Key Highlights

• RBNZ in hawkish hold, vows larger and quicker hikes despite split vote.
• ECB’s Yannis Stournaras says June hike is the “most likely outcome.”
• South Korean share prices double YTD on chip optimism.

Chart of the Day

Sharp gains in cash and short-dated instrument flow as rate expectations rise

^{Source: BNY}

In the ongoing absence of a deal to end the Iran conflict, global inflation expectations are continuing to rise, and now markets are shifting toward pricing in a potential Fed hike. Realized or not, even just the notion of the Fed moving back toward tightening marks a qualitative change in global policy expectations, and central banks in much of the world may need to match the FOMC, at least in messaging. Otherwise, they risk widening rate differentials against the dollar and generating additional pass-through in an environment where dollar-priced commodities are already generating headline inflation risk.

Based on flows into cash and short-term instruments (CAST) flows over the past week, there are clear signs that cross-border clients are more open to owning cash exposure. Normally, CAST flows rise when rate expectations shift higher or there is a sudden surge in risk aversion, mandating high cash allocations. As risk developments last week did not point to the latter, cross-border flows are likely more influenced by the view that foreign central banks are tracking the Fed, with multiple markets seeing some of their strongest flows in three months. Surprisingly, the U.S. is seeing some cross-border outflows, which points to some diversification or rotation coming through toward month-end.

What's Changed?

Global equities have extended their rally on AI optimism and ongoing peace talks with Iran in Pakistan. The Eid al-Adha holiday meant markets in much of South Asia were closed, while liquidity across markets remains focused on month-end and rebalancing. Oil prices continued to retreat, moving down 3-4% with a focus on tapping strategic petroleum reserves taps to offset the closure of the Strait of Hormuz.

• China: CNY has touched its strongest level since 2023, at 6.7783. Chinese equities fell, countering the wider APAC rally, even as January-April industrial profits rose 18.2% y/y. The Hong Kong watchdog has raided two Chinese brokerage firms and a hedge fund and arrested eight individuals in a clampdown on IPOs and on Chinese cross-border trading. Beijing is stemming capital flight, and this shows up in fixed income. Chinese bonds continued to rally, with 10y yields down 1.5bp to 1.73% and the key 7-day repo 1bp lower at 1.365%.
• Chips: SK Hynix has joined the $1tn market capitalization club, which includes Samsung and Micron, on the back of AI memory chip demand. The South Korean KOSPI printed a new record high, with Samsung and SK Hynix accounting for half of the index. Samsung is up 149% YTD while SK Hynix has gained 215%. Their U.S. counterpart Micron is up 245% YTD. Expectations are that semiconductor chip prices will rise 63% in Q2. The investment boom continues, with returns from data centers justifying the money flow.
• Central bank guidance. The hawkish hold from the RBNZ, the ECB’s warnings on geopolitical and fiscal risks and the focus on financial stability have not shown up in the rush to equities in May. Today’s speech by Carolyn Hewson of the RBA highlights the energy shock and role of central bankers, noting that this time is different from the 1970s. Australian CPI dipped in May despite ongoing fuel price jumps. The markets are now watching duration trades in fixed income globally, as they analyze the gap between breakeven inflation rates and nominal yields to determine what else is driving yield curve steepening.

Bottom line: The push for peace continues to dominate markets, even with open skepticism about the path. Economic relief in Iran and buying time for oil supplies globally appear as the key drivers. Whether this will suffice to hold the momentum for the ongoing AI boom and to cap bond yields will matter for the day ahead. Words are not the same as action, and continued chasing of the tape will rest on rates setting the value proposition. For FX, the role of USD as a risk barometer looks wobbly as well, with intervention risks from JPY and CHF to KRW and IDR. The focus in the U.S. session will be on the 5y U.S. Treasury sale, the ongoing regional Fed reports and the weekly ADP employment numbers. How investors balance May’s U.S. exceptionalism against the ongoing global backdrop of stagflation will require more than continued talk.

What You Need to Know

The RBNZ has kept the OCR unchanged at 2.25% in a split 3-3 decision but delivered a distinctly hawkish message, alongside upward revisions to both OCR and inflation forecasts versus February’s MPS. While the bank still highlighted uncertainty around medium-term inflation pressures and balanced higher costs against weak demand, it now signaled that the “OCR will most likely need to increase sooner and by more than envisaged.” The RBNZ projects the OCR at 2.84% by end-2026, up from 2.38% previously, with further rises to 3.15% in 2027 and 3.28% in 2028. Higher oil prices also lifted the inflation outlook, with CPI seen above 4% through 2026 before easing toward target during 2027. Front-end NZD OIS rates rose by 6-7bp, although the projected OCR path still sits below implied market predictions, with nearly 3.00% priced in for December 2026. NZX 50 +1.21% to 13228, NZDUSD +0.411% to 0.5871, 10y NZGB -1.6bp to 4.593%.

ECB Governing Council member Yannis Stournaras has told Kathimerini that a June ECB rate hike is now the most likely outcome, as the Middle East conflict keeps energy prices elevated for longer than previously expected. Stournaras argued that while any inflation overshoot may prove temporary, the ECB should still respond with a measured move toward tighter policy to prevent second-round inflation effects without causing excessive damage to economic activity. Fellow Governing Council member Mārtiņš Kazāks echoed this view, saying persistently higher energy prices have strengthened the case for further tightening. Markets already broadly expect the ECB to raise rates by 25bp on June 11, as the renewed energy shock drives up inflation pressures across the euro area and complicates the central bank’s path back toward its inflation target.

BoJ Governor Kazuo Ueda has emphasized that oil price shocks are complex tests of Japan’s entire inflation regime rather than isolated events. He highlighted that the impact of oil shocks depends heavily on initial conditions such as wage growth, inflation expectations, exchange rates and structural factors. Ueda noted that Japan is currently facing a fifth oil shock, with recent shocks amplified by yen depreciation and broader cost pressures including energy, food and logistics. He warned that temporary shocks can become persistent if they alter wages, expectations and price-setting behavior, underscoring the need for monetary policy vigilance. Nikkei +0.36% to 65233, USDJPY -0.132% to 159.36, 10y JGB -2.5bp to 2.7%.

Quad foreign ministers from Australia, India, Japan and the U.S. have announced new Indo-Pacific initiatives to enhance maritime security, port infrastructure and energy cooperation, aiming at countering China’s regional influence. Key measures include a maritime surveillance integration, a port upgrade project in Fiji and an energy security initiative with a planned fuel security forum. They also launched a critical minerals framework to strengthen supply chains amid China’s export restrictions. India and the U.S. have signed a related cooperation deal. China has criticized the Quad as divisive. The group is seeking a leaders’ summit later this year to deepen collaboration. MSCI World 0.29% to 1121, DXY -0.076% to 99.094, BBG Global Aggregate 0bp to 3.816%.

U.S. Trade Ambassador Jamieson Greer has announced that the Office of the U.S. Trade Representative will issue a Federal Register notice seeking public comments on establishing a Board of Trade with China. This initiative follows a recent summit between Presidents Trump and Xi, where both countries agreed to create Boards of Trade and Investment to manage economic relations. The Board of Trade is aiming to reduce tariffs on at least $30bn of non-sensitive goods. The move is part of ongoing efforts to ease trade tensions amid a current truce, while the U.S. is considering reapplying certain global tariffs after a Supreme Court ruling limited previous measures. S&P Mini +0.1% to 7545, DXY -0.076% to 99.094, 10y UST -1.2bp to 4.473%.

What We're Watching

U.S. May Richmond Fed Manufacturing Index forecast at 4 points vs. 3.0.

U.S. May Dallas Fed Services Activity is expected at -6.0 vs. -9.9.

Central bank speakers: The Fed’s Lisa Cook speaks on AI, the economy and the financial system at the Stanford Institute for Economic Policy Research (SIEPR) Policy Forum.

U.S. Treasury sells $69bn in 17-week bills, $28bn in a 2y FRN reopening and $70bn in 5y notes.

What iFlow is Showing Us

Mood: iFlow Mood has stabilized in risk-off territory, with continued equity selling offset by steady buying in core government bonds.

FX: Strong demand for USD and SEK contrasted with heavy CAD, NZD and DKK outflows within G10. APAC and LatAm FX broadly faced selling pressure, while EMEA currencies were mixed but generally softer. EUR scored holdings moved deeper into underheld territory.

FI: U.S. Treasurys and Eurozone and Chinese government bonds attracted significant inflows, alongside moderate demand for JGBs. In contrast, LatAm sovereign bonds saw the largest outflows, alongside Turkish, Hungarian and Philippine government bonds.

Equities: Broad-based outflows dominated across the iFlow universe, led by Japan, Indonesia and South Korea. Selected inflows were seen in Norway, New Zealand, Singapore, Thailand and China. Within DM sectors, utilities, materials and energy underperformed, while financials and consumer staples attracted buying.

Quotes of the Day

“Let us never negotiate out of fear. But let us never fear to negotiate." – John F. Kennedy

“The aim of an argument or discussion should not be victory, but progress.” – Joseph Joubert

Economic Details

France’s household confidence index fell to 82 points in May, from 84 in April. This marks its lowest level since March 2023, again well below the long-run average of 100. Consumer sentiment weakened further as households became markedly more pessimistic about making major purchases, with the corresponding balance falling five points. Views on both past and future personal financial conditions also deteriorated, while perceptions of France’s past standard of living recorded another sharp decrease. Households’ unemployment concerns eased slightly but remained elevated relative to historical norms. Inflation expectations moderated after recent surges, although perceptions of past price increases continued to rise. Savings intentions and perceived ability to save were broadly stable and remained comfortably above long-run averages, highlighting continued caution in consumer behavior despite softer economic confidence. CAC 40 +0.47% to 8212, EURUSD +0.112% to 1.1644, 10y OAT -2.4bp to 3.568%.

Italy’s industrial and services turnover increased strongly in value terms in March but remained much softer in volume terms, highlighting the continued importance of price effects. Industrial turnover rose 2.0% m/m by value and 0.7% by volume, supported by gains in both domestic and foreign markets. Meanwhile, services turnover was up 1.3% by value but only 0.1% by volume. Energy was the biggest driver of industrial growth, with turnover surging 23.0% m/m and 25.3% y/y in value terms, whereas consumer goods remained weak. On a y/y basis, industrial turnover rose 4.4% by value and 2.0% by volume, while services turnover increased by 4.6% and 1.6, respectively. Wholesale trade outperformed broader services activity. Overall, the data point to resilient nominal demand conditions in Italy, although underlying real activity remains subdued, particularly across services sectors. FTSE MIB +0.18% to 49991, USDJPY +0.032% to 159.35, 10y BTP -2.9bp to 3.672%.

Spain’s mortgage approvals rose 9.0% y/y in March to 46,661, extending the recovery in housing lending activity, while the average mortgage amount increased by 10.1% y/y to €174,132. Total capital lent for residential mortgages climbed 20.0% y/y, pointing to continued strength in housing demand and higher property values. The average interest rate on new residential mortgages eased to 2.84%, with fixed-rate loans continuing to dominate at 63.8% of new lending. Mortgage renegotiation activity weakened sharply, with total registered mortgage changes falling 28.3% y/y, led by declines in novations and debtor subrogations. By region, Navarra, Aragon and Madrid posted the strongest y/y increases in mortgage activity, while Galicia, Castilla y Leon and the Basque Country recorded the largest declines. Overall, the data suggest resilient Spanish housing credit conditions despite still-elevated borrowing costs. IBEX 35 +0.39% to 18410, EURUSD +0.112% to 1.1644, 10y Bono -2.9bp to 3.372%.

Switzerland’s UBS-CFA economic expectations index jumped 19.2 points to -11.1 in May, signaling a big improvement in sentiment after the deterioration triggered by the Iran war earlier in the year. Despite the rebound, the index remained in negative territory, indicating that sentiment among analysts is still cautious overall. Around 80% of surveyed experts now expect the Swiss economy to remain stable over the next six months, while fewer than 20% foresee deterioration. Expectations for the euro area and U.S. economies also improved modestly. Respondents believe the Iran conflict will continue to lift inflation pressures globally, although most do not expect the SNB to change rates in June, with two-thirds forecasting unchanged policy. However, expectations of future Swiss rate hikes increased, with the implied probability of at least one hike by March 2027 rising to 34%. SMI +0.46% to 13588, EURCHF +0.125% to 0.91473, 10y Swiss GB -2.4bp to 0.49%.

Japan’s Services Producer Price Index (SPPI) rose 3.0% y/y in April, down slightly from an upwardly revised 3.3% in March. Excluding international transportation, the index climbed 2.5% y/y (March: 2.9%). M/m growth was 0.5% for all items and also 0.5% excluding international transportation. Key contributors to the y/y increase included ocean freight transportation (+59.1% y/y), international air freight (+40.6%) and worker dispatching services (+3.3%). Real estate services (+2% y/y) and transportation/postal activities (5.1% y/y) also saw substantial rises. Some subcomponents such as domestic air passenger transportation and advertising services recorded declines. Nikkei +0.36% to 65233, USDJPY -0.132% to 159.36, 10y JGB -2.5bp to 2.7%.

Australia’s Consumer Price Index (CPI) rose 4.2% y/y in April 2026, down from 4.6% in March. CPI was up 0.4% m/m (March: 1.1%). Trimmed mean inflation rose 0.3% m/m, 3.4% y/y vs. 0.2% m/m, 3.3% y/y in March. Key contributors to the y/y inflation were housing (+6.3%), transport (+6.6%) and food and non-alcoholic beverages (+2.8%). Goods inflation eased to 4.7% y/y (from 5.5%), led by automotive fuel (+18.6%), which declined by 7.0% m/m. Services inflation edged down to 3.5% y/y, driven by medical services (+4.9%) and rents (+3.5%). Tradables inflation fell to 3.2% y/y; non-tradables rose to 4.7% y/y. ASX +0.29% to 5640, AUDUSD -0.21% to 0.7151, 10y ACGB -5.4bp to 4.858%.

Australia’s Westpac-Melbourne Institute Leading Index posted a six-month annualized growth rate of -0.17% in April, down from -0.11% in March, in the first consecutive below-trend readings since late 2024. This signals a clear loss of economic momentum likely to persist into early 2027. The index has deteriorated by 0.32 percentage points since November 2025 (+0.15%), mainly due to a 20% slump in consumer sentiment, which has shifted from a slight positive contribution to a 0.28-percentage-point drag on growth. Financial market indicators remain weak, while real economy indicators are still firm.

In Australia, total construction work done rose 3.4% q/q to AU$83.4bn in the March quarter (up 6.3% y/y). Engineering construction increased by 6.9% q/q (4.7% y/y) to AU$38.7bn, while building work rose 0.6% q/q (7.8% y/y) to $44.7bn. Within building, non-residential work grew 2.5% q/q (11.2% y/y), whereas residential building declined by 0.6% q/q but was up 5.6% y/y. The trend estimates for total construction work done rose 0.5% q/q to AU$80.6bn.

China’s industrial enterprises above designated size saw rapid profit growth from January to April 2026. Profits rose 18.2% YTD y/y vs. 15.5% YTD y/y in March. Equipment manufacturing profits grew 15.4% YTD y/y, with electronics up 107.7% YTD y/y. High-tech manufacturing profits surged 44.8% YTD y/y, led by semiconductors and automation. Mining and manufacturing profits increased by 26.0% and 20.4% YTD y/y, respectively, while utilities declined by 1.9% YTD y/y. April profits grew 24.7% y/y. Revenue rose 5.2% YTD y/y, supported by industrial production and producer price increases. Raw materials profits jumped 88.1%, driven by oil and metals. Unit costs fell, improving profitability. Challenges remain amid complex external conditions. CSI 300 -1.12% to 4893, USDCNY +0.052% to 6.7826, 10y CGB -0.7bp to 1.742%.

South Korea’s Composite Business Sentiment Index (CBSI) rose to 98.9 in May, up 4.0 points from April – its highest level since October 2022. The CBSI outlook for June increased by 3.7 points to 97.6. Manufacturing CBSI increased to 100.8 (+1.7 points), and its outlook rose to 100.3 (+2.3 points). Non-manufacturing CBSI climbed to 97.5 (+5.4 points), with the outlook up to 95.9 (+4.7 points). The Economic Sentiment Index (ESI) reached 97.5, up 5.8 points from April. Key components such as business conditions, production and new orders showed improvements across sectors. KOSPI +2.21% to 8225, USDKRW +0.43% to 1501.1, 10y KTB -5.1bp to 4.075%.

South Korea’s retail sales rose 7.2% y/y in April, driven by strong performances in both offline and online sectors. Offline retail sales climbed 6.7% y/y, with department stores up 21.7% and convenience stores up 3.3%, marking the tenth consecutive month of growth for these segments. Department store gains were broad-based across fashion, accessories and food, while convenience stores benefited from higher processed food sales amid early hot weather. Supermarket sales declined by 6.6% y/y, linked to e-commerce growth. Online retail revenue grew 7.5% y/y, led by cosmetics, groceries and home appliances, and accounted for 60.3% of total retail sales in March.

Samsung Electronics’ 2026 wage and bonus agreement has been approved by 73.7% of union members, narrowly averting a strike. The deal includes a special management bonus pool equal to 10.5% of semiconductor business operating profit, benefiting employees in the Device Solutions division. If operating profit hits ₩300tn ($200bn) this year, memory business employees with annual salaries of ₩100mn could receive about ₩550mn in bonuses paid in shares, plus regular incentives capped at 50% of salary, totaling up to ₩600mn in performance-related pay.

Taiwan plans to launch government-subsidized investment accounts for young people aged 6-18 as part of an 18-measure policy package to address its low birth rate. The government will provide a NT$5,000 monthly child allowance for minors under 18, with NT$2,500 automatically invested in dedicated accounts managed by professionals, guaranteeing a minimum return equivalent to a two-year fixed deposit rate. Additional measures include increased birth and education subsidies and tax incentives. Taiwan’s fertility rate stood at 0.86 in 2024, one of the lowest globally, prompting this initiative to boost family support and wealth management. TAIEX +1.68% to 44257, USDTWD +0.137% to 31.408, 10y TGB +3.6bp to 1.645%.