Key Highlights

• Long-end JGB yields spike as Japan approves first stopgap budget in 11 years.
• China launches new retaliatory trade probes against the U.S.
• Asian refiners are pushing crude wholesalers to switch benchmarks for lower prices.

Chart of the Day

Coefficient between “surge” flows and industry groups’ correlation with two-year break-even inflation

^{Source: BNY}

As we approach a month into the conflict, central banks are now focusing squarely on the inflation impact and gauging their responses accordingly. At present, the direction of travel appears to be one of maximum vigilance but short of moving aggressively, as the current cycle differs from 2022-2023 and there is no clear evidence yet of second-round effects.

Our flows point to a similar picture, whereby “inflation protection” themes across assets are emerging, but by no means dominant. For example, we can measure changes in inflation protection interest in U.S. equities, based on the principle that in an inflation protection environment, equity flows chase industry groups that are highly correlated with inflation and shun those with a lower inflation correlation.

Our indicator shows a clear rise in the U.S. inflation beta over the past week – a time when the prospect of prolonged global energy supply disruption had become clear and stress points in downstream products were also rising. Inflation protection flows are now at their highest in over a month, but still well below levels around end-January when break-evens also moved materially. Relative to break-evens, equity flows appear unwilling to over-react yet. A higher starting point compared with the beginning of the year is probably playing a role; however, U.S. equity flows may also confirm the view that the bounce in current expectations will be short-lived and that the demand-dampening effect will be far stronger over the medium term. Similarly, Fed expectations have not moved as aggressively, underscoring the state of the economy that anchored pre-conflict financial conditions.

What's Changed?

Like a college student with a paper due getting an extension, the deadline for Iran to reopen the Strait of Hormuz being pushed back to April 6 is a mixed result. It means more time for talks, but also less certainty and less energy flowing to the world. Risk sentiment is mixed: the inflation risks and energy dynamics are keeping USD firm with rotating equity preferences, while Asian credit spreads are widening and front-end rates continue to lead limited steepening. Notable highlights include INR turning underheld in iFlow, elevated oil prices and a sharp selloff in long JGBs, alongside mixed central bank signals: Mexico cut its policy rate, while South Africa kept its rates on hold.

• Binary expectations: The delay in the deadline for ceasefire talks to April 6 will either work or it won’t. That is the grim choice when trading war-related risks around financial assets today. The barometer for success remains oil prices, with Brent at $110 seen as unsustainable given the risks to non-linear price effects elsewhere – witness the FAO’s warning on food supply. If the Strait of Hormuz remains shut for ten more days, the hit to global oil supplies will near 400 million barrels, effectively neutralizing any effects of the IEA-led SPR release on markets. Headlines show the binary nature of the war, as the Pentagon mulls sending 10,000 ground troops to the Middle East.
• JGBs and JPY: 40-year JGB yields have risen 22bp to 3.925% today, while JPY is trading close to 160. The market pressure reflects the energy price shock. The longer the war continues with energy prices elevated, the greater the pressure on inflation and the lower the growth outlook. Expectations of FX intervention are high but will likely prove insufficient to counter the negative sentiment toward Japan, given oil moves. The key focus will be on G7 meetings next week.
• Uncertainty: Central bankers’ wait-and-see stance is extending to asset managers, as the duration and scale of the war and how this will affect policy and the global economy remain unknowable. The first-round effect of higher energy prices will lift headline CPI, hurting growth, but the second-round effects are less clear and depend on government reactions to market moves, subsidies and political will. The current reaction to the delay in any war escalation has been muted, partly because this is not the first time that deadlines have been extended. The role of uncertainty in driving surprises has also been muted as market bias shifts toward negative outcomes.

Bottom line: The capitulation moment for markets has been delayed multiple times during the month-long conflict. The role of financial conditions before the war was supportive of growth – with a weaker USD, tight credit spreads, lower rates and higher stock prices. The current tightening of conditions linked to the war and oil prices will matter if it feeds through to the economy in the form of job losses for consumers and weaker earnings for companies. While trading will reflect month-end rebalancing pressures and the usual Friday risk-off mood, we will also get the final consumer sentiment reading for the month, with many expecting confirmations of higher price fears and lower growth outlooks. Extending the deadline for an escalation of the war has not resolved the uncertainty over energy supply shocks. 

What You Need to Know

China has announced the launch of two investigations into U.S. trade practices, signaling a further deterioration in bilateral relations. The Ministry of Commerce said a trade barrier probe has been initiated and is expected to conclude within six months, citing preliminary evidence that U.S. measures have restricted Chinese exports, limited high-tech trade and blocked investment in key sectors. A separate investigation will examine U.S. actions affecting renewable energy trade, with authorities alleging constraints on imports from China, delays to deployment of new-energy products and restrictions on technological cooperation. Beijing stated that such measures disrupt global supply chains, harm Chinese firms’ interests and may breach World Trade Organization rules and existing trade agreements. CSI 300 +0.56% to 4503, USDCNY -0.066% to 6.9095, 10y CGB -0.4bp to 1.816%.

Japan has approved a ¥8.5tn stopgap budget to fund government operations for the first 11 days of fiscal 2026. This is the first such measure in 11 years and comes in response to delays to the full-year budget. The plan covers core spending such as social security and local government transfers, while also including new initiatives like free high school tuition and elementary school lunches. The provisional budget is expected to pass parliament shortly, as debate over the regular budget continues in the upper house following earlier approval by the lower chamber. With passage before the fiscal year-end unlikely, the regular budget is set to take effect automatically in April under constitutional provisions. Nikkei -0.43% to 53373, USDJPY +0.007% to 159.82, 10y JGB +10.5bp to 2.388%.

The BoJ has signaled that its estimate of the natural interest rate is gradually rising, reinforcing the case for continued monetary tightening despite a cautious policy stance. Updated estimates place the natural rate within a wide range, with underlying measures trending higher, reflecting improved growth potential and a more stable wage-price dynamic in the post-pandemic economy. Policymakers view this shift as evidence that the economy can sustain higher rates without undermining activity. Additional indicators, including a sustained positive output gap and inflation remaining above target, point to persistent price pressures. Together, these developments suggest the BoJ is building a stronger foundation for further rate hikes, with market participants increasingly anticipating a potential move in the near term.

Asian refiners are increasingly shifting to pricing U.S. crude against ICE Brent rather than the Dubai benchmark after Middle East marker prices surged to record levels, say market sources. The move follows a sharp spike in Dubai crude to $169.75, making it more expensive than Brent amid reduced supply linked to disruptions around the Strait of Hormuz and strong demand. Buyers have begun securing U.S. cargoes for July delivery under Brent-linked pricing, including a reported Japanese purchase of 2 million barrels at a premium to Brent. The shift is expected to reduce liquidity in Dubai-linked derivatives markets, while some refiners have also asked Saudi Aramco to adopt Brent pricing. Brent +2.028% to 110.2, WTI +1.863% to 96.24, Omani crude +6.715% to 119.52, Dubai crude -0.717% to 129.994.

What We're Watching

U.S. March final University of Michigan consumer sentiment forecast to ease to 54.0 vs. 55.5 with 1y and 5-10y inflation expectations forecast at 3.9% and 3.5% vs. preliminary readings of 3.40% and 3.20%, respectively.

U.S. March Kansas City Fed services activity is expected to drop to 3 points from 6.

Central bank speakers: San Francisco Fed president Mary Daly and Philadelphia Fed president Anna Paulson give remarks at the Macroeconomics and Monetary Policy Conference.

What iFlow is Showing Us

Mood: Sentiment improved modestly, with iFlow Mood narrowing to -0.085. The shift was driven by a sharp reduction in demand for core sovereign bonds, while equity flows remained broadly stable.

FX: Moderate inflows into G10 and LatAm currencies, with exceptions in EUR, CAD, NZD and PEN, which saw outflows. EMEA and APAC FX were broadly sold, led by significant outflows for ILS, TRY, ZAR and SGD.

FI: Continued demand for G10 and LatAm sovereign bonds, led by Eurozone, U.K. and Mexican paper, followed by U.S. Treasurys. EMEA bonds faced selling pressure, while APAC flows were mixed: buying in China and Thailand was offset by selling in Indonesia and India.

Equities: Broad-based selling persisted, with selective inflows into Australia, New Zealand, Poland, Thailand, Singapore and China. Heavy outflows were seen in Canada, Japan, India and South Korea. Within DM Americas, consumer discretionary, staples and materials were sold, while industrials attracted strong buying.

Quotes of the Day

“Life is short and if you’re looking for extension, you had best do well.” – Ben Harper

“We’re extensions of each other; we’re all connected.” — Chrissy Metz

Economic Details

The euro area’s February consumer expectations survey showed unchanged inflation perceptions over the past 12 months, while short-term inflation expectations fell slightly and longer-term expectations remained stable. The figures are likely stale, as the ECB notes that 97% of the responses were recorded before the Iran conflict. Nominal income growth expectations were unchanged, but expected spending growth increased, indicating some resilience in consumption. Economic growth expectations became less negative and the expected unemployment rate dropped, suggesting a modest improvement in labor market sentiment. House price growth expectations fell, while mortgage rate expectations were unchanged. Lower-income households continued to report higher perceived and expected inflation than higher-income groups, although differences remained broadly aligned, with younger respondents reporting lower inflation expectations than older cohorts. Euro Stoxx 50 -1% to 5510, EURUSD -0.035% to 1.1523, BBG AGG Euro Government High Grade EUR -6.5bp to 3.282%.

Spain’s flash CPI estimate showed a rise of 1.0% m/m in March, with the annual rate accelerating to 3.3% y/y from 2.3% in February. Core inflation remained unchanged at 2.7% y/y. The increase in headline inflation was mainly driven by higher prices for fuels and lubricants for personal vehicles, while electricity prices fell by less than the year-earlier reading and heating oil prices increased, contrasting with falls last March. The harmonized measure (HICP) also rose to 3.3% y/y, up 0.8 percentage points, with a m/m increase of 1.5% m/m and core HICP at 2.8% y/y. IBEX 35 -0.85% to 16714, EURUSD -0.035% to 1.1523, 10y Bono +5.9bp to 3.665%.

U.K. retail sales fell by 0.4% m/m in February, following a 2.0% m/m increase in January, while sales volumes rose by 2.5% y/y. Over the three months to February, volumes increased by 0.7% compared with the previous three-month period and were 3.0% higher y/y. The m/m decline was driven by weaker supermarket and household goods sales, partly attributed to adverse weather, while non-store retailers also saw falls as spending had been brought forward to January. Despite the m/m drop, underlying momentum remained positive, supported by strong non-store and non-food sales over the three-month period. Online spending rose by 0.6% m/m and 11.4% y/y, with the online share edging up to 28.2%. FTSE 100 -0.54% to 9918, GBPUSD -0.128% to 1.3313, 10y gilt +7bp to 5.044%.

U.K. GfK consumer sentiment weakened to -21 in March, its lowest level in nearly a year. This was down from -19 in February, amid concerns over the economic impact of the Iran war and potential sharp price rises. The biggest decline was in expectations for the general economic situation over the next 12 months (-37 vs. -31 in February), while personal finance views remained stable (+1 vs. +2 in February). Higher petrol prices, driven by a 50% rise in oil costs since late February, have affected households, with limited government support for heating oil users. Inflation is forecast to rise to 3.5% by the middle of the year, with the OECD projecting 4% for 2023. Household inflation expectations and savings rates increased, while willingness for major purchases fell.

Norway’s February retail sales fell by 1.1% m/m, following a 0.9% m/m increase in January, with declines observed across most sectors. Over the three months to February, sales rose by 0.3% compared with the previous period. The largest negative contribution came from “other household goods in specialized stores,” which dropped 4.1%, reversing a prior upward trend. The overall decline was partly offset by stable developments in grocery sales and a temporary increase in fuel sales. Broader retail trade, including wholesale and motor vehicles, rose by 1.2% m/m, supported by gains of 2.4% in wholesale and 0.7% in motor vehicle sales. OSE -0.82% to 1972, EURNOK -0.202% to 11.1575, 10y NGB +7.4bp to 4.529%.

The Norwegian unemployment rate was flat in March at 2.1%, unchanged from February on a seasonally adjusted basis, marking a pause after several months of falls. Unadjusted data showed 65,400 fully unemployed individuals, corresponding to 2.2% of the labor force. In addition, 25,300 people were partially unemployed (0.8%), while 12,500 were jobseekers on labor market programs (0.4%). This brought the total number of registered jobseekers to 103,100, or 3.4% of the labor force. Despite the stabilization in unemployment, authorities highlighted a strong increase in job vacancies, indicating continued robust labor demand and favorable conditions for jobseekers. Budapest SI -0.53% to 121857, EURHUF +0.336% to 389.28, 10y HGB -5bp to 7.31%.

Hungary’s Q4 balance of payments showed net lending of €466mn, with the seasonally adjusted balance at €1.185bn, equivalent to 2.0% of GDP, while the current account posted a surplus of €321mn and the capital account stood at €145mn. The goods balance recorded a deficit of €1.428bn as imports (€31.614bn) exceeded exports (€30.186bn), while the services surplus narrowed, including travel (€1.036bn) and non-travel (€1.815bn). The primary income deficit improved to €1.129bn and secondary income shifted to a €28mn surplus. The net international investment position stood at -40.8% of GDP, with external debt at €34.4bn and reserves rising to €50.2bn.

New Zealand’s ANZ-Roy Morgan Consumer Confidence index fell sharply in March to 91.3 from 100.1, the lowest level since October 2024, driven by uncertainty over the Middle East conflict and rising petrol prices. The future conditions index dropped to 96.7 (from 106.9), and current conditions declined to 83.1 (from 90.0). Inflation expectations for the next two years rose by 1.0 percentage points to 5.7%. Household sentiment on making major purchases weakened, with the net balance at -14, returning to October 2025 levels. House price inflation expectations climbed slightly from 3.6% to 3.8%. The economic outlook over the next 12 months worsened significantly, with a net balance of -25%. NZX 50 -0.32% to 12935, NZDUSD +0.139% to 0.577, 10y NZGB +4.5bp to 4.772%.

China’s Q4 balance of payments came in at a current account surplus of ¥1.73tn. This was driven by a goods trade surplus of ¥2.20tn, partly offset by deficits in services (¥343.5bn) and primary income (¥175.6bn), while secondary income posted a surplus of ¥49.2bn. The capital and financial account showed a deficit of ¥1.66tn. For the full year, the current account surplus stood at ¥5.24tn, alongside a capital and financial account deficit of ¥5.52tn. In USD terms, the Q4 current account surplus was $243.8bn, with a full-year surplus of $735.0bn. The authorities also announced data revisions and expanded disclosures to improve transparency. CSI 300 +0.56% to 4503, USDCNY -0.066% to 6.9095, 10y CGB -0.4bp to 1.816%.

Chinese industrial enterprises above designated size saw their profits jump 15.2% y/y in January-February 2026, accelerating from 0.6% in 2025. Manufacturing profits rose by 18.9% y/y, mining by 9.9% and utilities by 3.7%. Revenue grew 5.3% y/y, supporting profit recovery. Over 58% of the 41 industrial sectors reported profit growth, with over 60% showing improvement. Equipment manufacturing profits surged 23.5% y/y, accounting for 30.4% of total profits. High-tech manufacturing profits jumped 58.7% y/y, driven by smart products and semiconductors. Raw materials profits increased by 88.3% y/y. Unit costs came down, raising profit margins. Private enterprises’ profits grew 37.2% y/y. Risks remain amid global uncertainties and uneven sector recovery.

South Korea’s March 2026 Composite Business Sentiment Index (CBSI) for all industries edged slightly lower to 94.1 (-0.1 points from February), with the outlook for April dropping 4.5 points to 93.1. Rising raw material costs and heightened uncertainty stemming from the conflict outweighed strong IT exports. Manufacturing CBSI remained steady at 97.1, but its outlook fell 3.0 points to 95.9. Non-manufacturing CBSI decreased by 0.2 points to 92.0, with the outlook down 5.6 points to 91.2. The Economic Sentiment Index (ESI) fell 4.8 points to 94.0, reflecting weaker private sector sentiment. KOSPI -0.4% to 5439, USDKRW -0.007% to 1506.95, 10y KTB -0.5bp to 3.85%.

In February, foreign investors in South Korea net sold a record ₩19.56tn ($12.98bn) of local stocks, sharply up from net sales of ₩98bn in January, amid concerns over an AI industry bubble. AI-related stocks, including chipmakers, saw significant declines. Following this, offshore investors held ₩2.026qn in local stocks, representing 32.6% of market capitalization. U.S. investors were the largest sellers with ₩8.7tn of net sales, followed by British investors at ₩4.7tn. Conversely, foreign investors purchased a net ₩7.43tn of local bonds, holding ₩337.3tn as of end-February.

The Philippines’ February 2026 total external trade in goods reached $18.34bn, up 10.7% y/y from $16.57bn in February 2025. Exports rose 8.0% y/y to $7.33bn, led by electronic products ($4.23bn), gold and machinery. The top export destinations were the U.S. (19.3% of total exports), Hong Kong (16.0%), Japan (13.5%), China (9.1%) and the Netherlands (4.5%). Imports increased by 12.6% y/y to $11.01bn, with electronic products, mineral fuels and transport equipment as major categories. China was the largest source of imports (28.4%). The trade deficit widened by 23.1% y/y to -$3.68bn from -$4.274bn in December 2025. PSEi -0.19% to 5973, USDPHP +0.512% to 60.553, 10y PHGB +3.7bp to 6.899%.

The Philippines’ Producer Price Index (PPI) for manufacturing rose by 1.4% y/y in February, up from 1.3% in January and 1.1% in February 2025. Exports rose 8.0% y/y to $7.33bn, led by electronic products ($4.23bn), gold and machinery. The main driver was the manufacture of computer, electronic and optical products, which increased by 2.9% y/y, contributing 26.6% to the overall growth. Other contributors included beverages and basic metals. The PPI for food manufacturing slowed to 1.2% y/y from 1.4% in January, led by a deceleration in vegetable and animal oils and fats. Month-on-month, manufacturing PPI fell 0.1%, mainly due to declines in the computer products, food and furniture sectors.