Key Highlights

• Danish PM Mette Friederiksen says sovereignty was not negotiated during NATO-U.S. talks.
• Norges Bank keeps rates on hold at 4%, warns of geopolitics weighing on economic outlook.
• President Trump and President Volodymyr Zelenskyy to meet; special envoy Steve Witkoff says talks with Russia are “down to one issue.”

Chart of the Day

JPY and USDJPY flow ahead of BoJ meeting

^{Source: BNY}

The BoJ is expected to keep rates unchanged on Friday, and the information value of the meeting itself will be in doubt as the market gears up for a snap election. However, recent moves in JGB markets are still highly relevant to the BoJ’s operations and we expect Governor Kazuo Ueda to face stern questioning over policy execution, even if the central bank can only deal with hypotheticals at this point.

The last few sessions have seen flows turn around toward minor sales again, after a relatively strong start to the year. As valuations hit extremes, with USDJPY approaching 160, it made significant sense for asset allocators to reduce hedges given the risk of substantial appreciation. At the same time, there was also the prospect of sharp NAV declines on fixed income portfolios, which would also have led to a reduction in hedges. Either way, JPY’s current flow averages are positive by G10 standards and even better in terms of holdings, meaning that the positioning bias is heavily skewed in favor of appreciation. The question of how that is to be realized will have to wait, but the combined commentary across the domestic parliamentary divide and externally suggest that tolerance of further weakness is running thin.

How to adjust that through flows, and in which assets, is a separate question, however. It will be the next few BoJ decisions that matter more, depending on where yields and the JGB curve stand at that point. Meanwhile, iFlow continues to show some degree of divergence between USDJPY and JPY. It is telling that although aggregate JPY flow has turned back toward net sales over the past few sessions, USDJPY is still pointing to JPY buying, though the amounts are not significant. Over the past quarter, USDJPY’s selling average is also slightly lower than aggregate JPY purchases, suggesting that there is still some residual JPY buying on other legs, even if that has not been the case this week. 

What's Changed?

A relief rally in global markets followed President Trump’s pivot on Greenland and was extended by earnings announcements, AI investment optimism and better economic data. Tempering the global equity and bond bounce-back are geopolitical uncertainty and central bank policy being kept on hold. USD remains bid, but so too does gold. Bond yields are down but U.S. 10y rates are still over 4.22%. Stocks globally have moved higher but remain down on the week.

What is next? President Trump has expressed hopes that there will be no further action on Iran, and he sees his choices for a Greenspan-like Federal Reserve chair as down to two or three. The WSJ reports that the Trump administration is searching for a deal to end Cuba’s communist regime. The focus on Greenland shifts to Canada, where issues around trade rumble on ahead of July’s USMCA discussions. Meetings will be held over a Ukraine-Russia peace deal, which is seen as “reasonably close.” Oil is down 0.9% on news of a larger API crude oil inventory and more Venezuela crude supply en route.

Central banks holding out – Norges Bank kept its headline rate on hold at 4% and is in no hurry to cut further, citing geopolitics and sticky inflation. NOK responded with sizable gains, reaching a four-month high. Malaysia Bank Negara held rates at 2.75% citing geopolitics and MYR gains, while equities touched a seven-year high. In China, PBoC Governor Pan Gongsheng sees room for further cuts to the reserve requirement ratio (RRR) and interest rates in 2026; CNH fell 0.1% to 6.9640. The U.S. Supreme Court appears likely to let Fed Governor Lisa Cook keep her job; she vows to uphold political independence.

Economics and AI investments: Between Japanese exports hitting a record high in December and Australia unemployment dropping to a seven-month low of 4.1%, led by full-time jobs, global growth hopes are higher while bond yields remain range-bound. Nvidia CEO Jensen Huang added to the optimism, speaking at Davos about the “largest infrastructure buildout in human history”, as the “five-layer cake” blog drove global tech shares higher.

Bottom line: The ongoing Q4 earnings, the second look at U.S. GDP and the November PCE core price release all matter for U.S. trading ahead. The mood swings over geopolitical risks have left some scars, with “risk management” rising as a phrase for keeping diversification and shorter duration in play. Safe haven demand remains clearly evident in CHF and gold. The FT has highlighted the curbing of long-term bond issues and the rise of shorter-term borrowing in Europe. This playbook is key for the U.S. markets as well and leaves investors more likely to look for yields and growth elsewhere. The sustainability of deficit spending remains critical to keeping the mood together, with JGBs and U.S. 10y yields the key barometers. Investors are going back to basics in their search for diversified volatility-adjusted returns. 

What You Need to Know

Japan’s fiscal outlook for FY 2026 has deteriorated, with Cabinet Office estimates showing the primary balance slipping back to a deficit of around ¥0.8tn, or -0.1% of GDP, after Prime Minister Sanae Takaichi’s latest stimulus measures. Although this shortfall is the smallest since the fiscal target was set in 2001, it contrasts with an earlier projection of a ¥3.6tn surplus and reflects a broader measure that captures additional spending by central and local governments. The revision has raised investor concerns over fiscal discipline, contributing to a recent surge in long-dated government bond yields. While Takaichi’s surplus claim still holds under a narrower budget measure and debt-to-GDP is projected to fall, doubts persist over Japan’s medium-term fiscal credibility. Nikkei +1.732% to 53688.89, USDJPY +0.222% to 158.65, 10y JGB -3.9bp to 2.246%.

German Chancellor Friedrich Merz said he “deeply regrets” the European Parliament’s decision to challenge the Mercosur trade deal. Wednesday’s vote referred the deal to the EU Court of Justice, a step that could delay implementation by up to two years and potentially derail the deal altogether. Lawmakers backed the motion by 334 votes to 324, with 11 abstentions, following opposition led by France over concerns that increased imports of beef, sugar and poultry would undermine domestic farmers. The agreement with Argentina, Brazil, Paraguay and Uruguay, signed over the weekend, still requires approval to take effect. Supporters including Germany and Spain argued the pact is strategically important amid U.S. trade disruption, while the European Commission said it strongly regretted the vote. DAX +1.429% to 24911.9, EURUSD +0.069% to 1.1693, 10y Bund -1.8bp to 2.864%.

South Korea is not delaying the first planned $20bn tranche of its U.S. investment commitments as part of a trade deal framework, Finance Minister Koo Yun-cheol has said. He added that the time-consuming process to select projects is underway, even though it is unlikely to be completed in the first half of the year. Based on that process it would be “difficult for the funds to be executed within the first half of the year,” he explained. “I don’t know about the second half, but at least it will be difficult in the first half.” South Korea agreed to invest $350bn in the U.S. as part of a deal reached last year with the Trump administration. KOSPI +0.868% to 4952.53, USDKRW +0.232% to 1469.25, 10y KTB -4.9bp to 3.597%.

Norges Bank has kept its policy rate unchanged at 4.0%, with policymakers signaling that rate cuts are likely later in the year if the economy evolves broadly as expected. The Monetary and Financial Stability Committee judged that a restrictive stance remains necessary, as inflation has eased markedly but is still above the 2% target, with inflation excluding energy close to 3% since autumn. While unemployment has risen somewhat and capacity utilization has returned to near-normal levels, the committee warned that cutting rates too quickly could keep inflation elevated for longer. The rate outlook was assessed as broadly unchanged from December, when one to two cuts in 2026 were envisaged, despite heightened geopolitical uncertainty. Governor Ida Wolden Bache stated that “The current geopolitical situation is tense and is causing uncertainty, including about the economic outlook.” OSE +0.874% to 1747.08, EURNOK -0.524% to 11.5792, 10y NGB -0.7bp to 4.202%.

China’s central bank governor Pan Gongsheng said the People’s Bank of China will continue to implement an appropriately accommodative monetary policy in 2026, signaling that there remains room to cut reserve requirement ratios and interest rates. Speaking on policy priorities, Pan said the PBoC will flexibly and efficiently use multiple tools to maintain ample liquidity and ensure that growth in financing and money supply aligns with economic growth and price objectives. He added that the bank has already lowered rates on structural policy tools and expanded targeted facilities, including new lending support for private firms, agriculture, small businesses and technology investment. Pan also stressed the importance of keeping financing costs low, managing expectations, maintaining renminbi stability and safeguarding orderly financial market operations. CSI 300 +0.014% to 4723.71, USDCNY +0.009% to 6.9654, 10y CGB +0.3bp to 1.835%.

What We're Watching

U.S. Q3 GDP is expected at 4.3% q/q vs. an initial estimate of 4.3% q/q and 3.8% q/q in Q2. Core PCE is expected at 2.9% q/q vs. an initial estimate of 2.9% and 2.6% in Q2.

U.S. weekly jobless claims forecast at 209k vs. 198k the week prior.

U.S. November core PCE is expected at 0.2% m/m, 2.8% y/y vs. 0.2% m/m, 2.9% y/y in September.

U.S. Kansas City Fed manufacturing activity is expected to improve to 5 points from 1.

U.S. Treasury sells $95bn in 8-week bills, $105bn in 4-week bills and $21bn in new 10y TIPS.

What iFlow is Showing Us

Mood: iFlow Mood rose further to 0.37, with accelerated buying of equities against increasing selling of core sovereign bonds.

FX: SGD, CZK, AUD and ILS were most sold, against strong inflows in PLN, CLP, COP, CNY and CAD. Elsewhere, USD and JPY were lightly bought, while EUR and GBP saw light outflows.

FI: Light buying across the G10 and LatAm, led by Japanese, Peruvian and Colombian government bonds. Israeli, Turkish and Indonesian government bonds were most sold. Elsewhere, Chinese government bonds were lightly bought.

Equities: Mixed flows. Brazil, Japan, China, Indonesia, Thailand and Australia posted the most buying, against selling in Europe, the U.S. and Mexico. Within developed markets, consumer staples were most bought, against selling in the healthcare and financials sectors.

Quotes of the Day

“The only way you can stay on top is to remember to touch bottom and get back to basics.” – Shane Black

“It is better to fail in originality than to succeed in imitation.” – Herman Melville

Economic Details

Dutch house prices were up 5.8% y/y in December, but down 0.9% m/m. The December decline followed a prolonged upswing, but y/y growth remained strong, leaving prices around 13.9% above their previous peak reached in mid-2022. With December data in hand, Statistics Netherlands (CBS) estimated that owner-occupied house prices rose by an average of 8.6% over the whole of 2025. Housing market activity was also robust, with 237,154 transactions recorded in December, up 14% y/y, and nearly 16% more transactions over 2025 as a whole compared with the previous year. The average transaction price was €480,051, though the CBS stressed that price indices capture underlying market trends better than transaction prices alone. AEX +1.255% to 1006.41, EURUSD +0.069% to 1.1693, 10y NGB -2.1bp to 2.947%.

The Netherlands’ consumer confidence deteriorated in January, with the headline index falling to -23 from -21 in December. The decline was driven primarily by a worsening assessment of the economic climate, whose sub-index dropped to -40 from -35, reflecting more negative views on both the past 12 months and the outlook for the coming year. Consumers were also more pessimistic about the economy than the average seen over the past year. Purchasing willingness weakened as well, slipping to -12 from -11, as households judged the coming 12 months less favorably in terms of their financial situation and viewed the timing for major purchases as more unfavorable. Overall sentiment remained firmly negative and below its long-term average.

U.K. public sector borrowing in December was £11.6bn, down £7.1bn or 38.0% y/y, although this was still the tenth-highest December figure since records began in 1993. Borrowing in the financial year to December reached £140.4bn, down £0.3bn or 0.2% y/y, and the third-highest April-December total on record, while borrowing equated to 4.6% of GDP, 0.2 percentage points lower than a year earlier. The current budget deficit stood at £5.8bn in December, taking the YTD total to £94.9bn, down 1.6% y/y. Public sector net debt was 95.5% of GDP, up 0.9 percentage points y/y, while net financial liabilities rose to 85.0%. The central government net cash requirement was £14.5bn, down 25.2% y/y. FTSE 100 +0.707% to 10209.75, GBPUSD +0.112% to 1.3444, 10y gilt -4.1bp to 4.417%.

Norway’s unemployment rate in December was unchanged at 4.5% of the labor force. This was the same level as in November and broadly stable over the final months of the year. Statistics Norway noted that unemployment had eased slightly after rising sharply in the first half of 2025, before flattening out at around 4.5%. Trends earlier in the year were driven largely by increased labor supply, as more people previously outside the workforce began seeking jobs and were classified as unemployed. In the second half of 2025, labor supply growth slowed, contributing to limited further increases in unemployment. Separate register-based data showed a modest rise in employment in December, with both jobs and employees increasing slightly. OSE +0.874% to 1747.08, EURNOK -0.524% to 11.5792, 10y NGB -0.7bp to 4.202%.

Polish business sentiment improved across most surveyed sectors in January, with both diagnostic and forward-looking components signaling a broad-based pickup in economic conditions. The strongest assessments continued to come from financial and insurance activities, where the general business climate indicator rose to 25.4, broadly in line with its long-term average. Conditions also improved significantly in information and communication, accommodation and food services, wholesale trade, transport and storage, and retail trade. Despite m/m gains, sentiment remained weakest in construction and manufacturing, where indicators, at -5.6 and -4.1 respectively, stayed below long-term norms. Overall, the January survey suggested a clear improvement in confidence relative to December, albeit with persistent sectoral divergence. WIG +1.515% to 122699.9, EURPLN -0.008% to 4.2127, 10y PGB -3.3bp to 5.11%.

Poland’s December wage data showed a sharp acceleration, with average gross earnings in the enterprise sector rising 8.6% y/y and 5.6% m/m to PLN 9,583.31, well above market expectations. Statistics Poland said the stronger showing was driven primarily by larger-scale of additional payments, including discretionary, annual and quarterly bonuses, holiday, incentive and jubilee payments, and sector-specific awards such as Miner’s Day bonuses. These payments significantly lifted headline remuneration beyond underlying monthly trends. The December increase followed more moderate wage dynamics earlier in the year and highlights the strong seasonality in earnings linked to bonus payments. The outcome exceeded consensus estimates of 6.9% y/y and 3.9% m/m, underlining upside risks to short-term wage inflation pressures.

Poland’s December PPI recorded a deeper decline than expected: industrial producer prices fell 2.5% y/y and 0.4% m/m, undershooting consensus estimates of -2.2% y/y and -0.1% m/m. The y/y decline was broad-based across major industrial components, led by industrial processing (-2.7% y/y) and energy-related prices for electricity, gas and water (-1.6% y/y), while mining prices fell 1.7% y/y despite a 0.8% m/m rebound. By contrast, water supply and waste management prices rose 1.7% y/y, and construction and assembly production prices increased by 3.6% y/y and 0.5% m/m, continuing to provide upward pressure. Overall, the data point to persistent disinflation at the factory gate, offset partially by construction-related cost pressures. In other figures, construction and assembly production in December 2025 increased by 4.5% y/y and 36.2% m/m.

Poland’s December industrial production rose 7.3% y/y, sharply outperforming expectations of a 2.9% increase, while output edged down 0.1% m/m, far less than the forecast 2.8% decline. After seasonal adjustment, sold industrial output was up 4.7% y/y and 2.1% m/m, pointing to stronger underlying momentum. By sector, mining and quarrying output rose 8.7% y/y and manufacturing increased by 7.7% y/y, while electricity, gas and water production fell 2.1% y/y. Water supply, sewage and waste management recorded the strongest growth, up 11.3% y/y. Compared with November, most sectors saw modest m/m falls, with the exception of energy and water-related activities, which posted sizable m/m increases.

Türkiye’s consumer confidence rose 0.3% m/m in January, lifting the headline index to 83.7 from 83.5 in December. The improvement reflected a 4.3% m/m rise in expectations for the general economic situation over the next 12 months, while households’ current financial situation increased by 0.4% m/m. By contrast, expectations for household finances over the next year declined by 2.3% m/m, and assessments of spending on durable goods fell 0.7% m/m. Despite the monthly uptick, the index remained well below the 100-point threshold, signaling that overall consumer sentiment stayed in pessimistic territory. BI 100 +0.93% to 12846.58, USDTRY +0.02% to 43.3026, 10y TGB -15bp to 29.53%.

Türkiye’s January manufacturing capacity utilization showed mixed m/m movements, according to the central bank’s Economic Tendency Survey, which covers 1,752 firms. The seasonally adjusted capacity utilization rate increased by 0.2 percentage points m/m to 74.4%, indicating a modest improvement in underlying manufacturing activity. Meanwhile the non-seasonally adjusted rate declined by 0.3 percentage points m/m to 74.1%, reflecting seasonal factors at the start of the year. Across goods groups, utilization fell in consumer goods, particularly durable items, while intermediate goods were broadly stable and investment goods edged lower. Sector data continued to show significant dispersion, with relatively high utilization in food, beverages and tobacco, and weaker readings in textiles, apparel and machinery-related industries.

Türkiye’s January real sector confidence softened on a seasonally adjusted basis, with the Real Sector Confidence Index (RKGE-MA) falling by 0.7 points m/m to 103.0. Meanwhile, the non-seasonally adjusted index rose 0.8 points m/m to 101.6, remaining above the neutral 100 threshold. The survey of 1,752 manufacturing firms showed that assessments of fixed capital investment, recent total orders, general business conditions, inventories and expected employment supported confidence, while expectations for export orders, production and current total orders weighed on the index. Firms reported stronger expectations for domestic demand and production over the next three months, alongside firmer employment and investment intentions. Cost pressures remained elevated, although the 12-month-ahead producer price inflation expectation came down by 1.2 percentage points m/m to 31.8%.

Japan posted a small trade surplus of ¥106bn in December 2025: exports rose 5.1% y/y to ¥10.41tn while imports increased slightly faster, up 5.3% y/y to ¥10.31tn. Export growth was Asian-led (+10.2% y/y), driven by strong shipments to Hong Kong (+31.1%), Taiwan (+20.7%) and China (+5.6%), underpinned by robust electrical machinery and semiconductor-related exports (+11.3% y/y). U.S.-bound exports fell sharply (-11.1% y/y), reflecting weaker automotive and capital goods demand. On the import side, gains were concentrated in electrical machinery (+22.7% y/y) and foodstuffs, partly offset by continued falls in mineral fuel values amid softer energy prices. In real terms, export volumes rose 6.4% y/y versus import volumes of 2.1% y/y, indicating that net exports likely provided a modest positive contribution to Q4 GDP. However, the thin surplus underscores Japan’s continued exposure to U.S. demand weakness despite resilient Asian tech cycles. Nikkei +1.732% to 53688.89, USDJPY +0.222% to 158.65, 10y JGB -3.9bp to 2.246%.

South Korea’s real GDP decreased by 0.3% q/q in Q4 2025 (Q3: +1.3%). Private consumption grew by 0.3% q/q and government consumption by 0.6% q/q, but construction investment fell 3.9% q/q. Exports declined by 2.1% q/q, led by motor vehicles and machinery and equipment, with imports down 1.7%. On a y/y basis, Q4 GDP rose 1.5% y/y (1.8% in Q3), and annual 2025 GDP grew 1.0% y/y. Services (+1.7% y/y) and exports (+4.1% y/y) showed growth, while manufacturing slowed (+2.0% y/y) and construction contracted sharply (-9.6% y/y in 2025). KOSPI +0.868% to 4952.53, USDKRW +0.232% to 1469.25, 10y KTB -4.9bp to 3.597%.

Australia’s unemployment rate fell to 4.1% in December 2025 (seasonally adjusted), driven by a 65,000 increase in employment, made up of 55,000 full-time and 10,000 part-time jobs. The participation rate edged up to 66.7%. Underemployment dropped by 0.5 percentage points to 5.7%, with notable declines among young people and males. The underutilization rate fell to 9.8%. Trend unemployment decreased slightly to 4.2%, with trend employment up 0.2% m/m and 1.2% y/y. Monthly hours worked hit a record 2 billion, rising 0.4% m/m. ASX +0.76% to 5506.92, AUDUSD +0.592% to 0.6802, 10y ACGB +1.6bp to 4.797%.

New Zealand’s electronic card transactions fell -1.0% m/m to $11bn in December 2025, with 195 million transactions averaging $58 each. Retail spending declined by -0.1% m/m, led by decreases in apparel (-3.6%), consumables (-0.1%), motor vehicles (-1.8%) and durables (-0.1%), while fuel (+1.1%) and hospitality (+1.4%) rose. Non-retail (excluding services) spending dropped 1.4% m/m, and services spending fell 2.1% m/m. For the December 2025 quarter, retail spending rose 0.5% q/q, driven by consumables (+0.5%), hospitality (+0.9%) and fuel (+1.3%), despite declines in apparel, motor vehicles and durables. Total card spending increased by 0.9% q/q. NZX 50 +1.041% to 13556.87, NZDUSD +0.377% to 0.5866, 10y NZGB +0.9bp to 4.569%.

New Zealand’s international migration figures for the year ended November 2025 showed 132.6k arrivals (-9% y/y) and 121.9k departures (+4% y/y), resulting in a net gain of 10.7k. Non-New Zealand citizens contributed a net annual gain of 51.4k, while New Zealand citizens recorded a net loss of 40.8k. Key arrival citizenships included New Zealand (27k), India (17.3k) and China (14.9k). Monthly migration in November 2025 saw arrivals of 10.9k (+5% m/m) and departures of 9.9k (+1% m/m), with a net gain of 900. Estimated emigration levels remain at near-15-year highs, while arrivals have also fallen 40% from the post-pandemic peak in 2023.

Taiwan’s December labor market showed modest improvement, with employment rising by 0.05% m/m to 11.645 million, while unemployment fell 0.80% m/m to 398k and the jobless rate declined to 3.30%, or 3.35% on a seasonally adjusted basis, flat m/m. The labor force participation rate edged up 0.02 percentage points m/m to 59.59%. The number of people outside the labor fell 0.08% m/m to 8.166 million. For the full year, average employment increased by 0.26% y/y, while average unemployment declined by 0.82% y/y and the average unemployment rate eased to 3.35%. Broader labor underutilization indicators were mixed in December, with LU1 easing to 3.35%, while LU2, LU3 and LU4 edged higher m/m. TAIEX +1.599% to 31746.08, USDTWD -0.139% to 31.601, 10y TGB -1bp to 1.406%.

Hong Kong’s December CPI rose 1.4% y/y, accelerating from 1.2% in November, while underlying inflation increased to 1.2% y/y from 1.0%, reflecting higher package tour charges and transport fares. On a seasonally adjusted basis, the average monthly increase over the three months to December was 0.2%, up from 0.1% previously, on both headline and underlying measures. CPI(A), CPI(B) and CPI(C) rose 1.5%, 1.3% and 1.4% y/y, respectively. Price gains were led by transport, miscellaneous services and housing, while durable goods, clothing and utilities declined. For 2025 as a whole, headline CPI increased by 1.4% y/y and underlying inflation was 1.1%, with official commentary noting that price pressures remained modest and contained. Hang Seng +0.169% to 26629.96, USDHKD +0.022% to 7.7988, 10y HKGB -1.2bp to 1.417%.

Bank Negara Malaysia kept the overnight policy rate unchanged at 2.75%, with officials signaling confidence that the current stance remains supportive of growth while preserving price stability. Policymakers highlighted stronger-than-expected global growth in 2025, underpinned by lower tariffs, AI-driven investment and fiscal support, while acknowledging risks to the 2026 outlook from trade policy, geopolitics and financial market volatility. Domestically, growth is expected to remain near the upper end of forecasts in 2025 and extend into 2026, supported by resilient household demand, steady investment execution, firm electrical and electronics exports and tourism. Inflation pressures were described as contained, with headline and core inflation expected to remain moderate and stable. KLCI +0.664% to 1717.14, USDMYR -0.252% to 4.0378, 10y MGB -1.5bp to 3.564%.