Key Highlights

• President Trump calls off a plan to attack Iran on Tuesday after appeals from three Middle East powers.
• Japanese Finance Minister Satsuki Katayama says government is ready to take steps “as needed” against JPY weakness, after Q1 growth beats expectations.
• U.K. jobs drop 100k in April, in the biggest fall since May 2020 and wage growth slows to a post-COVID low of 3.4%, shifting market BoE rate hike expectations.

Chart of the Day

Hedging interest apparent in Eurozone sovereign debt

^{Source: BNY}

Global bond markets remain volatile as shifting U.S.-Iran headlines keep inflation risks elevated, with Europe particularly exposed to higher energy and input costs. This week’s PMI data are likely to reinforce a stagflationary backdrop of rising prices and weakening services demand, a difficult mix for rates markets.

Despite the sharp move higher in yields, our flow data do not yet show broad-based exits from European sovereign debt. Cross-border inflows into Spain and Italy remain resilient, Sweden is benefiting from softer inflation, and U.K. demand has held up despite pressure at the long end. France is the main exception, where fiscal concerns and stagflation risks are already weighing on flows.

The key question is whether cross-border hedging dynamics are beginning to pressure EUR further. Recent EUR strength appears to be linked to some unwinding of hedges alongside renewed sovereign outflows. For the ECB, supporting duration stability may become more important than FX stability, even if that ultimately requires tighter policy to preserve real rates credibility.

What's Changed?

The about-turn in peace hopes is battling against the ongoing inflation fears, turning risk sentiment lower. Turnaround Tuesday returns as the key risk for the U.S. sessions; global shares are mixed, bonds are mixed, the dollar is flat and oil is only marginally lower despite President Trump calling for more time to talk. The world keeps on spinning, and the cost of waiting for a resolution is showing up in duration. Higher bond yields have driven modest profit-taking in global tech shares, stalling the momentum. The iFlow Mood Index is now sharply negative after the highs set in April’s ceasefire rally, reflecting institutional wariness about chasing record-high prices.

• Indonesia: IDR has hit fresh record lows, which will pose a test for the BI tomorrow: equities are down again, while 10y bonds are stable, holding near 6.76%. Both Moody’s and Fitch have downgraded Indonesian bonds, warning about new government policy shifts. IDR has shed 14% of its value since President Prabowo Subianto took office in October 2024. MSCI has removed six Indonesian companies from its index and dropped another 13 from its small cap index. Politics matters more than natural resources in some nations.
• Russia: U.S. Treasury Secretary Scott Bessent has extended the Russia oil waivers that lapsed on Saturday, in an effort to help distressed importing nations cope with the energy shock. At the same time, Russian President Valdimir Putin’s visit to China will push the Siberia 2 gas pipeline. The pipeline could eventually carry up to 50 billion cubic meters of gas a year, replacing the lost European market. President Xi Jinping had suggested Putin might regret the war in Ukraine in his talks with President Trump, while the U.S. has considered fighting the ICC ruling against the Russian president. The war in Ukraine has escalated again, with Russia conducting nuclear drills and bombing Ukraine’s Danube port city of Izmail, which is key for grain exports. Ukraine has hit Moscow and industrial targets in the Yaroslavl region.
• EM bonds: The Philippines has cancelled a 7y bond sale as investors sought yields as high as 8.125%. Treasurer Sharon Almanza said that the government rejected all bids because the “rates are too high.” There were PHP 37bn of bids against the PHP 30bn sale. This contrast with India, where 10y rates fell 3bp to 7.10%, partially reversing yesterday’s 7bp rise. The government raised fuel prices by 3%, in its first hike in four years, helping to ease fiscal concerns. EM bonds face inflation from energy imports, a stronger USD and higher U.S. rates.

Bottom line: Better growth but weaker jobs around the world are overlaid by higher inflation, leaving policy uncertainty high and volatility across markets higher. The wait for the U.S. FOMC minutes and Nvidia earnings has paused momentum in equities but has not stopped the ongoing bond pain. The difference between spinning and turning will be important for the U.S. trading session, as it highlights the spread between involuntary and purposeful action. Shutting down risk from oil and inflation shocks is different to making ongoing purchases of equities on AI investments. However, not all turns are immune from the laws of physics.

What You Need to Know

RBA Assistant Governor Sarah Hunter has warned that the risk of inflation expectations drifting higher is “elevated,” which could necessitate a more substantial economic slowdown to bring inflation back to target. The shock to oil prices will exert upward pressure on inflation over the next year, contributing around 0.4 percentage points to underlying inflation in the quarter to March 2027. Underlying inflation is then expected to ease, and headline inflation to fall thanks to lower oil and travel prices. The RBA is aiming to keep inflation expectations anchored around the midpoint of its 2-3% inflation band. Rising fuel prices, exacerbated by the Iran conflict, are driving inflation pressures, affecting travel, transport, postal services, groceries and construction costs. The RBA has raised rates three times this year to 4.35% and is monitoring how quickly firms pass higher costs on to consumers, with risks that faster and broader pass-through could drive up inflation expectations. ASX +0.49% to 5568, AUDUSD -0.21% to 0.7134, 10y ACGB -5.4bp to 5.06%.

India has raised fuel prices again, effective Tuesday May 19, with diesel and gasoline prices in New Delhi increased by 1% and 0.9% to INR 91.58 and INR 98.64 per liter, respectively, following a 3% hike on Friday. These are the highest levels since May 2022. The hikes come amid rising crude costs caused by the Middle East conflict, which have resulted in state refiners Indian Oil Corp., Bharat Petroleum and Hindustan Petroleum incurring daily losses of INR 7.5bn ($78mn) selling fuel below cost. Despite a March fuel tax cut, losses are persisting and further price increases are expected. Bloomberg has also reported that local airlines are asking state refiners to holding off on hiking jet fuel prices for domestic flights until the conflict in the Middle East ends. SENSEX +0.38% to 75601, USDINR -0.099% to 96.45, 10y INGB -2.6bp to 7.105%.

The U.S. Treasury has extended its waiver allowing purchases of Russian oil already in transit for another month, signaling continued concern over energy market disruption following the closure of the Strait of Hormuz. Treasury Secretary Scott Bessent said the extension is intended to stabilize crude markets and support energy-vulnerable countries by ensuring supply continues to reach global markets. The decision marks a second reversal after previous commitments to let the waiver expire, reflecting persistent pressure from rising oil prices and concerns over the impact on poorer importing nations. The move has drawn criticism from some U.S. lawmakers and Ukraine, while also highlighting broader tensions in U.S. sanctions policy as Washington simultaneously tightens measures against Iranian oil exports and Chinese refiners. Brent -1.321% to 110.62, WTI -0.148% to 108.5, Omani crude +0.423% to 107.06, Dubai crude +1.326% to 105.782.

Indonesia, the Philippines and India are facing mounting financial vulnerabilities as the global bond selloff and Iran war oil shock intensify pressure on already-fragile emerging Asian economies. Rising U.S. Treasury yields and a stronger dollar are fueling capital outflows, weakening regional currencies and increasing pressure on central banks to tighten monetary policy even as growth slows. Policymakers across the region are responding with foreign exchange intervention and measures to support domestic bond markets, though investors remain concerned about rising energy costs, inflation, widening current account deficits and political risks. Analysts warn that the region faces conditions reminiscent of past emerging market crises, with sustained high oil prices and tightening global financial conditions threatening to further erode reserves and destabilize economic environments that are already fragile. MSCI Asia -0.64% to 265, USD vs. APAC FX Index +0.219% to 104.5436, BBG AGG APAC Government High Grade USD unchanged at 4.9%.

What We're Watching

U.S. ADP weekly employment change is expected at 25,000 (four-week average) vs. 33,000.

U.S. April pending home sales forecast at 1.0% m/m, 2.1% y/y vs. 1.5% m/m, 1.8% y/y in March.

Canada April CPI forecast at 0.7% m/m, 3.1% y/y vs. 0.9% m/m, 2.4% y/y in March.

Canada March building permits are forecast to rise to 2.4% m/m vs. -8.4% m/m.

Central bank speakers: Fed Governor Christopher Waller participates in a policy panel at the International Research Forum on Monetary Policy at the European Central Bank, ECB Chief Economist Philip Lane joins a panel discussion at The International Research Forum on Monetary Policy 2026.

U.S. Treasury sells $85bn in 6-week bills.

What iFlow is Showing Us

Mood: Risk-off sentiment has deepened, driven by accelerated equity outflows, while flows into core government bonds remained steady. iFlow Mood fell further to -0.195.

FX: Flows were mixed and moderate. Within G10, DKK, GBP, JPY, and CAD were sold, while the rest saw inflows, led by NZD.

FI: Buying was concentrated in Eurozone and Colombian government bonds, U.K. gilts and U.S. Treasurys, while substantial selling hit Japanese government bonds, followed by Australia, New Zealand and Brazil.

Equities: Broad selling persisted across G10 equities, particularly in Japan, Sweden and the U.S., alongside outflows from Poland and South Korea. In contrast, Chinese, Thai and Singapore equities attracted inflows. Within EM Asia, the information technology and energy sectors were sold, while healthcare and financials saw better demand.

Quotes of the Day

“It’s not magic. It’s physics. The speed of the turn is what keeps you upright. It’s like a spinning top.” – Deborah Bull

“Let the great world spin for ever down the ringing grooves of change.” – Alfred, Lord Tennyson

Economic Details

The euro area goods trade surplus narrowed sharply to €7.8bn in March from €34.1bn a year earlier, as exports declined 5.5% while imports rose 4.4%. The deterioration was driven mainly by a steep fall in surpluses for chemicals, and machinery and vehicles, with chemicals exports particularly weak. In Q1, the euro area trade surplus fell to €16.6bn from €55.4bn a year earlier, reflecting declining external demand and softer exports. At the EU level, the trade surplus similarly narrowed to €5.9bn in March, while the energy deficit widened significantly. Trade with the U.S. weakened sharply on the export side, whereas imports from China continued to rise, contributing to a larger bilateral deficit.

Spain’s external trade data for March showed exports rising 5.1% y/y to €35.9bn, while imports increased 1.6% y/y to €40.2bn, narrowing the trade deficit to €4.4bn from €5.5bn a year earlier. Over the quarter, exports grew by 0.7%, while imports fell 2.5%, improving the coverage ratio to 89.2%. Export growth was driven mainly by capital goods, automobiles, food products and raw materials, while chemicals remained weak. By geographical market, Europe continued to dominate exports, with strong growth to France, Italy, Germany and Portugal, while exports to Asia and the Middle East declined sharply. Imports from China and Japan rose strongly, particularly of vehicles and machinery. Regional export performance was again led by Catalonia, Madrid, Andalusia and the Valencian Community. IBEX 35 +0.4% to 17803, EURUSD -0.232% to 1.1629, 10y Bono +0.1bp to 3.573%.

U.K. median monthly pay growth remained firm in April, at 4.9% y/y. The strongest wage increases were recorded in health and social work, and the weakest in finance and insurance. At the same time, labor market conditions continued to soften, with payrolled employment estimated at 30.2 million, down 0.7% from a year earlier, equivalent to a decline of 210,000 jobs. The largest employment losses were concentrated in wholesale and retail trade, while health and social work continued to add jobs. On a m/m basis, payroll employment fell by 100,000, although the figures remain provisional and subject to revision. Overall, the data suggest ongoing labor market cooling alongside still-resilient wage pressures. FTSE 100 +0.51% to 10376, GBPUSD -0.298% to 1.3394, 10y gilt -3.3bp to 5.065%.

U.K. Labour Force Survey estimates showed labor productivity growth remaining modest in Q1, with output per hour worked rising 0.4% y/y while output per worker declined by 0.1%. Alternative estimates using administrative payroll and labor market data pointed to stronger gains, with output per hour increasing 2.1% and output per worker up 1.6% over the same period. By sector, information and communication continued to provide the strongest support to productivity growth relative to pre-pandemic levels, driven by robust output gains alongside more moderate increases in hours worked. In contrast, human health and social work remained the largest drag on productivity, as rapid growth in hours worked continued to outpace relatively limited increases in output.

Japan’s preliminary Q1 real GDP rose 0.5% q/q, 2.1% y/y, up from 0.2% q/q, 0.8% y/y in the previous quarter. Domestic demand increased by 0.2% q/q, supported by private consumption growth of 0.3% q/q. Residential investment was down 3.1% y/y, while non-residential investment grew 2.7% y/y. Public demand rose 0.3% q/q, led by a 1.4% increase in public investment. Exports expanded by 1.7% q/q, with imports up 0.5% q/q, contributing positively to net exports. The GDP deflator increased 0.5% q/q, indicating moderate inflationary pressure. Nikkei -0.44% to 60551, USDJPY -0.12% to 159.12, 10y JGB +5.6bp to 2.792%.

Japanese industrial production data for March show m/m declines of 0.4% in production, 0.9% in shipments and 1.8% in inventories. Year-on-year, production rose by 2.4% and shipments by 2.2%, while inventories fell 5.3%. The manufacturing capacity index remained flat at 95.1 (0.0% m/m), down 1.2% y/y. The operating rate decreased by 1.2% m/m but was up 4.2% y/y. Key sector movements include gains in production machinery and petroleum products, and declines in chemicals and electronics.

Japan’s tertiary industry activity index for March fell 0.2% m/m, from -0.7% m/m in February, marking the second consecutive m/m decrease. Broadly, personal services fell 0.7% m/m, while business services rose 0.4% m/m. Sector-wise, declines were recorded in leisure-related services, wholesale trade and medical/welfare, driven by drops in dining, entertainment and machinery wholesaling. Conversely, the information and communications, electricity/gas/water supply and retail sectors showed gains, supported by software services, a rebound in electricity and strong auto retail sales. Overall, the industry shows signs of recovery despite some stagnation, maintaining the current assessment.

Australia’s Westpac-Melbourne Institute Consumer Sentiment Index rose 3.5% to 83 in May from 80.1 in April, reflecting easing fuel price shocks due to a temporary halving of fuel excise tax. Despite this, consumers remain deeply pessimistic, with job loss fears high and homebuyer sentiment sharply down. The impact of the federal budget was perceived more negatively than last year, especially among older generations. Sentiment varied significantly by age: baby boomers and Generation X are very weak (~70), millennials modestly pessimistic (94.6) and Generation Z positive (104), highlighting a widening generational divide. ASX +0.49% to 5568, AUDUSD -0.21% to 0.7134, 10y ACGB -5.4bp to 5.06%.

The minutes from the latest RBA meeting hinted a pause after three consecutive rate hikes. The bank stated that “while it was still uncertain, financial conditions would probably be somewhat restrictive after this decision” and that this “would give the board space to see how the conflict in the Middle East develops and Australian households and businesses respond.” The RBA’s baseline forecasts assume a 60bp cash rate rise in 2026 and gradual easing of oil prices, with trading partner growth stable due to AI investment. Domestic GDP growth is expected to slow below potential, raising unemployment to 4.7% by mid-2028. Headline inflation is forecast to peak at 4.8% in Q2 2026, easing to target by mid-2027, while core inflation is set to remain above 3% until mid-2028. The board raised the cash rate by 25bp to 4.35%, balancing inflation risks against economic softness. The RBA agreed that any assessment of how the incoming data could change the outlook should acknowledge that monetary policy could not alter the near-term trajectory of inflation and, additionally, that output growth would likely be lower than potential growth for some time.

New Zealand’s output producer price index (PPI) rose 0.8% q/q in Q1 (Q4 2025: 0.1% q/q), while the input PPI increased 1.4% q/q (Q4 25: -0.5% q/q). The farm expenses price index (FEPI) rose 1.7% q/q, and the capital goods price index (CGPI) increased by 0.2% q/q. Key output industry changes included a 6.4% decline in dairy product manufacturing, a 7.5% rise in dairy cattle farming and a 6.1% increase in electricity and gas supply. On the input side, dairy product manufacturing costs rose by 5.7%, electricity and gas supply by 8.2% and meat product manufacturing by 3.6% q/q. NZX 50 +1.66% to 12974, NZDUSD +0.018% to 0.5855, 10y NZGB -8.4bp to 4.739%.

In New Zealand, electronic card transactions decreased by 1.6% m/m in April. They totaled NZ$9.2bn across 168 million transactions, averaging NZ$55/transaction. Retail spending fell 1.3% m/m (-NZ$89mn), with consumables (-2.1% m/m), hospitality (-1.3% m/m), durables (-1.1% m/m), fuel (-2.0% m/m), motor vehicles (-4.1% m/m) and apparel (-1.3% m/m) all down. Non-retail spending dropped 4.0% (NZ$94mn), including healthcare and travel, while services decreased by 3.0% m/m (NZ$12mn). This indicates a broad-based reduction in consumer spending compared with March.

South Korea’s outstanding household credits rose by ₩14.0tn to ₩1.993qn in Q1, up 0.7% q/q or 3.5% y/y. Household loans increased by ₩12.9tn to ₩1.866qn or 3.3% y/y, with merchandise credits up ₩1.1tn to ₩127.3tn (7.2% y/y). Lending by non-bank depository corporations and other financial corporations grew by ₩8.2tn and ₩5.0tn, respectively, while commercial and specialized banks’ lending declined by ₩0.2tn. Household housing-related loans accounted for ₩1.179qn of the total loans. KOSPI -3.25% to 7272, USDKRW -1.011% to 1509.1, 10y KTB +2.7bp to 4.247%.

Malaysia’s inflation rose to 1.9% y/y in April, up from 1.7% in March, with the core rate easing from 2.1% y/y to 2.0%. Key contributors included alcoholic beverages and tobacco (2.8%), information and communication (2.0%), food and beverages (1.2%) and furnishings and household maintenance (0.4%). Personal care and social protection inflation eased to 4.8% from 7.0%. Monthly inflation increased to 0.4% m/m in April from 0.3% m/m in March, driven by transport (2.5%) and information and communication (1.6%). KLCI +0.06% to 1729, USDMYR -0.026% to 3.9755, 10y MGB +2.9bp to 3.595%.

The Philippines’ gross international reserves stood at $104.3bn at end-April, as the country maintained a strong external liquidity position equivalent to 6.9 months of imports and nearly four times its short-term external debt obligations. At the same time, the balance of payments recorded a $2.1bn deficit in April, bringing the cumulative deficit for the January-April period to $7.4bn. The data suggest that despite ongoing external financing pressures and sustained balance of payments deficits, reserve buffers remain substantial and continue to provide support against currency volatility, external shocks and foreign debt servicing requirements. PSEi -0.75% to 5897, USDPHP +0.012% to 61.745, 10y PHGB +0.1bp to 7.189%.

Hong Kong’s seasonally adjusted unemployment rate remained unchanged at 3.7% in February-April, while the underemployment rate edged down to 1.5% from 1.6% in the previous rolling period. Labor market conditions were mixed across sectors, with unemployment declining mainly in construction but increasing in manufacturing. Total employment and the labor force both edged lower during the period, while the unemployment count increased modestly. Underemployment fell, supported by improvements in construction-related activities and food services. Authorities noted that the broader economy’s resilient growth momentum should continue to support labor market conditions, although officials remain cautious regarding elevated geopolitical risks and their potential economic impact. Hang Seng +0.48% to 25798, USDHKD +0.023% to 7.8322, 10y HKGB -1.2bp to 1.417%.