Key Highlights

• RBNZ cuts rates by 50bp to 2.5%, against expectations of a 25bp reduction, warns further cuts are likely.
• Bank of Thailand holds rates at 1.5%, defying expectations of a 25bp cut, states deflation risks remain low.
• In Japan, LDP leader Sanae Takaichi holds talks with coalition partner Komeito; splits could delay parliamentary vote; Finance Minister Katsunobu Kato is watching JPY weakness closely.

Chart of the Day

iFlow Carry returns to positive statistical significance

^{Source: BNY}

After several false starts in September, iFlow Carry has shifted back into statistical significance for the first time in almost three months. This should not come as a surprise given the flows into equity markets and the fact that the dollar was struggling with a shift in Fed expectations through much of September. We had anticipated such a move since late summer as the Fed’s pivot became clear, but an earlier attempt before the September FOMC meeting failed. At that point, we had feared that the maximum point of Fed dovishness had been attained, which would limit broader inflows back into higher yielders. In some respects, our view was correct on this, as the highest-yielding currencies have not generally performed well in flow terms over the past month. However, the dollar has now taken on the carry mantle, as rate differentials reached the maximum point of divergence during Fed week and sentiment had turned around due to data and Fed commentary before the shutdown began. This runs counter to the narrative that hedging in the dollar is picking up due to rate differentials moving against the greenback. These hedges may have been the trend in the run-up to the Fed decision, but they failed to extend.

What's Changed?

The U.S. dollar was up again overnight, bringing it 1% higher against EUR and JPY on the week, while gold was up 4.5%. The currency debasement trade, coupled with tech valuation fears, drove markets overnight. Gold broke through $4,000, and tech shares were sold in Asia. The EU markets are focused on French bonds, which are down 4.5bp as caretaker PM Sébastien Lecornu hopes for a budget that will prevent a snap election. The RBNZ’s decision to cut interest rates by 50bp rather than 25bp left NZD lower, especially on dovish guidance for another cut in November. Currency matters more than rates ahead of the U.S. open, as the market braces for the eighth day of the federal government shutdown, but one that brings the FOMC minutes, the federal budget deficit monthly report, more Fedspeakers and the $38bn 10y note sale. Investors’ response to the current xAI tech deals will also be important for the mood, given circular dealing doubts and vendor-finance memories of previous bubbles. The balancing act in equities is between a drag on foreign earnings outlooks and growth from USD gains, and the rise in equities due to ongoing trend chasing and possible positive developments in French and U.S. budget discussions. The lack of data hasn’t hurt markets but this could change with today’s 10y sale, as yield curves reflect the urgency of acting now rather than later. 10-30y spreads in Japan and Germany matter for how investors absorb the U.S. supply and the ongoing fears of currency debasement everywhere. Debt is money, and money is debt. 

What You Need to Know

The Reserve Bank of New Zealand has cut rates by 50bp to 2.50% and is open to further reductions in the OCR. The larger-than-expected rate cut is more than the RBNZ’s own economic forecast set out in August, when it saw OCR rates at 2.50% by Q1 2026. The overall assessment is on the dovish side, especially on growth, where the RBNZ sees significant spare capacity in the domestic economy. RBNZ takes the view that a larger reduction in the OCR could mitigate this risk by providing a clear signal that supports consumption and investment. On inflation the outlook is mixed, with both upside and downside risks to domestic inflationary pressure. In the forward-looking statement, the RBNZ noted that the committee remains “open to further reductions in the OCR” compared with the phrasing “there is scope to lower the OCR further” in the August press release. NZX 50 +0.312% to 13531.29, NZDUSD -0.582% to 0.5809, 10y NZGB -0.8bp to 4.226%.

Thailand’s Monetary Policy Committee voted 5-2 to keep the policy rate at 1.50%, with two members preferring a 0.25-point cut to 1.25%. The committee cited risks from weakening exports due to U.S. trade policies, a slower recovery in tourism and fragile domestic demand. Inflation is projected at 0.0% in 2025 and 0.5% in 2026, mainly from lower energy and food prices, but members warned of possible deflationary pressures. Credit growth remains contracted because of weak corporate borrowing and cautious lending to SMEs and low-income households. The MPC stressed the need to monitor the impacts of U.S. tariffs, government budget disbursement, SME competitiveness and baht movements. Policymakers reaffirmed their readiness to adjust rates if these risks materially affect economic recovery and price stability. SET +1.552% to 1305.59, USDTHB +0.201% to 32.513, 10y TGN -0.1bp to 1.394%.

U.K. government borrowing for the fiscal year to August was revised down by £2bn to £81.8bn after HM Revenue & Customs identified errors in VAT receipt data, the Office for National Statistics said. Borrowing for the previous fiscal year was also cut by £1bn. The correction follows a series of data issues that have undermined confidence in the ONS, including an inflation overestimate in April and the postponement of retail sales data in August. Despite the revision, borrowing remains £9.4bn above the Office for Budget Responsibility’s forecast of £72.4bn, adding pressure ahead of Chancellor Rachel Reeves’s upcoming budget. FTSE 100 +0.059% to 9484.75, GBPUSD -0.319% to 1.3442, 10y gilt +0.8bp to 4.744%.

France’s outgoing Prime Minister Sébastien Lecornu has expressed optimism that a political accord on forming a new government could soon be reached, as talks continued with left-wing parties on Wednesday. Lecornu said there was broad agreement to pass a budget before year-end, adding that reducing the deficit remained essential but that smaller spending cuts may be possible, targeting a deficit below 5% of GDP in 2026. Former Prime Minister Elisabeth Borne signaled openness to suspending the controversial pension reform that raised the retirement age to 64, a key Socialist demand. However, the proposal risks adding billions to France’s deficit, with outgoing finance minister Roland Lescure warning of major fiscal costs from 2026 onward. CAC40 -0.196% to 7956.12, EURUSD -0.274% to 1.1679, 10y OAT +2.7bp to 3.594%.

What We're Watching

U.S. September federal budget forecast at $50bn vs. $-344.8bn in August.

U.S. FOMC meeting minutes for September where the Fed delivered a 25bp rate cut and a downward revision on the dot plot – watching for debate over the speed of easing and the terminal rate.

Central bank speakers: St. Louis Fed President Alberto Musalem and Federal Reserve Governor Michael Barr to give remarks at the 2025 Community Banking Research Conference; Minneapolis Fed President Neel Kashkari speaks at the Center for Indian Country Development’s 10th Anniversary Event and Data Summit.

U.S. Treasury sells $69bn in 17-week bills and $39bn in a 10y note reopening.

What iFlow is Showing Us

Mood: iFlow Mood remained negative, with increasing outflows in both equities and core sovereign bonds. iFlow Mood is at -0.012.

FX: USD, JPY, EUR, HUF and ILS posted the most outflows, against good inflows into GBP, DKK, AUD, CZK, KRW and IDR. JPY scored holdings narrowed but remains the most overheld currency within G10.

FI: U.K. gilts and Eurozone government bonds posted the most demand, against light selling in Australian, New Zealand and Japanese government bonds. Flows in the rest of the region were light and muted.

Equities: Japanese and South African equities were most bought. Elsewhere, Australian, Canadian and U.K. equities were significantly sold, followed by Europe and Mexico. Equities were lightly sold across the APAC region.

Quotes of the Day

“We can’t control the impressions others form about us, and the effort to do so only debases our character.” – Epictetus

“We are defined by our dignity to rise above debasement. We are certainly better people for doing so.” – Corey Taylor

Economic Details

Germany’s industrial production fell 4.3% m/m in August, following a revised 1.3% increase in July, while output was down 3.9% y/y. The decline was led by an 18.5% drop in automobile manufacturing and a 6.2% fall in machinery production, partly due to plant holidays and model adjustments. Pharmaceutical output decreased 10.3%, and electronics production fell 6.1%. Overall industrial output excluding energy and construction declined 5.6% m/m, with investment goods down 9.6%, consumer goods down 4.7% and intermediate goods down 0.2%. Energy production slipped 0.5%, while construction rose 0.6%. Production in energy-intensive industries increased slightly, by 0.2% m/m, but remained 4.0% lower y/y. DAX -0.027% to 24371.65, EURUSD -0.274% to 1.1679, 10y Bund +0.9bp to 2.728%.

Sweden’s preliminary September CPI inflation rate stood at 0.9% y/y, down from 1.1% in August, while prices were flat m/m. The CPIF (Consumer Price Index with fixed interest rate) eased slightly to 3.1% from 3.2% in August, rising 0.1% m/m, while the CPIF-XE (excluding energy) slowed to 2.7% from 2.9%, also up 0.1% m/m. Statistics Sweden statistician Caroline Neander said the preliminary figures suggest a decrease in inflation from the previous month. The data indicate that underlying price pressures remain moderate, with energy components continuing to weigh on overall inflation. Detailed and final figures for September are scheduled for release on October 15. OMX -0.516% to 2727.142, EURSEK -0.148% to 10.965, 10y Swedish GB +1bp to 2.766%.

Hungary’s consumer prices rose 4.3% y/y in September, unchanged m/m. Food prices increased 4.7% overall, with sharp rises for chocolate and cocoa (+19.2%), eggs (+18.2%) and coffee (+17.6%), partly offset by lower prices for margarine (-29.0%), flour (-12.0%) and milk (-7.4%). Energy prices were 10.6% higher, driven by a 23.4% jump for gas and a 2.3% rise for electricity. Alcoholic beverages and tobacco rose 7.1%, while services were up 5.9%, including 12.9% for recreation and 9.3% for rents. Consumer durables increased 2.5%, led by jewelry (+20.7%). Prices were flat m/m, as lower seasonal food costs offset increases for clothing and footwear (+1.5%). Budapest SI +0.366% to 100286.9, EURHUF +0.26% to 389.7, 10y HGB 0bp to 6.81%.

Czech retail sales rose 3.5% y/y and 0.6% m/m in real terms in August. Excluding motor vehicles, sales increased 0.6% m/m, with automotive fuel up 1.6%, non-food goods up 0.7%, and food up 0.1%. Year-on-year, non-food sales grew by 4.1% and fuel sales by 10.9%, while food sales fell 0.1%. Online and mail-order sales rose 8.8%, and non-specialized retail sales increased by 7.8%. The strongest gains were seen in cosmetics (+12.1%), cultural and recreation goods (+7.7%) and clothing (+6.3%), while ICT equipment (-9.7%) and household goods (-2.4%) declined. Motor vehicle sales including parts rose by 9.1% y/y, and repairs by 4.5%. In separate figures, the unemployment rate rose to 4.55% in September from 4.49% in August. Prague SE -0.685% to 2362.06, EURCZK +0.054% to 24.322, 10y CZGB +0.2bp to 4.481%.

Japan’s real wages fell 1.4% y/y in August, marking an eighth consecutive monthly decline, as inflation continued to outpace pay growth. Nominal wages rose 1.5% to ¥300,517, extending a 44-month streak of increases but slowing from 3.4% in July and 3.1% in June as the effect of summer bonuses faded. Consumer prices used in wage calculations rose 3.1%, mainly due to higher food costs, keeping real earnings in negative territory. A Ministry of Health, Labor and Welfare official noted that future wage trends will depend on inflation movements, while the BoJ continues to monitor wage and price dynamics for its next policy decision. Nikkei +0.013% to 47950.88, USDJPY +0.153% to 150.58, 10y JGB -0.8bp to 1.684%.

Japan’s August current account surplus fell 4.8% y/y to ¥3.78tn, marking a second monthly decline as lower income from overseas investments outweighed a narrower trade deficit. The goods account recorded a ¥105.9bn surplus, reversing July’s deficit, as exports decreased 0.4% y/y to ¥83.6tn and imports dropped 6.0% to ¥82.5tn. The services deficit widened sharply to ¥189.9bn from ¥79.0bn a year earlier, driven by higher payments for intellectual property and financial services. Primary income, typically Japan’s main surplus component, fell 11.5% y/y to ¥4.30tn due to lower direct and portfolio investment returns. On a seasonally adjusted basis, the current account rose 30.8% m/m to ¥2.46tn, supported by a rebound in trade and moderating service losses.

Japan’s Economy Watchers Survey for September showed sentiment deteriorating as household and corporate activity weakened amid lingering inflation and extreme weather. The current conditions index rose slightly to 46.7 from 45.2, while the outlook index held at 47.5, both remaining below the 50 threshold that separates improvement from deterioration. Consumers continued to cut discretionary spending, particularly on apparel and dining, with higher food and energy costs curbing demand. Retailers nationwide reported cautious buying and smaller purchase volumes, while service industries cited slower domestic tourism after the summer and a drop in high-end consumption. Corporate views were mixed – manufacturers saw steady output in select export sectors, but smaller firms faced cost pressures and labor shortages. Employment sentiment held broadly steady, though hiring mismatches persisted. Overall, respondents highlighted inflation fatigue, sluggish wage gains and weak purchasing power as key headwinds.

Taiwan’s September CPI rose 1.25% y/y, easing from 1.60% in August, while prices fell 0.23% m/m (up 0.11% seasonally adjusted). Core CPI increased 1.46% y/y. Food prices rose 2.64% as pork, vegetables and eggs climbed, while jewelry prices surged 8.75%. Transport and communication costs fell 2.02% due to lower oil prices and reduced car and motorbike taxes, offset partly by higher train fares. The PPI dropped 3.73% y/y but rose 0.24% m/m, while import and export prices in USD terms declined 1.9% and 0.12% y/y, respectively. Average inflation for January-September stood at 1.77%. TAIEX +1.685% to 27211.95, USDTWD +0.428% to 30.507, 10y TGB +0.6bp to 1.345%.

FTSE Russell announced that Vietnam will be upgraded from Frontier to Secondary Emerging Market status, effective September 21, 2026, pending an interim review in March 2026 to confirm sufficient access for global brokers. The decision follows significant reforms by Vietnamese authorities, including the removal of the prefunding requirement for foreign institutional investors and the introduction of a non-prefunding settlement model with a formal failed-trade handling system. FTSE Russell said Vietnam now meets all criteria for Secondary Emerging Market status. Finance Minister Nguyen Van Thang called the upgrade a milestone in Vietnam’s integration into global capital markets, pledging further reforms to enhance transparency and digitalization. VN-I 0.555% to 1694.66, USDVND -0.016% to 2636110y VGB -0.1bp to 3.665%.

Indonesia’s September Consumer Confidence Index (CCI) stood at 115.0, down from 117.2 in August, indicating that optimism remained resilient despite a slight softening in sentiment. The Current Economic Conditions Index fell to 102.7 from 105.1, as perceptions of income (112.9) and durable goods purchases (103.2) stayed positive, while job availability remained below 100 at 92.0. The Consumer Expectations Index eased to 127.2 from 129.2, supported by expectations for income (134.3), business activity (124.2), and employment (123.1). The share of income spent on consumption rose to 75.1%, while debt repayments declined to 11.2% and savings remained steady at 13.7%. Confidence strengthened in Mataram, Makassar and Pontianak, but weakened in Medan, Manado and Padang. JCI +0.401% to 8172.496, USDIDR -0.085% to 16540, 10y IDGB -4.3bp to 6.252%.

Thailand’s consumer confidence index rose to 50.7 in September from 50.1 in August, marking the first increase in eight months, reported the University of the Thai Chamber of Commerce. The economic sub-index also edged up to 44.4 from 44.1, reflecting improved sentiment following the government’s $1.4bn stimulus package aimed at boosting consumption. Despite the gain, readings below 100 indicate continued concern over domestic economic conditions, higher living costs and global headwinds linked to trade tensions. The university expects GDP growth of 2.0% in 2025, revised up from 1.7% in June, supported by stronger private consumption, investment and export performance. SET +1.552% to 1305.59, USDTHB +0.201% to 32.513, 10y TGN -0.1bp to 1.394%.

The Philippines’ unemployment rate fell to 3.9% in August from 4.0% a year earlier and 5.3% in July, marking the lowest level in over a year. The number of unemployed people dropped to 2.03 million from 2.59 million in July. The employment rate rose to 96.1%, with 50.10 million Filipinos employed, up from 49.15 million in August 2024. The labor force participation rate climbed to 65.1%, translating to 52.13 million people in the labor force. Services remained the largest employer at 61.5%, followed by agriculture at 20.4% and industry at 18.1%, with construction, fishing and administrative services driving job gains. PSEi +1.392% to 6083.83, USDPHP -0.335% to 58.15, 10y PHGB +1bp to 5.99%.