Key Highlights

• Israeli press reports that the Gaza deal will take effect at noon local time.
• China further tightens rare earth controls, targeting the defense and chips industries.
• Philippines’ BSP cuts rates by 25bp to 4.75%, noting inflation expectations remain well-anchored.

Chart of the Day

HUF and Polish equities among CEE assets correcting lower

^{Source: BNY}

The past 48 hours have been filled with policy surprises, with the BSP, RBNZ, BoT and NBP all confounding expectations. All except the BoT were more dovish than expected, but we believe it is the NBP where the flow effect will be most significant, not just for PLN but also for the region. Throughout the past quarter, CEE has consistently been the best-held region throughout iFlow. The arguments are well-worn: high real rates, credible inflation targeting policies and general restraint on the fiscal side. Furthermore, as EUR and USD rates continued to decline, the carry trade was seen as quite viable and there was no indication that monetary easing would be advanced. However, with signs that inflation is now returning to target or below at a faster-than-expected pace and the state of the global cycle as yet unknown, central banks are not taking any chances. That is especially true in CEE, where trade exposures to the rest of the Eurozone as part of the industrial supply chain are acutely exposed to global trade tensions. Furthermore, these positions are also now showing profitability pressures, and there are also very high levels of asset exposure in the underlying economies. If the region’s central banks are confident enough that weak domestic demand will manage to limit pass-through inflation, allowing some currency weakness to further ease financial conditions would not be unwelcome.

What's Changed?

Unofficial calm predominates as markets wait for peace and prosperity. The equity rally extended in APAC, as the Chinese markets returned after their Golden Week holidays. Tech buying dominated, sending the Shanghai Composite index to ten-year highs. Better AI demand helped the region as well, with TSMC reporting a monthly bounce in sales after a summer lull. JPY weakness was touted as a benefit by the economic adviser Aida, which added to the Nikkei’s strength. The mood on risk has shifted in EMEA, as German trade numbers point to weaker domestic and foreign demand, the focus on the imminent ECB minutes highlights the limits of further easing and banks issue warnings ahead of Q3 earnings releases. U.S. futures are mixed, with the IMF and BoE warning on AI correction risks. The FOMC minutes yesterday highlighted the divisions on the inflation outlook and the limits of significant easing. Close attention will be paid to Fedspeakers today for their take on the size and speed of further cuts. The nascent U.S. Senate talks on a piecemeal approach to fixing the government shutdown are not helping U.S. bonds, but USD remains bid. One thing that won’t happen today – the scheduled U.S. economic releases on wholesale trade and jobs – shifts the focus onto unofficial data. The WSJ report on weaker jobs has rekindled fears of slowing growth and sticky inflation. Mixing this all together, the bid dollar, the stuck bond market and the consolidation in equities set the stage for less party spirit and more caution. This is despite the week having delivered rate cut surprises from central banks, a strong technical extension in risk rallies and hopes for peace and budget deals. Carry and trend are the two countervailing factors to watch in the present moderation, with the unofficial and official data on the world economy uneven enough to force investors to wait for Q3 earnings before chasing the ticker tape. 

What You Need to Know

Israel and Hamas have agreed to the first phase of a ceasefire and peace plan in Gaza, marking the most significant breakthrough since the two-year conflict began. Announced by President Trump, the deal includes the release of all remaining hostages, an Israeli troop withdrawal to an agreed line and a large-scale prisoner exchange. The accord, brokered with mediation from Egypt, Qatar and Turkey, was hailed by both Trump and Israeli Prime Minister Benjamin Netanyahu as a “great day” for peace. The Israeli cabinet will meet at 6pm local time to discuss the hostage release deal; Finance Minister Bezalel Smotrich has said he won’t vote in favor of the deal. TA-35 +1.761% to 3259.97, EURILS -0.49% to 3.2525, 10y IGB -8bp to 3.94%.

Philippines Bangko Sentral Ng Pilipinas (BSP) delivered its fourth straight 25bp cut to 4.75% and maintained its dovish bias. The BSP turned softer on both inflation and growth outlook compared with the previous policy meeting in August. While the BSP reiterated that “potential electricity rate adjustments and possible increases in tariffs on rice imports could add some upward pressures,” for inflation, it added that “risks to the inflation outlook are limited as price pressures are expected to ease,” a clear dovish signal paving the way for further rate cutting. On the growth front, the BSP noted that the outlook for domestic economic growth has weakened. It acknowledged that there could be room for one more rate cut this year. The BSP’s latest inflation projections for 2026 and 2027 are 3.1% (August: 3.3%) and 2.8% (August: 3.4%), respectively. PSEi -0.678% to 6057.4, USDPHP +0.547% to 58.275, 10y PHGB -6.9bp to 5.904%.

China tightened its rare earth export controls on Thursday, expanding restrictions on processing technology and explicitly targeting overseas defense and semiconductor industries. The Ministry of Commerce’s new rules build on April’s curbs, which disrupted global supply chains, adding licensing requirements for recycling equipment and a broader range of rare earth magnets. Licenses will be denied for defense-related users abroad and granted for advanced semiconductor applications only on a case-by-case basis. Beijing also barred Chinese firms from collaborating on rare earth projects overseas without approval. The move, coming ahead of a Trump/Xi summit, reinforces China’s dominance in rare earth processing – over 90% of global output – and strengthens its leverage in trade negotiations with the U.S. CSI 300 +1.482% to 4709.48, USDCNY +0.071% to 7.1274, 10y CGB -2.5bp to 1.846%.

U.S. authorities have approved several billion dollars’ worth of Nvidia AI chip exports to the United Arab Emirates. These are the first licenses issued since President Trump took office and signal implementation of a bilateral AI partnership agreed in May. The deal includes Emirati pledges to invest $1.4tn in the U.S. over the next decade, matching U.S. chip shipments on a dollar-for-dollar basis. Initial permits exclude Abu Dhabi-based G42, a key OpenAI partner. The agreement allows for up to 500,000 advanced AI chips annually, with one-fifth earmarked for G42. The initiative, centered on a five-gigawatt data center in Abu Dhabi, has drawn scrutiny in Washington over China-related security risks but represents a major advance in U.S.-UAE technological cooperation. NASDAQ Mini +0.043% to 25342, DXY +0.08% to 98.994, 10y UST +0.8bp to 4.125%.

Japan’s Komeito party remains divided over whether to continue its coalition with the ruling LDP amid intensifying fallout from the LDP faction slush fund scandal. At a Central Executive Committee meeting on October 9, party leader Tetsuo Saito reported inconclusive coalition talks with LDP President Sanae Takaichi, with further discussions set for October 10. Saito demanded greater transparency and tougher regulations on corporate and group political donations, citing revelations that implicated senior LDP figures in illegal fundraising activities. He warned that failure to reach agreement on reforms could end Komeito’s coalition participation and said he would withhold support for Takaichi’s prime ministerial nomination if no progress is made. Nikkei +1.771% to 48580.44, USDJPY +0.262% to 153.09, 10y JGB +0.9bp to 1.699%.

What We're Watching

U.S. weekly jobless claims will not be released due to the government shutdown and were last seen at 228k. Likewise, U.S. August wholesale trade and wholesale inventories, which are expected at 0.6% m/m and -0.2% m/m vs. 1.4% m/m and -0.2% m/m in July, respectively, will not see the light of day.

Central bank speakers: Fed Chair Jerome Powell delivers welcoming remarks at the Fed Community Bank Conference; Fed Vice Chair for Supervision Michelle Bowman moderates a discussion at the Fed Community Banking Conference, where she will also deliver a speech; Fed’s Michael Barr and Neel Kashkari speak on the economic outlook at the Economic Club of Minnesota.

U.S. Treasury sells $95bn in 8-week bills, $110bn in 4-week bills and $22bn in a 30y bond reopening. 

What iFlow is Showing Us

Mood: iFlow Mood remains in negative territory, with accelerating selling of equities. Core sovereign bonds were also sold. iFlow Mood is at -0.02.

FX: USD, JPY and HUF were most sold, followed by EUR, ILS and ZAR against notable inflows in DKK, CZK, KRW and GBP. JPY scored holdings narrowed but remains the most overheld currency with G10 region.

FI: U.K. gilts and Eurozone and Singapore government bonds were most bought, against selling in Turkish government bonds, followed by light selling in Australian and New Zealand government bonds.

Equities: Australian, Canadian and U.K. equities were significantly sold, followed by Eurozone and Mexican equities. Japanese and South African equities posted the most buying. Within DM Americas, the health care and information technology sectors were most bought, against selling in the communication services, financials, consumer staples and utilities sectors. 

Quotes of the Day

“Who is official and who is unofficial these days? It all depends on your point of view…” – Mikhail Bulgakov

“Unkempt about those hedges blows an English unofficial rose.” – Rupert Brooke

Economic Details

Germany’s August exports fell 0.5% m/m and 0.7% y/y to €129.7bn, while imports declined 1.3% m/m but rose 3.5% y/y to €112.5bn. The seasonally adjusted trade surplus widened to €17.2bn from €16.3bn in July but remained below the €21.9bn surplus seen in August 2024. Exports to EU countries fell 2.5% m/m, including a 2.2% drop to the Eurozone, while sales to non-EU markets rose 2.2%. Shipments to the U.S. decreased 2.5% m/m and 20.1% y/y to €10.9bn, the weakest since late 2021, whereas exports to China rose 5.4%. Imports from China declined 4.5% m/m to €13.5bn. On an unadjusted basis, exports were down 3.9% y/y and imports rose 1.0%, leaving a nominal trade surplus of €12.8bn. DAX +0.416% to 24699.36, EURUSD -0.129% to 1.1613, 10y Bund +1.1bp to 2.69%.

The U.K.’s September RICS House Price Balance came in at -15% vs. an upwardly revised -18% in August. The latest RICS U.K. Residential Market Survey reveals that subdued momentum continued to characterize the housing market in September. Buyer demand and agreed sales remained in negative territory for the third consecutive month. Survey participants indicated no imminent recovery in sales volumes, with near-term and 12-month expectations both at -9%. While short-term price pressures remain negative (-21%), a net balance of +12% of respondents expect prices to rise again over the next year. FTSE 100 -0.189% to 9530.84, GBPUSD -0.344% to 1.3358, 10y gilt +1bp to 4.719%.

Norway’s September producer price index fell 2.8% y/y and 1.7% m/m, reflecting lower energy-related prices. Energy goods dropped 7.9% y/y and 2.7% m/m, while extraction and related services fell 11.9% y/y. In contrast, electricity, gas and steam prices surged 38.0% y/y. Excluding energy, PPI rose 1.3% y/y, with machinery and equipment up 6.7%. Manufacturing prices edged down 0.2% m/m but increased 1.3% y/y. Meanwhile, the price index of first-hand domestic sales rose 2.5% y/y and 0.2% m/m. Food prices increased 3.3% y/y, while crude materials declined 4.5%. Overall, producer prices were weighed by weak energy components, whereas domestic sales inflation was supported by steady gains in food and manufacturing products. OSE +0.557% to 1661.56, EURNOK +0.196% to 11.6228, 10y NGB +0.5bp to 4.072%.

Türkiye’s August industrial production rose 7.1% y/y, driven by a 7.7% increase in manufacturing output, a 6.1% rise in electricity, gas, steam and air-conditioning supply and a 2.6% gain in mining and quarrying. On a m/m basis, total industrial output grew 0.4%, as manufacturing expanded by 0.7% while mining and quarrying edged down 0.1% and utilities production fell 2.5%. The data indicate continued strength in Turkey’s manufacturing sector despite softer performance in energy-related activities. BI 100 +0.826% to 10845.08, USDTRY +0.058% to 41.7211, 10y TGB -4bp to 31.45%.

Japan’s portfolio update for the week to October 3 indicated record foreign investor buying of Japanese equities. Divergent flows were in evidence, as Japanese investors net sold both foreign equities (¥-1.453tn, the highest weekly outflow since early June 2025) and foreign bonds (¥-927bn vs. ¥-159bn the previous week) while foreign investors net bought Japanese bonds (¥1.258tn) and Japanese equities (¥2.480tn). The net buying of Japanese equities was the highest weekly figure on record. The seasonal pattern argues for further inflows momentum in the coming weeks. Nikkei +1.771% to 48580.44, USDJPY +0.217% to 153.02, 10y JGB +0.4bp to 1.694%.

Japan’s September preliminary machine tool orders rose 9.9% y/y, accelerating from 8.5% in August, reported the Japan Machine Tool Builders’ Association. Domestic orders increased 3.0% y/y, rebounding from a 0.9% fall in August, while foreign orders climbed 13.3% y/y, up from 12.3%. On a m/m basis, total orders surged 14.7%, led by a 34.1% rise in domestic demand, while foreign orders grew 7.6%. The total order value reached ¥137.78bn, with ¥42.79bn from the domestic market and ¥94.99bn from overseas. September marked the strongest annual growth since March, supported mainly by a recovery in domestic investment and steady overseas demand for Japanese machinery.

Australia October consumer inflation expectations rose to 4.8% from 4.7% y/y, the highest since June 2025 (5.0% y/y). The RBA will still find some solace in the result, as the sequential figure dropped to 0.1% m/m. This came after a sharp rise of 0.8% m/m in the September print, which had reversed two months’ worth of significant declines and raised the prospect of inflation expectations becoming unanchored again. Sovereign yields were broadly stable, with the 1-3y part of the ACGB curve steady at 3.57%, and we believe the market is questioning the RBA’s ability to ease significantly from current levels. ASX +0.624% to 5156.49, AUDUSD -0.122% to 0.6578, 10y ACGB -1.4bp to 4.349%.

Taiwan’s September exports surged 33.8% y/y to $54.25bn, while imports rose 25.1% to $41.86bn, resulting in a trade surplus of $12.40bn. Export gains were led by information, communication and audio-video products (+86.9%) and electronic components (+25.6%), partly offset by a 1.7% drop in base metals. Imports grew strongly for electronic parts (+42.7%), ICT products (+70.0%) and machinery (+52.7%), while mineral products fell 11.3%. Exports rose sharply to the U.S. (+51.6%), ASEAN (+34.0%), Europe (+27.3%) and Japan (+23.3%), and imports increased from South Korea (+54.2%), Europe (+34.1%) and ASEAN (+23.9%) in particular, underscoring broad trade strength. TAIEX +0.88% to 27301.92, USDTWD +0.01% to 30.535, 10y TGB -1.2bp to 1.335%.