Key Highlights

• BoJ Governor Kazuo Ueda stresses that the rate hike path is intact despite impending elections.
• Japanese Finance Minister Satsuki Katayama refuses to “rule out any means” on the exchange rate.
• ECB’s François Villeroy de Galhau warns that dollar depreciation could weigh on Eurozone inflation.

Chart of the Day

PLN leading European FX flows ahead of NBP decision

^{Source: BNY}

PLN has had a very strong start to the year. The currency has extended the net purchase streak that began in December and was also one of the leading names initially, when carry appeared to be in favor; it did not even need to rely on the early-2026 surge in commodity prices to complement price action. Consequently, the NBP should be in a relatively comfortable position heading into today’s policy decision – the first major central bank decision in Europe this year. It is likely to maintain easing as the direction of travel.

We do not see the main risk to the economy as monetary in nature; rather, it is the issue of fiscal dominance in CEE that represents a clear risk to asset holdings in the region. With the deficit expected to reach 6.5% of GDP and measures being proposed to artificially reduce household outlays, financial conditions are likely to remain loose, and not even a strong currency can serve as an effective offset. We believe it would be preferable for the NBP to adopt a different bias, but constraints are too great in this respect. If the market begins to question EM fiscal paths and high-carry names while the Fed and ECB are unable to provide a more dovish offset, PLN and its peers may face a turn, particularly after such a strong run.

What's Changed?

The weight of the news ahead is tipping the scales for risk today. U.S. stock futures are lower again, in their first back-to-back losses of the year, as the focus turns to the agenda ahead. Leading sources of worry include the U.S. Supreme Court’s possible release of its decision on President Trump’s tariff policy; Denmark and Greenland’s foreign ministers meeting with Vice President JD Vance; PPI; retail sales; and more big bank Q4 earnings. Overnight, markets’ focus was on JPY weakness, as the currency reached an 18-month low and the MoF warned of intervention. This was accompanied by ongoing JGB selling, with yields higher, and a jump in the Nikkei as BoJ policy competed with fiscal expectations and politics, with a snap election call fully priced in. The pressure to run the U.S. and Japan economies hot leaves government policy everywhere as a driver for volatility.

• Economics is sending mixed signals worldwide – In Japan, the Reuters Tankan index has slipped to a six-month low, highlighting shifting growth expectations as we look toward the BoJ meeting and general election. South Korean unemployment jumped to a 25-year high in December, adding to the pressure on the BoK. Indian WPI came in higher, as prices of food and manufacturing goods rose, suggesting less room for the RBI to maneuver ahead. China has blamed the U.S. for its record $1.2tn surplus in 2025, even as its exports beyond the U.S. soared.
• Commodities and geopolitics. China’s record surplus with surging exports added to global recovery expectations, with metals leaping higher again, led again by silver breaking beyond $90/oz. The focus on trade and tariffs remains intense; any new policy uncertainty will act as a drag. Iranian protests are continuing, as is the crackdown on these by the government and concerns about U.S. action, but oil prices are back below $65/barrel for Brent crude.
• Earnings and rotations. The news that the U.S. has approved Nvidia H200 chip exports following China’s trade surplus announcement should help tech. However, the spotlight will be on bank earnings and how markets digest credit provisions, underwriting and merger revenues and any policy shifts on mortgages and credit cards. iFlow shows investors were content to buy banks and sell technology shares ahead of this week, but this could stall.

Bottom line: The U.S. trading session looks set for another rough start, even as the rest of the world holds onto risk. The chase for yield and value leaves global defense shares, high-yield bonds and commodity-linked FX leading gains. The U.S. exceptionalism that started 2026 is fading, with the uncertainty on policy and sustainability key. USD continues to be a barometer, with JPY vs. EM positioning central. Q4 earnings may be the anchor that holds markets together, as the battle between micro and macro factors plays out in margins and investment plans. The current list of worries will inevitably be whittled away, with the key factor supporting markets being the seasonal push to put cash to work. 

What You Need to Know

Japanese Finance Minister Satsuki Katayama has warned that authorities are prepared to act against excessive yen weakness, as the currency slid closer to levels that have previously triggered intervention. Speaking to reporters, she said the recent rapid depreciation was deeply regrettable and a cause for concern, adding that the government would respond appropriately without ruling out any options. The yen weakened further amid reports that Prime Minister Sanae Takaichi may dissolve parliament and call a snap election, fueling concerns that a stronger mandate could lead to fiscal deterioration. Katayama said she had shared concerns over one-sided yen moves with U.S. Treasury Secretary Scott Bessent during talks in Washington, though the currency continued to fall despite a narrowing in U.S.-Japanese interest rate differentials. MoF official Atsushi Mimura also stated that he was seeing “concerning, one-sided and sudden moves in the FX market.” Nikkei +1.479% to 54341.23, USDJPY -0.189% to 158.84, 10y JGB +1.5bp to 2.188%.

Bank of Japan Governor Kazuo Ueda said the central bank’s rate hike path remains unchanged despite growing political uncertainty, emphasizing that policy normalization will continue if the economy and inflation evolve as expected. Speaking in Tokyo, Ueda said Japan’s economy stayed in a moderate recovery in 2025 and that wages and inflation are likely to rise gradually, supporting further adjustments to monetary easing. He downplayed the impact of recent financial market volatility linked to speculation about a snap election, noting it has not prompted any shift in the BoJ’s stance. The remarks follow last month’s rate increase to 0.75%, the highest level since 1995, with most economists expecting the next hike later this year, potentially influenced by ongoing yen weakness and rising import costs.

Chinese stocks wiped out gains after authorities raised the minimum margin requirement for financing securities purchases to 100%, in the latest policy effort to curb risks. Under the new rule, investors must now provide margin equal to the full value of the securities they buy on credit, up from the previous 80% threshold, according to a Shenzhen Stock Exchange statement. The move, which applies to the Shenzhen, Shanghai and Beijing bourses, underscores regulators’ efforts to tighten risk controls in the capital markets. Similar measures were taken across metals exchanges last week amid the frenzy in trading, with authorities clearly trying to move early to mitigate risks to retail investors. CSI 300 -0.401% to 4741.93, USDCNY -0.079% to 6.9722, 10y CGB -0.6bp to 1.849%.

Bank of England MPC member Alan Taylor stated overnight that globalization has not ended but is likely at a temporary plateau, with long-term forces still supportive of trade. Speaking in Singapore, he highlighted that global trade has leveled off since the global financial crisis but remains underpinned by technology, falling trade costs and the expansion of services and intangible capital. He downplayed the risk of a 1930s-style collapse from recent U.S. tariff hikes, saying they are more likely to cause trade diversion than outright contraction. On monetary policy, Taylor said smoother global trade acts as a positive supply shock, lowering inflation. He added that trade diversion could reduce U.K. inflation by around 0.2 percentage points in 2026-27, supporting earlier and sustained policy normalization. FTSE 100 +0.238% to 10161.47, GBPUSD +0.202% to 1.3449, 10y gilt -0.3bp to 4.395%.

Outgoing ECB Vice-President Luis de Guindos said euro area monetary policy remains firmly focused on price stability, with inflation assessed as being in a good place. He noted that headline inflation stood at 2.0% in December, supported by lower energy prices and a slight easing in core inflation, although strong wage growth continues to underpin underlying price pressures. De Guindos said forward-looking indicators point to wage growth moderating over the coming quarters and stabilizing toward the end of 2026, consistent with inflation settling sustainably at the ECB’s 2% target in the medium term. He added that economic activity has proved resilient, driven mainly by domestic demand, with monetary policy appropriately calibrated amid elevated global uncertainty. Euro Stoxx 50 +0.244% to 6044.53, EURUSD +0.052% to 1.1648, BBG AGG Euro Government High Grade EUR +0.7bp to 2.968%.

What We're Watching

National Bank of Poland is expected to keep rates on hold at 4.0%. Polish assets have started the year on a strong note, but high deficit levels will constrain the central bank.

U.S. November PPI is forecast up 0.2% m/m with no October data as comparison, while the ex food and energy measure is forecast up 0.2% m/m, 2.7% y/y vs. 2.7% in September.

U.S. November retail sales expected up 0.4% m/m from October’s 0% m/m, with retail sales ex-auto at 0.4% m/m vs. 0.4% m/m in October. Control group sales forecast up 0.4% after 0.8% m/m.

U.S. Q3 current account is seen at $-239bn from $-251.3bn.

U.S. December existing home sales forecast to rise 2.2% to 4.22 million, from 4.13 million in November.

U.S. October business inventories expected at 0.1% vs. 0.2% in September.

Central bank speakers: Philadelphia Fed President Anna Paulson speaks on the economic outlook; Fed Governor Stephen Miran speaks on regulations, the supply side and monetary policy; Minneapolis Fed President Neel Kashkari speaks in a virtual town hall with the Wisconsin Bankers Association; New York Fed President John Williams delivers opening remarks at the NY Fed’s annual “An Economy That Works for All” event.

U.S. Treasury sells $69bn in 17-week bills.

What iFlow is Showing Us

Mood: Equities selling momentum has continued but was still outpaced by outflows in core sovereign bonds. iFlow Mood has eased further to 0.120. Market sentiment has continued to deteriorate.

FX: CZK, ILS and NOK were significantly sold, followed by outflows in AUD and HUF, while HKD and SGD posted the strongest inflows within the iFlow universe. Elsewhere, USD and GBP were lightly sold, against marginal inflows in EUR and JPY.

FI: U.S. Treasurys and Chinese and Indonesian government bonds posted significant buying, against large-scale selling in Israeli, South Korean and Chilean government bonds. Eurozone government and U.K. gilts were lightly sold.

Equities: U.S, Hungarian, South African and South Korean equities were significantly sold, followed by large outflows in the U.K. and India and light selling in China. Within EM APAC, the materials, industrials and utilities sectors were bought, against selling in the information technology and communication services sectors.

Quotes of the Day

“Whatever is going to happen will happen, whether we worry or not.” – Ana Monnar

“Worry is a cycle of inefficient thoughts whirling around a center of fear.” – Corrie ten Boom

Economic Details

The Netherlands’ goods exports rose 4.7% y/y in volume terms in November, adjusted for working days, marking a clear improvement compared with earlier in the year. Export growth was driven mainly by higher shipments of transport equipment and machinery. On the import side, goods volumes increased by 5.5% y/y, supported primarily by stronger inflows of crude oil, natural gas and transport equipment. Despite the firmer export performance, the CBS Exports Radar showed that conditions for exports in January remained almost as unfavorable as in November. While the y/y contraction in German manufacturing output shifted into growth, this positive development was offset by more adverse real exchange rate trends, limiting any improvement in the broader external environment. AEX -0.087% to 996.3, EURUSD +0.052% to 1.1648, 10y NGB +0.1bp to 2.925%.

Sweden’s November industrial orders rose sharply, with total orders increasing by 11.8% m/m in seasonally adjusted terms and surging 23.0% y/y on a calendar-adjusted basis. The monthly gain was broad-based across most industrial subsectors, although developments diverged by market: domestic orders fell 12.1% m/m, while export orders jumped 24.7% m/m. On an annual basis, orders from domestic customers rose 5.7% y/y, whereas orders from abroad climbed a much stronger 32.5% y/y. For the January-November period, total industrial orders were 8.0% higher y/y, reflecting a 3.0% increase in the domestic market and an 11.2% rise in the export market. OMX +0.229% to 2990.721, EURSEK -0.08% to 10.7313, 10y Swedish GB -0.4bp to 2.879%.

Sweden’s November household consumption rose 1.0% m/m in constant prices adjusted for calendar and seasonal effects, rising 3.5% y/y in calendar-adjusted terms. Three of the four largest consumption aggregates recorded monthly gains, led by recreation and culture, goods and services, which climbed 3.5% m/m. Retail trade, mostly food and beverages, increased by 0.7% m/m, while housing, electricity, gas and heating rose 0.2% m/m. In contrast, transport and retail sales and service of motor vehicles declined by 1.6% m/m. On an annual basis, recreation and culture rose 11.8% y/y, retail trade increased by 2.5% y/y and housing edged up 0.6% y/y, while transport fell 0.7% y/y.

Romania’s December CPI accelerated to 9.7% y/y, with prices rising 0.22% m/m, confirming sustained inflationary pressures at year-end. Over the past 12 months, average inflation stood at 7.3%. Food prices increased by 7.8% y/y, non-food goods rose 10.5% y/y and services inflation reached 11.0% y/y, highlighting broad-based price pressures across the consumption basket. On a m/m basis, food prices rose 0.37%, non-food goods increased by 0.08% and services advanced 0.28%. The harmonized HICP registered 8.6% y/y, with a 0.23% m/m increase, while its 12-month average inflation rate was 6.8%, underscoring Romania’s elevated inflation relative to EU peers. BET +0.643% to 26498.06, EURRON -0.018% to 5.09, 10y RGB -6.2bp to 6.58%.

Japan’s December machine tool orders rose 10.6% y/y, according to preliminary data from the Japan Machine Tool Builders’ Association, marking a moderation from November’s 14.8% but extending the positive annual trend. Growth was driven entirely by foreign demand, with overseas orders up 15.1% y/y, while domestic orders fell 1.1% y/y. On a m/m basis, total orders surged 15.5%, rebounding from a 4.5% decline in November. Domestic orders jumped 23.4% m/m, while foreign orders increased by 13.1% m/m. In level terms, total orders amounted to ¥158.2bn, comprising ¥39.5bn in domestic orders and ¥118.8bn in foreign orders, underscoring the continued dominance of external demand. Nikkei +1.479% to 54341.23, USDJPY -0.189% to 158.84, 10y JGB +1.5bp to 2.188%.

Japanese December M2 money supply was unchanged at 1.7%, while M3 eased from 1.2% to 1.1% y/y. We note that the recent uplift in money supply growth since the beginning of 2025 has been accompanied by the easing of inflation. This kind of inverse relationship was observed during COVID, though macro conditions are quite different, especially with the supply constraints that Japan continues to face. Inflation expectations will likely remain high given JPY’s current performance, despite Governor Ueda’s comments overnight pointing to hopes for only moderate gains.

Australian job vacancies fell by 0.2% in the three months to November 2025, driven by a 6.8% y/y decline in private sector vacancies, while public sector vacancies rose 8.9% (down 5.2% y/y over 12 months). There were 326,700 vacancies in November. Vacancies fell in seven out of 18 industries in the three months to November 2025, notably education and training (-15.5%) and rental, hiring and real estate services (-12.8%). The largest annual industry fall was in arts and recreation services (-27.7%), with manufacturing up 33.1%. By region, vacancies fell in five states and territories, led by the Northern Territory (-11.3%), while Victoria recorded a rise of 7.0%. ASX +0.187% to 5471.2, AUDUSD +0.195% to 0.6695, 10y ACGB +0.9bp to 4.717%.

New Zealand saw a 2.8% m/m rise in the seasonally adjusted number of new dwellings receiving consent in November, after a 0.7% fall in October 2025. 35,969 new homes were consented in the 12 months to November, up 7.0% YTD y/y, driven by multi-unit homes. Townhouses, flats and units rose 9.6% to 15,643; apartments increased 49% to 2,647; retirement village units fell 26% to 1,291. Stand-alone house consents grew 3.6% to 16,388. By region, Auckland led growth, with contributions from Canterbury, Otago, Wellington and Waikato. 3,517 homes received consent in the month of November, up 14% y/y, with stand-alone houses up 15% and multi-unit homes up 11%. Seasonally adjusted consents rose 2.8% m/m in November after a 0.7% fall in October. NZX 50 +0.744% to 13757.71, NZDUSD +0.14% to 0.5746, 10y NZGB +5bp to 4.48%.

New Zealand November filled jobs rose 0.3% m/m, the biggest increase since October 2023. Actual filled jobs fell 0.4% y/y to 2.37 million, from a low of -1.97% in February 2025. By industry, construction jobs declined 3.6% y/y and manufacturing was down 1.6% y/y, while health care (+1.8% y/y) and public administration (+2.1% y/y) rose. Gross earnings rose 2.4% y/y to $15.9bn. The improved jobs releases suggest a reversal of unemployment from current highs of 5.3% as of Q3 2025.

China December exports beat expectations, climbing 6.6% y/y to $357.8bn vs. 5.9% y/y in November. Imports grew 5.7% y/y to $243.64bn vs. 1.9% y/y, leaving a trade balance of $114.14bn for the month or $1.189tn for the full year. Exports to Hong Kong surged to 31.5% y/y ($35.49bn), with ASEAN up 11.3% ($66.36bn) and the EU up 11.5% y/y ($51.91bn), while exports to the U.S. fell to -30.2% y/y ($34.18bn). The total trade surplus for 2025 climbed to $1.2tn, though the U.S. share of exports fell sharply to 11% of the total. The growing imbalance with the EU will remain a flashpoint for Sino-European relations this year, though recent steps toward a price floor for Chinese EV exports to Europe point to some rapprochement. CSI 300 -0.401% to 4741.93, USDCNY -0.079% to 6.9722, 10y CGB -0.6bp to 1.849%.

China’s Human Resources and Social Security Minister Wang Xiaoping said the country will prioritize high-quality and sufficient employment by coordinating fiscal, monetary and employment policies to keep the labor market stable. She said the government will expand and upgrade jobs through measures such as job retention subsidies, tax and fee reductions and a new round of employment support for university graduates, while migrant workers will be supported through both local and outward employment channels. Wang said flexible and platform workers, including food delivery riders and ride-hailing drivers, will see nationwide expansion of a pilot occupational injury insurance scheme and broader access to employee pension insurance. She also stressed the importance of targeted skills training to address labor mismatches, focusing on areas such as artificial intelligence, new energy vehicles and elderly care, supported by improved local training service networks.

South Korea’s seasonally adjusted unemployment rate for December surged from 2.7% to 4.0%, in a typical end-of-year spike. The economically active population reached 29.426 million, up 0.9% y/y, with a labor force participation rate of 64.1%, rising 0.2 percentage points y/y. 28.209 million people were in work, an increase of 0.6% y/y, and the employment-to-population ratio was 61.5%, up 0.1 percentage points y/y. The unemployment count rose to 1.217 million people, a 9.2% y/y increase, pushing the unemployment rate to 4.1%, up 0.3 percentage points y/y. The economically inactive population shrank by 0.3% y/y to 16.448 million. In other figures, South Korean December export price growth eased to 1.1% m/m, 5.5% y/y from a downwardly revised 3.5% m/m, 6.8% y/y in November. The import price index slowed to 0.7% m/m, 0.3% y/y from 2.4% m/m, 1.9% y/y in November. KOSPI +0.649% to 4723.1, USDKRW -0.265% to 1471.9, 10y KTB +2.2bp to 3.417%.

India’s December wholesale price inflation turned positive, with the All India WPI rising 0.83% y/y after -0.32% in November, driven mainly by manufactured products and primary articles. On a m/m basis, the WPI was up 0.71%. Manufactured products inflation accelerated to 1.82% y/y, while primary articles registered a modest 0.21% y/y increase. Fuel and power inflation remained negative at -2.31% y/y, despite a 1.23% m/m rise in the index. The WPI food index was flat y/y, improving from -2.60% previously, alongside a 0.51% m/m increase. The headline WPI index level rose to 157.0 in December, reflecting broad-based monthly gains across major groups. SENSEX -0.264% to 83407.31, USDINR -0.002% to 90.1862, 10y INGB +1.5bp to 6.643%.