Key Highlights

• French Prime Minister Sébastien Lecornu resigns after only 27 days in office, triggering further turmoil in European bond markets.
• Japan’s PM-elect Sanae Takaichi is set to appoint Ministry of Finance veterans to key LDP leadership roles, driving stock appreciation, yield curve steepening and JPY weakness.
• OPEC+ plans to raise oil production by 137,000 barrels/day in November, citing a steady global economic outlook and healthy market fundamentals; this is still less than expected.

Chart of the Day

OATs and JGBs very weakly held despite recent improvements

^{Source: BNY}

OATs and JGBs were in the spotlight overnight, as the prospect of new governments exerted further pressure on countries with challenging fiscal narratives. The two governments face differing degrees of instability, but the need to address popular concerns over the cost of living while attempting to manage an ever-rising debt load has resulted in volatility in their respective government yield curves. However, we suspect that expectations of major deterioration in conditions could prove off the mark. Our data indicate that current holdings in both markets are relatively light and below their rolling 12-month averages. Their respective holdings peaks for this year were just after “Liberation Day,” prompted by an immediate flight from U.S. paper; however, as conditions normalized in the U.S. Treasury market, marginal demand based on diversification interest has proven difficult to attain. Flows into France were firm through the summer despite the political challenges throughout, but gains have largely been in the front end, with limited impact on broader duration. The JGB market has faced stronger outflows from cross-border investors of late, but overall holdings are neutral as the new administration takes shape. In both economies, we believe risk premiums via the currency will be a bigger factor, and JPY is particularly exposed in this respect: valuation-based flows will be challenged by a return to the “Abenomics” framework for the currency.

What's Changed?

Politics is moving markets this Monday, as the election of a new LDP leader in Japan and the resignation of the French prime minister have put fiscal worries into focus globally. Japan’s bond curve has steepened, with 10y JGB yields up 2.2bp and 30y up 13.7bp, while in France 10y OAT yields are up 8.3bp and 30y up 9bp. The FX markets have moved sharply, with JPY shedding 1.8% of its value and breaking through 150 to the USD, while EUR is off 0.5% at 1.1660. In Japan, hopes of more government spending have driven shares up 4.75%, whereas in France the doubts about a budget have left the CAC 40 1.7% lower. These stories serve as warning signals for the U.S. market open, where the federal shutdown continues with layoff risks rising and polls showing the nation remains divided over who to blame. The focus is on today’s Senate vote, which will be important to how the Trump administration proceeds. For the week ahead, traders are listening to Fedspeakers, reading the Fed minutes and watching the University of Michigan consumer sentiment for some indications on policy and the economy. This week will test whether no news is indeed good news for investors, as the lack of information offers little comfort to the current political impasse. The ability for growth and inflation to remain in check is what matters most to business and consumers, making their shrugging off of the shutdown logical but time-limited. The test for today will be in the correlation of a stronger dollar hurting equities and how the APAC and EMEA curves drive the U.S. bond market ahead of coupon supply. The coin toss on risk depends on which side lands up, i.e., whether this is about USD strength or EUR and JPY weakness. 

What You Need to Know

Amid mounting criticism and threats of censure, French Prime Minister Sébastien Lecornu submitted his resignation, which was accepted by President Emmanuel Macron. The first part of the new government, unveiled the previous day, was largely composed of former ministers and close allies of the president. Shortly after his appointment, Bruno Retailleau denounced on X a government that “does not reflect the promised rupture” and announced the convening of a Republican Party strategic committee while threatening to resign. Meanwhile, Jean-Luc Mélenchon demanded the “immediate” examination of a motion to remove Macron from office, while RN leaders Marine Le Pen and Jordan Bardella urged the president to dissolve the National Assembly. CAC 40 -1.913% to 7926.9, EURUSD -0.546% to 1.1678, 10y OAT +8.2bp to 3.59%.

Japan’s incoming prime minister Sanae Takaichi is set to form a cabinet closely aligned with the powerful Aso faction following her election as Liberal Democratic Party president on October 4. She plans to appoint former Prime Minister Taro Aso, 85, as LDP vice president, while senior Aso faction member and former finance minister Shunichi Suzuki, 72, is expected to become secretary-general. Of the 20 lawmakers who nominated Takaichi, most belong to the 43-member Aso faction. Takaichi, who will be confirmed as Japan’s first female prime minister on October 15, also plans to name Toshimitsu Motegi as foreign minister and Minoru Kihara as Chief Cabinet secretary, and to include rivals Takayuki Kobayashi and Shinjiro Koizumi in her administration, with two senior party posts reserved for women. Nikkei +4.753% to 47944.76, USDJPY +1.947% to 150.34, 10y JGB +3bp to 1.692%.

Czechia’s PM-elect Andrej Babiš has reaffirmed his loyalty to Europe and NATO after his ANO movement won the parliamentary election with 34.5% of the vote and 80 of 200 seats. Declaring his party “clearly pro-European and pro-NATO,” Babiš said he wanted Europe to “function” and criticized “negative information spread abroad,” stressing that he had always been a reliable European partner. His remarks followed concern over his 2024 alliance with Hungary’s Viktor Orbán in the hard-right “Patriots for Europe” bloc. Despite this, he campaigned on domestic priorities, opposing increased defense spending, the purchase of 24 F-35 jets and Czech participation in EU arms procurement for Ukraine. Coalition talks are underway as he seeks parliamentary backing to form a government. Prague SE +0.322% to 2376.4, EURCZK +0.145% to 24.295, 10y CZGB -5.2bp to 4.45%.

U.S. Democrats are pushing to limit President Trump’s unilateral spending powers amid the ongoing government shutdown dispute but face near-certain rejection by the White House. Their proposed spending bill includes language restricting Trump’s authority to rescind or freeze funds approved by Congress, a move that has angered lawmakers in both parties. However, Republicans acknowledge there is virtually no chance Trump will sign a bill curbing his control. The standoff risks dividing Democrats if they receive a GOP offer to reopen the government, especially as they also seek to restore expiring Affordable Care Act subsidies to address rising insurance premiums. S&P Mini +0.255% to 6781.25, DXY +0.655% to 98.363, 10y UST +2.6bp to 4.144%.

What We're Watching

U.S. Treasury sells $84bn in 13-week bills and $75bn in 26-week bills.

Fedspeakers: Kansas City Fed’s Jeffrey Schmid speaks on the economic outlook.

What iFlow is Showing Us

Mood: iFlow Mood remains in negative territory with increasing selling momentum in both equities and core sovereign bonds. iFlow Mood is at -0.025.

FX: COP and ILS posted the most outflows, against good buying interest in DKK, IDR and KRW. Elsewhere, USD, EUR and JPY were lightly sold, against GBP inflows.

FI: Notable flows were good buying in U.K. gilts and Eurozone government bonds, against selling in Turkish and New Zealand government bonds.

Equities: All-out selling across all regions globally, above all in DM EMEA. Canada, Eurozone and U.K. equities were significantly sold. South Africa, Chile, Indonesia, South Korea and Hong Kong were the only recipients of equity inflows. 

Quotes of the Day

“He who walks in the middle of the road gets hit from both sides.” – George P. Shultz

“Peace and justice are two sides of the same coin.” – Dwight D. Eisenhower

Economic Details

Euro area retail trade volume rose 0.1% m/m in August, while remaining flat across the EU. Compared with a year earlier, sales increased 1.0% in the euro area and 1.1% in the EU. In the euro area, food, drinks and tobacco volumes rose 0.3% m/m, non-food products (excluding fuel) fell 0.1% and automotive fuel rose 0.4%. Annually, non-food sales grew by 1.9%, automotive fuel by 0.8% and food, drinks and tobacco by 0.1%. Among member states, the largest m/m increases were in Lithuania (+1.7%), Cyprus and Malta (both +1.5%) and Sweden (+1.1%), while Romania (-4.0%), Poland (-0.8%), Luxembourg and Portugal (both -0.7%) recorded the sharpest declines. Euro Stoxx 50 -0.569% to 5619.56, EURUSD -0.546% to 1.1678, BBG AGG Euro Government High Grade EUR +1.1bp to 2.927%.

Eurozone construction activity worsened in September, with the HCOB Eurozone Construction PMI falling to 46.0 from 46.7 in August, marking a sizable contraction across the bloc. France and Germany led the downturn, while Italy saw only a marginal fall. Housing was the worst-performing segment, followed by commercial construction, while civil engineering recorded only a modest decline. New orders dropped sharply again, led by France and Germany, though Italy posted a slight rise. Employment fell at the softest rate in six months, while input cost inflation picked up, particularly in Germany. Business confidence fell to its lowest level since January amid weak demand and rising costs.

Global investor sentiment improved markedly in October, according to the sentix Economic Index, which rose 3.8 points though remaining in negative territory. The Eurozone index climbed 3.8 points as both current conditions (+2.8) and expectations (+5.0) strengthened, suggesting a correction after September’s excessive pessimism. Germany’s index increased by 4.2 points, with expectations up 6.3, though its current situation (-36.5) remained deeply recessionary. The U.S. showed resilience despite its government shutdown, while Asia ex-Japan surged to 18.1, its highest level since February 2022, signaling strong momentum. Japan also improved moderately, while Eastern Europe stabilized. Overall, investor data pointed to tentative signs of global recovery led by Asia.

Germany’s construction sector remained in recession in September, with the HCOB Germany Construction PMI at 46.2, slightly up from 46.0 in August, marking continued contraction. Civil engineering activity grew for the third time in four months, while housing and commercial construction declined further. New orders dropped sharply again, and employment fell at a faster rate. Input and subcontractor cost inflation accelerated, with overall business expectations remaining pessimistic despite a slight uptick. The sector continued to face high costs, tight budgets and weak demand, while long-term financing conditions remained restrictive despite recent ECB rate cuts. DAX +0.013% to 24382.05, EURUSD -0.546% to 1.1678, 10y Bund +2.4bp to 2.722%.

France’s construction sector contracted sharply in September, with the HCOB France Construction PMI dropping to 42.9 from 46.7 in August, extending its downturn to 40 months. Activity declined across all segments, led by residential building, which fell at the fastest rate since June. Commercial construction also weakened, while civil engineering returned to contraction. New orders fell more sharply amid client hesitation and subdued conditions. Employment and material purchasing both declined, though job losses eased. Input price inflation slowed to a five-month low, but business confidence deteriorated to its weakest level in ten months, with 35% of firms expecting lower output versus 13% anticipating growth. CAC40 -1.913% to 7926.9, EURUSD -0.546% to 1.1678, 10y OAT +8.2bp to 3.59%.

Italy’s construction sector showed signs of stabilization in September, with the HCOB Italy Construction PMI rising to 49.8 from 47.7 in August, signaling only a marginal decline in activity. New orders increased for the first time in three months, supported by stronger customer interest and public tender wins. Housing output returned to slight growth, while commercial and civil engineering activity contracted. Employment rose for a 13th consecutive month, and purchasing activity also picked up. Input cost inflation eased to its lowest level in over five years, offering some relief. Confidence weakened to a 13-month low, reflecting concerns about tax incentives and future workloads. FTSEMIB -0.525% to 43031.15, EURUSD -0.546% to 1.1678, 10y BTP +4.2bp to 3.553%.

Spain’s August industrial production rose 3.4% y/y in calendar-adjusted, seasonally adjusted terms, up 0.7 percentage points from July, while the unadjusted index increased 0.4% y/y. On a monthly basis, output fell slightly by 0.1%, though this decrease was smaller than in the previous month. Among adjusted sectors, capital goods led growth with a 4.9% rise, followed by non-durable consumer goods at 4.4% and energy at 3.7%, while durable consumer goods fell 1.1%. Equipment goods also showed the only positive monthly rate at 2.6%, with intermediate goods down 1.5%. Regionally, annual output rose in eight autonomous communities, led by Andalucía (+8.4%), while País Vasco (-7.9%) posted the steepest decline. IBEX 35 -0.405% to 15554, EURUSD -0.546% to 1.1678, 10y Bono +3.4bp to 3.266%.

U.K. construction activity fell for a ninth consecutive month in September, though the rate of decline slowed, with the S&P Global UK Construction PMI climbing to 46.2 from 45.5 in August. Residential and civil engineering activity shrank at softer rates, while commercial construction fell faster. New orders decreased marginally, the slowest drop in nine months, and employment continued to fall amid hiring freezes. Input cost inflation accelerated but remained below early-2025 levels. Business optimism was subdued, with confidence near a two-year low as firms cited client caution ahead of the autumn budget and weak demand despite new opportunities in energy and infrastructure projects. FTSE 100 -0.106% to 9481.22, GBPUSD -0.305% to 1.3439, 10y gilt +4.2bp to 4.732%.

Switzerland’s unemployment rate was unchanged at 2.8% in September, with the number of jobseekers rising by 1,128 (+0.9%) from August to 133,233, up 17.7% y/y. Seasonally adjusted unemployment increased by 1,741 (+1.3%) to 139,564, pushing the adjusted rate up 0.1 percentage points to 3.0%. Youth unemployment (ages 15-24) rose 1.3% m/m to 13,861 (+15.9% y/y), while unemployment among older workers (50-64) rose 1.0% m/m to 36,191 (+17.5% y/y). Registered jobseekers totaled 213,750 (+2.2% m/m), while reported vacancies fell 1.3% to 37,372. In July, 3,495 people exhausted unemployment benefits (+38.7% m/m), and 10,785 workers were on short-time work in June (-7.9% m/m). SMI +0.051% to 12513.59, EURCHF -0.211% to 0.93191, 10y Swiss GB +1bp to 0.25%.

Hungary’s August retail sales rose 2.4% y/y in calendar-adjusted terms and 0.8% m/m on a seasonally adjusted basis. Food sales increased by 2.3% y/y, with non-specialized food and beverage stores up 3.9% but sales at specialized outlets down 2.0%. Non-food retailing expanded by 4.9%, led by textiles, clothing and footwear (+8.7%) and pharmaceuticals, medical goods and cosmetics (+6.6%). Sales of automotive fuels rose 2.2% y/y, while online and mail-order retailing grew 6.6%. In January-August, total retail sales were 2.8% higher y/y, with food up 2.7%, non-food up 4.3% and automotive fuel up 0.7%. Budapest SI -0.051% to 100411.8, EURHUF +0.096% to 388.48, 10y HGB +1bp to 6.81%.

Czech consumer prices fell 0.6% m/m in September and rose 2.3% y/y, according to the Czech Statistical Office’s flash estimate. Prices of goods, including energy and automotive fuels, declined, contributing to the overall monthly drop. Service prices, which include water supply and other regulated items, increased slightly but were canceled out by lower goods prices. The 2.3% y/y rise reflected moderate increases in both goods and services, maintaining headline inflation within a stable range. Final data will be released on October 10. Prague SE +0.322% to 2376.4, EURCZK +0.145% to 24.295, 10y CZGB -5.2bp to 4.45%.

Japan’s regional economies in October were assessed by the BoJ as continuing a moderate recovery overall, with all nine regions reporting conditions as either “recovering moderately” or “picking up,” though some weakness persisted in parts. Public investment remained high or was increasing in most regions, and business fixed investment showed steady gains nationwide. Private consumption was resilient, supported by inbound tourism in areas such as Kanto-Koshinetsu, despite higher prices. Housing investment varied by region, with weakness in Kinki and Kyushu-Okinawa but some recovery in Hokuriku linked to post-earthquake reconstruction. Production was mostly flat to improving, and employment and income conditions were improving moderately across all regions. Nikkei +4.753% to 47944.76, USDJPY +1.947% to 150.34, 10y JGB +3bp to 1.692%.

Australia’s September Melbourne Institute Inflation Gauge came in at 0.4% m/m, 3.0% y/y from -0.3% m/m, 2.8% y/y in August. The m/m pick-up is moderate by this year’s standards but nonetheless has pushed the annualized figure back to 3.0% y/y for the first time since April. This supports our view that rate cuts will remain difficult to come by for the RBA, and terminal rates are at present expected to remain well above 3.0%. ASX -0.148% to 5125.83, AUDUSD -0.046% to 0.6601, 10y ACGB -0.1bp to 4.333%.

New Zealand’s ANZ World Commodity Price Index fell 1.1% m/m in September, led by a 3.2% drop in dairy prices after August’s brief rebound, with whole milk powder down by 5.6%, skim milk powder by 5.9% and butter by 3.5%. Log prices also weakened, though gains in meat, fiber, horticulture and aluminum partly offset losses. Meat and fiber rose 0.8% m/m and 10.4% y/y, with beef up 1.5% and wool up 7.5%, while horticulture increased 1.8% m/m on higher kiwifruit prices. Forestry fell 1.2% m/m on soft Chinese demand. Aluminum gained 2.1% m/m and 7.6% y/y as smelter margins remained strong. In NZD terms, the index declined 0.6% m/m as the currency weakened for a third month, but was still up 14.0% y/y. NZX 50 -0.184% to 13489.24, NZDUSD -0.138% to 0.5823, 10y NZGB +2.3bp to 4.234%.

Thailand’s September headline CPI fell 0.72% y/y, extending its negative streak to six months and remaining below the Bank of Thailand’s 1.0-3.0% target for a seventh consecutive month. The decline, driven by lower energy prices, was deeper than the 0.60% fall forecast, following a 0.79% drop in August. Core CPI rose 0.65% y/y, indicating no deflationary signs. Over the first nine months of 2025, headline inflation averaged a 0.01% decline, while core inflation stood at 0.90%. The Ministry of Commerce cut its full-year forecast to 0%. Following August’s 25bp rate cut to 1.50%, markets expect another easing step as the government rolls out co-payment subsidies to bolster consumption without adding inflationary pressure. SET -0.373% to 1288.79, USDTHB +0.068% to 32.415, 10y TGN -0.1bp to 1.395%.

India September final PMI services came in at 60.9 (flash 61.6 vs. 62.6 in August). Operating conditions across India’s service economy remained favorable in September, with healthy demand trends underpinning further growth in total new orders, exports, employment and business activity. In all four cases, however, rates of expansion eased versus August. Encouragingly, a softer increase in expenses helped curtail charge inflation. Confidence regarding the year-ahead outlook for output also strengthened. SENSEX +0.76% to 81823.94, USDINR +0.003% to 88.785, 10y INGB -0.6bp to 6.505%.

Hong Kong September PMI manufacturing eased slightly from 50.7 to 50.4. Hong Kong SAR private sector firms recorded another improvement in overall business conditions during September. However, the rate of growth softened slightly m/m and was only marginal overall. While output increased at a slightly stronger rate, the most pronounced since last November, new orders fell fractionally for a second successive month. Demand outside of the Hong Kong SAR remained weak, as sales to mainland China and worldwide fell markedly at the end of the third quarter. However, business sentiment improved during September, and while firms were still broadly downbeat, the degree of pessimism was the least severe since November 2023. Turning to prices, overall input costs rose at a solid pace that was the strongest for nearly two years amid higher raw material costs. Output prices were also raised, though the rate of charge inflation was only fractional. Hang Seng -0.675% to 26957.77, USDHKD +0.008% to 7.7824, 10y HKGB -1.2bp to 1.417%.