Key Highlights

• U.S. imposes 25% tariff on imports from countries trading with Iran, effective immediately.
• German Chancellor Friedrich Merz sees Iranian regime in its “final days and weeks,” while Iranian MP warns of greater unrest.
• Japanese Prime Minister Sanae Takaichi tells senior party members she plans to call early elections.

Chart of the Day

iFlow Trend moves into negative statistical significance

^{Source: BNY}

Our iFlow Trend indicator has turned statistically significant and negative for the first time this year. This is somewhat surprising given that iFlow Carry has recently moved into positive statistical significance, as the two indicators typically show some degree of alignment when it comes to risk appetite. In the case of iFlow Trend, the signal suggests that currencies with strong spot rate performance are experiencing outflows, potentially reflecting interest reduction or profit-taking, while previously poorly performing currencies are beginning to find some traction.

Against a backdrop of ongoing exogenous stress factors affecting markets, however, this lack of congruence between signals is itself not entirely unexpected. Unlike iFlow Carry, trend is more fluid in terms of flow versus momentum alignment, so it is necessary to examine the underlying drivers anchored by both momentum and flow rankings. In both cases, there is not yet a clear distinction between carry and non-carry names. For example, based on normalized flow figures as of January 9, ZAR and HUF are performing strongly, but flows are softening, indicating a lack of interest in adding to exposures. We have identified both as over-positioned on a total asset exposure basis for 2025, making such behavior understandable.

By contrast, LatAm names such as COP and PEN continue to support carry, with a positive flow and momentum alignment. At the opposite end of the spectrum, APAC names are seeing greater funding interest in spot terms, while flows have improved, hinting at value-based plays emerging. TRY is also a carry name that may have attracted some value-driven demand following a difficult fourth quarter.

What's Changed?

Did Turnaround Tuesday happen yesterday? Today, market sentiment is mixed, as we look toward CPI and bank earnings announcements and a greater focus on the Fed, housing and bond supply. The biggest movers overnight were oil (+2%), JPY (-0.5%), 10y JGB yields (+7.5bp) and the Nikkei (+3.1%, as it caught up after a long weekend). The moves overnight are linked to headlines about Iran and Japan. U.S. equity futures are lower, as bond yields remain close to a breakout at 4.20% for 10y, matching EMEA moves, while USD ex JPY is stuck.

• Iran, oil and tariffs. The push for 25% tariffs on anyone doing business with Iran has hit China and its oil imports. The market reaction has been clear, with oil higher, taking Brent to around $65/barrel. Also contributing to oil – further attacks on Russian oil tankers in Black Sea. Global oil disruption to supplies look important as economic growth suggests steady demand.
• Central bank speakers – holding policy unchanged. Global G10 central bankers have issued a coordinated statement in support of Federal Reserve Chairman Jerome Powell. John Williams of the NY Fed sees rates as “well-positioned” to stabilize labor markets and bring inflation to 2%, suggesting he is happy to keep rates on hold. BoJ Governor Kazuo Ueda has reiterated that the central bank will continue raising rates if economic and price trends remain consistent with forecasts. The ECB’s François Villeroy de Galhau has come out in support of Powell and pushed back on 2026 rate hike talk as “fanciful.”
• Japan and JPY. The intervention line at 160 looks to be critical for markets, as the snap election risk is compounded by doubts about the pace of BoJ tightening and ongoing worries about deficit spending. Japanese Finance Minister Satsuki Katayama has spoken to U.S. Treasury Scott Bessent, noting he shares concerns about “one-sided depreciation.” The odds of a joint intervention to support JPY are not reflected in FX options.

Bottom line: We can see new record highs for EU shares, ongoing gains for AI investments and higher global rates, while no trend seems to fit in FX. The focus on commodity-linked FX is stalling despite oil and gold gains.  Markets are stuck in a bog, looking for a solid base from which to climb higher. There are valuation worries in shares, inflation fears in bonds and dollar doubts linked to policy and politics. The mood swings look more extreme than market price actions over the last 24 hours, suggesting exhaustion with regard to any new headlines. Investors are looking for bigger boots to slog through the mire of current signals, with an eye on bonds as the key to getting momentum back. 

What You Need to Know

Japan’s Prime Minister Sanae Takaichi is expected to dissolve the lower house at the opening of the ordinary Diet session on January 23, aiming to capitalize on her high approval rating (78.1% in a recent JNN poll) and secure more seats for stable governance. Markets anticipate an expansion of her “responsible proactive fiscal policy,” temporarily driving the yen temporarily to ¥159, pushing long‑term bond yields to record levels and lifting the Nikkei above 53,000. Analysts note that while fiscal easing may support short‑term growth, it could raise long‑term rates and spur inflation concerns, possibly prompting earlier BoJ rate hikes. A snap election may also delay budget approval, risking a provisional budget. Nikkei +3.098% to 53549.16, USDJPY -0.667% to 158.91, 10y JGB +7.6bp to 2.173%.

President Trump has said any country doing business with Iran will face a 25% tariff “on any and all business being done with the U.S.” That new tariff on imports from Iran’s trading partners is “effective immediately,” and the order is final and conclusive. Further details about the tariff announcement were not immediately clear. The apparent effort by Trump to economically isolate Iran comes as the oil-rich Middle Eastern country struggles to suppress an ongoing swell of massive anti-government protests. S&P Mini -0.11% to 7008.75, DXY +0.127% to 98.987, 10y UST +1.8bp to 4.193%.

11 international central bankers, representing national central banks, the ECB and the BIS, have issued a joint statement in support of Fed Chair Jerome Powell. The statement stresses that “the independence of central banks is a cornerstone of price, financial and economic stability in the interest of the citizens that we serve” and “Chair Powell has served with integrity, focused on his mandate and an unwavering commitment to the public interest.” The statement also described Powell as “a respected colleague who is held in the highest regard by all who have worked with him.” ECB President Christine Lagarde (on behalf of the entire ECB Governing Council) and Bank of England Governor Andrew Bailey were leading signatories.

China has said it would “protect its rights and interests” when asked about the prospect of new U.S. tariffs based on trade with Iran. Spokesperson Mao Ning emphasized that China consistently opposes interference in other nations’ internal affairs and the use or threat of force in international relations, urging all parties to act in ways that promote peace and stability in the Middle East. She added that China is closely monitoring developments in Iran and will take all necessary measures to ensure the safety of Chinese citizens. China is Iran’s biggest trading counterpart, but key U.S. partners such as EU countries and Türkiye also conduct substantial trade with Iran. CSI 300 -0.603% to 4761.03, USDCNY +0.042% to 6.976, 10y CGB -1.5bp to 1.848%

What We're Watching

U.S. December NFIB small business optimism expected to improve to 99.2 from 99.0.

U.S. weekly ADP NER pulse estimated at 5k, after the last reading in December showed a four-week average +11.5k.

U.S. December CPI forecast at 2.7% y/y, flat vs. November, while core CPI is also expected at 2.7% y/y, up from Nov 2.6% y/y.

U.S October new home sales are expected at 715k vs. 800k in August.

U.S. December federal budget balance forecast to improve to -$155bn from -$173.3bn.

Central bank speakers: St. Louis Fed President Alberto Musalem speaks on an MNI webcast about the economic outlook and policy; Richmond Fed President Tom Barkin participates in a moderated conversation at the CFO Society.

U.S. Treasury sells $75bn in 6-week bills and $22bn in a 30y bond reopening. 

What iFlow is Showing Us

Mood: Sentiment has deteriorated further, with a pickup in equities selling against steady flows in core sovereign bonds. iFlow Mood has eased to 0.124, its lowest level since mid-November 2025.

FX: BRL, INR and GBP posted the most outflows, while most inflows were seen in SGD, PLN and JPY. Elsewhere, USD and NZD were bought, against selling in EUR, ZAR, THB and CNY.

FI: LatAm and G10 sovereign bonds were investors’ favorites, led by Mexican, Peruvian, Swedish and Australian government bonds, along with U.K. gilts. Israeli, South African and Turkish government bonds were most sold. Mixed and light flows in the APAC complex.

Equities: Selling pressure continued, with significant outflows in the U.S., the U.K., Chile, Mexico, South Africa, Hong Kong, South Korea and Taiwan. Peru, Sweden, Japan and Indonesia stood out with inflows.

Quotes of the Day

“Without aspirations for a better existence, you’re stuck in the mud and going nowhere.” – Kimora Lee Simmons

Economic Details

Euro area households’ and non-financial corporations’ data for the third quarter showed broadly stable financing dynamics alongside some moderation in income growth. Households’ financial investment increased at an unchanged annual rate of 2.7%, while gross non-financial investment, mainly housing, grew 2.8%. Gross disposable income growth slowed to 2.9% y/y, from 3.3% previously, as consumption growth eased to 3.1% y/y, leaving the gross saving rate unchanged at 15.2%. Household net worth growth moderated to 4.8% y/y, reflecting slower housing valuation gains, and the debt-to-income ratio edged down to 81.5%. For non-financial corporations, financing growth was unchanged at 1.6% y/y, while the gross operating surplus accelerated to 2.6%. Corporate investment growth slowed, leverage ratios fell and the debt-to-GDP ratio came down to 66.0%, indicating gradual balance sheet repair. Euro Stoxx 50 +0.189% to 6027.67, EURUSD +0.009% to 1.1668, BBG AGG Euro Government High Grade EUR unchanged at 2.961%.

The euro area’s current account recorded a surplus of €283bn over the four quarters to Q3 2025, equivalent to 1.8% of GDP, down from €425bn, or 2.8% of GDP, a year earlier. The narrowing was driven primarily by a shift in primary income from a €55bn surplus to a €41bn deficit, alongside a wider secondary income deficit and a smaller services surplus, partly offset by a larger goods surplus. The goods balance benefited from stronger chemicals exports and a smaller energy deficit, while the services balance was weighed down by other business services and intellectual property charges. The international investment position showed net assets of €1.72tn, or 11.0% of GDP, at end-Q3.

France’s budget balance for November recorded a narrower deficit, with the central government execution balance at -€155.4bn, improving by €17.1bn compared with the same period last year. General budget revenues reached €324.8bn, up €19.7bn y/y, driven by a €19.1bn increase in net tax receipts, reflecting higher personal income tax, corporate tax and other fiscal revenues. Non-tax revenues rose by €0.6bn. General budget expenditure totaled €405.5bn, up €4.7bn y/y on a current perimeter basis, partly reflecting temporarily higher debt servicing costs, alongside structurally higher energy-related public service spending and military outlays. Transfers via revenue-sharing mechanisms increased by €1.9bn. The balance of special accounts stood at -€18.5bn, improving by €4.0bn y/y. CAC 40 -0.248% to 8338.05, EURUSD +0.009% to 1.1668, 10y OAT +2.7bp to 3.533%.

Dutch inflation in December fell to 2.8% y/y, slightly below November’s 2.9%, with consumer prices overall unchanged from the previous month. The decrease was driven mainly by cheaper bungalow park accommodation, which was 4.5% less expensive than a year earlier, and lower motor fuel prices. For 2025 as a whole, average consumer prices were 3.3% higher than in 2024. Harmonized inflation (HICP) came in at 2.5%, while euro area inflation eased to 2.0%, with energy prices lower across the region but higher in the Netherlands. CBS noted that seasonal effects influence monthly comparisons and confirmed that both CPI and HICP will adopt a new 2025 base year from early 2026. AEX +0.427% to 997.78, EURUSD +0.009% to 1.1668, 10y NGB +1.9bp to 2.936%.

U.K. December retail sales pointed to a weak Christmas trading period, with overall sales rising just 1.2% y/y, below the 12-month average of 2.3%, according to industry data. Food sales proved relatively resilient, supported by higher prices, but non-food sales slipped 0.3% y/y, reversing strong growth a year earlier as spending on clothing and electronics disappointed. Card spending fell 1.7% y/y, the sharpest decline since early 2021, highlighting subdued consumer demand. Grocery inflation reached 4.3% y/y, lifting average supermarket spending to £476, yet prompting many households to plan cutbacks. Discount grocers outperformed, with Aldi and Lidl posting strong y/y gains, while general merchandise retailers reported weak festive sales amid discounting and low confidence. FTSE 100 -0.048% to 10135.87, GBPUSD +0.09% to 1.3477, 10y gilt +2.1bp to 4.394%.

Norwegian used‑home prices rose 2.2% between the third and fourth quarters of 2025, seasonally adjusted, with increases across all regions except Trøndelag ex Trondheim, where prices fell 0.7%. Stavanger saw the strongest quarterly rise at 3.8%, and all housing types increased, led by small houses. Compared with the same quarter in 2024, national prices were up 5.9%, with Stavanger and Bergen recording jumps of 18.1 and 10.6%, respectively, while Trøndelag ex Trondheim had the weakest growth at 1.4%. For full year 2025, prices increased by 5.5% nationally, again strongest in Stavanger (15.5%) and Bergen (10.9%), with apartments in blocks showing the highest annual growth. OSE +0.599% to 1713.86, EURNOK +0.192% to 11.7696, 10y NGB +1.4bp to 4.188%.

Norwegian residential construction costs rose 4.3% in December 2025, up from 3.8% in December 2024, reflecting continued cost pressures across materials and building types. Costs for timber‑frame detached houses increased by 4.2%, while apartment block construction rose 4.3%. Material costs climbed 5.1% for timber‑frame homes and 3.7% for blocks, driven largely by a 13.4% rise in timber prices since December 2024. Meanwhile, reinforcement steel prices fell 4.2%, construction steel rose 2.2% and concrete and concrete elements increased by 3.1 and 5.2%, respectively. The annual average construction cost increase for 2025 was 4.3%, up from 3.8% in 2024.

Hungarian consumer prices in December 2025 were 3.3% higher than a year earlier and 0.1% above November, while average prices for the whole of 2025 rose 4.4%. Food prices increased by 2.6%, with sharp rises in chocolate (13.5%), confectionery (12.4%) and coffee (12.0%), while margarine (-27.8%) and flour (-11.6%) became significantly cheaper. Electricity, gas and other fuels rose 8.9%, including a 19.8% jump in gas. Services increased by 6.8%, driven by recreational services (14.3%) and personal care (9.8%). Consumer durables were up 2.7%, though motor fuels fell 8.6%. For full-year 2025, the strongest y/y increases were in services (6.7%) and food (5.3%).

Czech consumer prices fell 0.3% m/m in December, driven by cheaper food and beverages, including sharp declines in butter (-9.6%), UHT semi‑skimmed milk (-7.6%), pork (-4.9%), eggs (-4.7%), chocolate (-4.0%) and yoghurt (-3.3%). Alcohol prices also fell, with wine (-5.7%), beer (-2.0%) and spirits (-1.6%) all lower, while fuel prices dropped 1.9%. Offsetting upward pressure came from housing and utilities, where rental prices rose 0.5%, and household appliances, up 3.3%. Y/y inflation held steady at 2.1%, with slower food inflation but stronger housing‑related increases, including actual rentals up 6.4% and water supply up 4.2%. The HICP fell 0.3% m/m and rose 1.8% y/y. Prague SE +0.55% to 2756.18, EURCZK -0.058% to 24.272, 10y CZGB +0.7bp to 4.497%.

Türkiye’s current account posted a $3.996bn deficit in November 2025, while the figure excluding gold and energy was a $2.132bn surplus. The goods deficit reached $6.385bn, contributing to an annualized $23.2bn current account deficit and $68.4bn goods deficit. Services generated a strong $3.926bn surplus, led by transportation ($1.717bn) and travel ($3.108bn). On the financing side, annualized inflows came mainly from direct investment ($4.8bn) and loans ($30.1bn), while portfolio flows, trade credits and deposits had negative effects. In November, direct investment inflows reached $343mn, portfolio investments saw a $1.024bn outflow and official reserves fell $4.766bn. BI 100 +0.367% to 12299.75, USDTRY +0.087% to 43.1544, 10y TGB -2bp to 29.37%.

Australia January Westpac consumer confidence dipped further to 92.9 from 94.5, driven by worsening near-term outlooks. Nearly two-thirds of consumers now expect mortgage rates to rise in 2026, more than double the share in September. Confidence in job prospects has declined, while views on the “time to buy a dwelling” measure improved, especially among 18 to 34-year-olds. House price expectations cooled slightly but remain bullish. The decline was centered on expectations for family finances (-4.5% m/m) and the economy (-6.5% m/m) over the next year, partially offset by a 2.3% m/m rise in assessments of past family finances. ASX +0.012% to 5466, AUDUSD -0.105% to 0.6705, 10y ACGB +0.6bp to 4.708%.

New Zealand’s Q4 2025 NZIER Quarterly Survey of Business Opinion showed business confidence rallying strongly, as a net 39% of firms expected improved economic conditions (vs. 17% in Q3). Manufacturing led the optimism at 56%, supported by rising domestic and export demand. Building sector confidence improved, but demand and profitability remain weak. Retail and services sectors also saw improvements in sentiment amid rising demand and expectations of lower interest rates. Cost pressures eased, with inflation contained due to spare capacity, especially in construction. Hiring and investment intentions increased. The OCR is expected to be kept at 2.25% until hikes begin in H2 2026. NZX 50 -0.199% to 13656.05, NZDUSD +0.226% to 0.5772, 10y NZGB +3bp to 4.429%.

Japan’s November 2025 current account balance rose to ¥3.67tn (vs. ¥2.834tn in October 2025), driven by a larger trade surplus of ¥625.3bn (vs. ¥98.3bn in October 2025). Exports rose 5.1% y/y to ¥9.391tn, led by semiconductors (+13.0% y/y), pharmaceuticals (+48.1% y/y) and non-ferrous metals (+14.8% y/y), with key increases to Asia (+4.4% y/y) and Western Europe (+23.6% y/y). Imports fell 0.5% y/y to ¥8.765tn. The services balance deficit narrowed to ¥44.1bn (vs. -¥294.6bn). Financial account net assets increased by ¥4.117tn, supported by higher direct investment and securities inflows. Nikkei +3.098% to 53549.16, USDJPY -0.667% to 158.91, 10y JGB +7.6bp to 2.173%.

Japan’s Economy Watchers Survey showed the current conditions diffusion index (DI) at 48.6 for December, down 0.1 points vs. November, as deterioration in household and corporate sentiment outweighed an improvement in employment. The future conditions DI rose to 50.5, up 0.2 points, driven by stronger corporate and employment expectations despite weaker household sentiment. In raw (unadjusted) terms, the current DI rose 0.5 points to 48.5, while the future DI fell 0.7 points to 48.1. Overall, respondents viewed the economy as recovering, with expectations that the recovery will continue, though concerns remain about price increases.

Japan December bank lending growth rose to 4.4% y/y with average December outstanding loans of ¥660.7tn from 4.1% in November, driven by a sharp acceleration in loans from major banks. Lending growth at major banks accelerated to 5.7% y/y (vs. 4.9% in November), while total regional banks recorded a steady 4.1% y/y increase. Foreign banks saw a sharper rise, with yen-denominated loans up 29.7% y/y. Outstanding loans across major, regional and shinkin banks totaled ¥660.7tn. On the funding side, deposits and CDs grew more moderately, with total deposits at city, regional and shinkin banks increasing by 0.9% y/y in December. Deposit growth at city banks stood at 0.8% y/y, while shinkin banks’ deposits fell 0.4% y/y, reflecting continued divergence across banking segments.