process. More and more central banks now have benchmark rates at or below 2% – a generally common inflation target – but the FX outcomes are not that straightforward. iFlow Carry remains neutral, as indicated by our data over the past week – the preference for larger APAC names is clear (Exhibit #1).

Forward look

We believe APAC FX – even amongst the low-yielders – will continue to outperform European FX. In some respects, Europe is a victim of its own success. The shift toward stronger fiscal impulse and with the EUR being the prime initial beneficiary of diversification flow away from the dollar has already generated significant re-rating, but the catalysts were arguably due to external circumstances, namely changes in the U.S.’ defense posture and tariffs. APAC is also struggling with the latter, but structural issues with prices and weak demand are well known. Like Europe, soft trend growth was almost a given – much of it due to industrial policy – but with China embarking on an involution drive, Taiwan and South Korea both benefitting from global semiconductor investment, and Japan moving toward a different price cycle, growth expectations are now divergent. Asset flows into the region will continue to outpace a very well-held Europe, and FX will benefit accordingly. There are already reports of increases in borrowing out of low-yielding Europe due to cheaper funding costs, and more importantly its funding markets are far easier to access.

China/APAC flow story not yet matching fundamental view

EXHIBIT #2: RETAIL PARTICIPATION IN CHINESE EQUITIES (MARGIN PURCHASES AND BALANCE)

_{Source: BNY, Macrobond}

Our take

Misgivings over U.S. equity valuations do not appear to be extending into China and Hong Kong markets. Fresh off a record Southbound flow into Hong Kong equities via the Shanghai–Hong Kong stock connect last Friday, regional investors have returned the favor this week as the Shanghai composite reached the highest levels in ten years. As we highlighted on Friday, allocations into China and Hong Kong markets remain light. Fundamentals remain in question – as last week’s poor data round confirms – and there is no clear reason to rotate out of U.S. and select European sectors yet. Furthermore, the composition of investors also warrants closer scrutiny, especially regarding the retail pipeline. For example, the Hong Kong IPO pipeline remains robust, but the high headline coverage ratios far too often rely on margin-based retail participation. The Hong Kong Monetary Authority this month has already introduced new rules which “mandate IPO candidates allocate at least 40% of their shares to institutional investors in bookbuilding, from zero.” Similar trends require monitoring for mainland equities as well. Previous stock rallies, which ultimately proved short-lived mid-last decade and even last September, were driven by high levels of retail and margin participation (Exhibit #2). While margin purchases are not at last year’s extremes, balances remain high and momentum is strengthening.

Forward look

We have argued recently that efforts to improve profitability and ultimately allow broad swathes of Chinese sectors to re-rate are now central to policy, but results will take time to mitigate the effects of several cycles of supply expansion and adverse competition. On Monday, Premier Li Qiang announced additional measures to support the adjustment process and vowed to hit full-year growth targets, though we believe it is now too late in the year to expect forceful stimulus. Nonetheless, validation will arise when both local and cross-border institutional managers increase participation – and do so more willingly rather than by mandate. This means that corporate earnings will need to generate several rounds of upside surprises and tracking errors begin to rise as China and Hong Kong increasingly outperform. It is reasonable to assume that retail cannot hold on for that long, so the road ahead could prove bumpier, but organic growth in global institutional participation is necessary. Monitoring outright flows aside, further steepening in the Chinese government bond curve will also provide evidence of a rotation into equities.

Bond markets taking no chances ahead of Jackson Hole

EXHIBIT #3: SHORT UTILIZATION CHANGE, U.S., U.K. AND CANADA

_{Source: BNY}

Our take

The main theme at Jackson Hole this month is labor, and we expect leading central bankers to attempt to identify why labor market cooling is not directly translating into softer wage growth. Even accounting for poor response rates to labor market surveys and other data-based caveats, it is undeniable that the link between changes in vacancies and wages is becoming increasingly tenuous. Recent figures in the U.K. and Australia have cast doubt on the need for the latest interest cuts by the Bank of England and Reserve Bank of Australia, and the Federal Reserve’s September decision faces similar challenges. Our data indicate that the market is not taking chances with bear steepening, and there is some movement in short utilization in the U.K. and U.S. Canada – another economy which faces similar stagflation challenges – is not facing similar pressures in bond markets as the market is likely seeing their latest labor market figures as an indication of a looming recession, giving the Bank of Canada greater policy impetus to ease.

Forward look

Markets perhaps need to return to bond market first principles and appreciate that term premia and inflation are not mutually exclusive. Excessive government spending is seen as inflationary and drives up long-dated yields. In recent years, global economies have seen a surge in government spending on services – in most cases, beyond levels considered sustainable in the long term – which tend to have lower productivity growth. This was a point ECB President Lagarde highlighted several years ago in her Sintra speech detailing the reasons behind stagflation even in the Eurozone. As U.S. and U.K. debt-to-GDP ratios look set to move well into triple digits, with limited sign of consolidation, total economy productivity is unlikely to make material gains as public services spending is crowding out other forms of productivity gains. Active fiscal consolidation remains politically unpalatable and central bankers will tread carefully when addressing such risks. On the other hand, governments concerned about borrowing costs and hoping for more rate cuts will need to look at their own roles in preventing the very same.

Chart pack