iFlow | Start of the Week | Healthy Corrections?

Key Highlights

Risk assets face correction, not reversal
EM assets show steady allocation growth
Fiscal tensions pressure EMEA bond yields

What you need to know

Last week, another pullback in risky assets led by technology left investors trying to distinguish between healthy corrections and trend reversals. This week should deliver some clarity, with Nvidia earnings seen as a key element in the multi-factor story of buying the dip against valuation and policy fears. Federal Open Market Committee (FOMC) speakers made clear that the December rate cut isn’t a sure thing, dimming hopes for an easy year end. The market, having previously priced in a 75% chance of a 25bp cut, has dropped to 45% odds.

The reopening of the U.S. government didn’t bring much joy to markets either. Concern is rising that upcoming economic data from the Bureau of Labor Statistics (BLS) won’t support a rate cut. There are expectations that weaker jobs data and higher inflation will mean balanced risks. Neither is good for risk, as stagflation returns to the lexicon.

The risk-off moves in equities didn’t matter much to bonds, as credit widening in investment-grade debt linked to issuance and AI-investment doubts dominated. In FX markets, funders like the Japanese yen (JPY) and Swiss franc (CHF) outperformed, but the larger Friday moves came from the Taiwan dollar (TWD) and South Korean won (KRW), where U.S. trade deals clearly have a currency component. Driving the U.S. dollar (USD) lower may help some sectors, but not those that make money abroad, like technology. Circular investments in AI between companies continue to stoke fears of a bubble and remain the primary driver of market anxiety for the week ahead.

Will investors continue to find comfort in holding emerging markets?

_{EXHIBIT #1: LOW EM ASSET DEMAND INDEX}

Enlarge

_Source: BNY

Our take: Since April, emerging market (EM) assets, both bonds and stocks, have supported investment diversification and returns, lifting the index to near the 80th percentile this week. The carry trade component of some EM bonds has been one key part of the story, led by Brazil, South Africa and Colombia. The AI boom and demand for semiconductors have been the other, with Taiwan, South Korea and India gaining share. What is notable about Exhibit 1 and the rally-up in EM demand this year is the steady increase, rather than the boom-bust moves seen in previous years. This activity suggests that global investors are rethinking EM allocations overall and adding to them as cash comes in, putting money to work in EM.

Forward look: Risks heading into the FOMC meeting and upcoming U.S. economic data will likely influence rates and allocations. The U.S. demand index is near historic lows, in stark contrast to EM. The risk of a shift back to U.S. markets could follow. The narrative to get there likely rests on Fed rate cuts along with evidence of slow but sufficient growth and dormant inflation. What clearly matters is putting money to work this week, particularly in equities.

To that end, Nvidia and the recent trade deal push from the Trump Administration, with details about Taiwan and South Korea, appear pivotal for shifting sentiment toward “buying-the-dip.” However, positioning already looks high, and that gives pause to the correlation between any U.S. tech bounce and its follow to EM.

Political risks from Latin America are also in play, with all eyes on the Chile vote and what it means for Brazil and Colombia. In addition, South African Reserve Bank (SARB) policy will be closely watched, particularly for its impact on the rand, the other favorite in this basket. It seems clear that the steady EM rise in portfolios may be under some duress through month end.

What we’re watching

U.S. BLS data schedules, Canada CPI and liquidity

_{EXHIBIT #2: CANADIAN CPI CORE TRIMMED AND MEDIAN}

Enlarge

Source: BNY, Bloomberg

Our take: The government shutdown ended late last week, but we still don’t know when official data releases will resume. Any updates on timing will likely emerge this week. In a recent post on its website, for example, the BLS noted “it may take time to fully assess the situation and finalize revised release dates.” September data – especially the labor market report – were likely already collected and assembled and should be among the first releases, perhaps as early as later this week. October data are particularly at risk after White House Economic Advisor Kevin Hassett said we may never know the unemployment rate, even if some data for the month are released.

Forward look: We will see the Fed minutes, which should be fascinating reading given the two-sided dissents at the FOMC last month. We’ll be looking for clues about the intensity of debate – including how many others supported holding off on a rate cut alongside Kansas City Fed President Jeffrey Schmid, who previously dissented to the hawkish side. With market expectations for a December cut now about 50–50, and hawkish commentary from FOMC members last week, markets will look to the minutes for further information.

In Canada, the Bank of Canada appears reluctant to cut rates again, with October Consumer Price Index (CPI) report due next week. A firm inflation print could effectively close the door on a December rate cut. Retail sales are also on deck next week. We expect these data will not be enough to tip the balance back toward another dovish policy move.

EMEA:Fiscal tensions coming to the fore

_{EXHIBIT #3: CHANGE IN HUNGARY AND U.K. 10Y BOND YIELDS SINCE OCT. 1}

Enlarge

_{Source: BNY}

Our take: As global economic headwinds continue to build, governments are clearly pushing for as much fiscal support as possible. Monetary authorities would like to do their part as well, but the inflation environment continues to render matters difficult, with more signs of direct conflict emerging between finance ministries and central banks.

The U.S. was at the forefront of such concerns earlier in the year, and we observed how such tensions can undermine flows into underlying assets. However, there are similar concerns emerging in Europe as well. If the dollar and U.S. Treasurys are not immune to pressures from fiscal dominance, the same risks apply in Europe.

Hungary and the U.K. are the clearest examples of policy conflict, especially with respect to how the labor market continues to skew inflation figures. We can see that both countries’ government bond markets are now reacting adversely, and the front end may not be immune either.

In the U.K., pay growth is running closer to 5%, especially for public sector employees, compared with a base rate of 4%.The risk is that even if central banks choose to hold their ground (not our base case for the next Bank of England (BoE) meeting) because of inflation, the lack of fiscal consolidation will strongly inhibit future rate cuts. Forward-looking pricing in government bonds is now reacting in kind. The upcoming U.K. budget is no longer expected to raise taxes, and spending cuts have never been central to the discussion.

In Hungary, data this week are expected to show pay growth accelerating to 8.9%, while the central bank is under pressure to cut rates from 6.50%. Budget deficit target reduction plans have been scrapped, increasing the risk of higher prices and lower real rates. Poland appears to be heading toward a similar situation.

The best-case scenario in Europe right now is further stagflation. Even in Germany, doubts are growing over the net growth or productivity gains from the adjustment in the constitutional debt brake to allow more defense spending. Over time, the asset allocation implications will be highly unfavorable.

Forward look: In Europe this week, central bank rhetoric is taking precedence over data, and markets in the region will likely take their lead from the gradual return of U.S. data and how equity markets react.

The Magyar Nemzeti Bank (MNB) is expected to hold rates at 6.5% and largely maintain the forint’s (HUF) position as the main carry name in the Central and Eastern European region. The central bank can only stress that the new fiscal trajectory will mean “higher for longer” and hope that external conditions slow wage growth.

Aside from French and Eurozone CPIs for October, the main focus will be on the preliminary Purchasing Managers’ Index (PMI) reports for November across Europe. Expectations are for continuation: mild contraction in manufacturing, but services are expected to remain robust. If the underlying price indicators are kept in check, the European Central Bank (ECB) will likely repeat that things are “in a good place,” though this applies only to inflation. We expect downside surprises to activity data and leading indicators to steadily increase in frequency, but a policy reaction will likely need to wait until Q1.

APAC: Regional exports growth, Australia PMI, Japan PMI, CPI and Bank Indonesia

_{EXHIBIT #4: REGIONAL EXPORTS GROWTH}

Enlarge

_{Source: BNY, Bloomberg}

Our take: In the Asia-Pacific (APAC) region this week, attention will center on regional export and trade data, including South Korea’s exports for the first 1–20 days of the month, as well as export figures from Japan, New Zealand, Malaysia, Thailand, India and Singapore. Additional key releases include South Korea’s Q3 household debt, October CPI data from Malaysia and Japan, Q3 GDP figures for Thailand and Singapore, and preliminary November PMI manufacturing readings for India, Australia and Japan. There are no major data releases in China, except the 1y and 5y loan prime rates (LPR), which are anticipated to remain unchanged at 3.0% and 3.5%, respectively.

South Korea’s exports for the first 1-20 days will be closely monitored to assess whether the recent growth momentum, reflected by a 6.4% y/y increase in the initial ten days, can be sustained. Regional export performance in October has been mixed: Taiwan posted a record 49.7% y/y rise, while China experienced an unexpected 1.1% contraction. Trade with the U.S. varied significantly: Taiwan’s exports surged by 144% y/y, while China and South Korea posted declines of 25.1% and 16.2%, respectively.

Markets will watch the broader regional outlook for signs of continued export growth into Q4 following a brief decline in early Q3 2025. As of September, export growth rates were as follows: Japan (4.2% y/y), New Zealand (19% y/y), Malaysia (12.2% y/y), Thailand (19% y/y), India (6.8% y/y) and Singapore (6.9% y/y).

The November flash manufacturing PMIs for Japan and Australia will be in focus after notable corrections in October. Australia’s PMI entered contraction territory for the first time since December 2024, while Japan registered its fourth consecutive month of contraction. India’s flash manufacturing PMI is expected to remain strong.

Thailand’s Q3 GDP is likely to slow, mirroring trends elsewhere in the region. October inflation data for Japan and Malaysia will also be released, though these are not expected to prompt imminent monetary policy adjustments. Markets are currently pricing in a 6bp rate hike at the December Bank of Japan (BoJ) meeting (base rate: 0.5%) and no change from Bank Negara Malaysia (base rate: 2.75%). On the monetary policy front, Bank Indonesia is scheduled to meet this week. While consensus anticipates a 25bp rate cut to 4.5%, we see a strong likelihood that Bank Indonesia will maintain current rates for a second consecutive month.

Forward look: Unsettling foreign equity outflows accompanied the positive price action in equity and currency markets across the region. The combination of foreign equity outflows and domestic outflows that favor foreign equities have exerted unusually large currency depreciation pressure in the South Korea won. The won hit intraweek highs of 1,475 before ending the week strong at 1,455, as South Korea pledged to stabilize the currency, including coordination with the National Pension Service and major exporters. Ongoing concern over tech and AI-related equity valuations, potential for further profit-taking in the equity complex and volatility in U.S. fund rate expectations will remain key drivers for the region this week. Domestic macro data have taken a back seat, as evidenced by the muted reaction in the Shanghai Composite and Chinese yuan, despite disappointing credit, investment and activity data last week.

Bottom line

Near-term volatility will likely persist as investors weigh AI-driven equity valuations, central bank policy uncertainty, and fiscal constraints across developed markets. Sustained EM resilience suggests selective opportunities, particularly in high-carry and export-linked economies, but elevated positioning argues for tactical caution. A patient, data-driven approach emphasizing diversification and liquidity will be key to navigating the evolving macro and policy landscape through year end.

Calendar for November 17–November 21

Central bank decisions

Hungary, Magyar Nemzeti Bank (Tuesday, Nov. 18): No changes are expected in the MNB rate, but we expect markets to remain nervous about the monetary outlook as fiscal pressure continues to grow. Recent changes to deficit targets – which will be maintained at 5% – have materially shifted the demand outlook, warranting a strong monetary offset. Such tensions are not new for Hungary, and we have seen similar challenges globally. However, there is very limited tolerance for fiscal dominance risks at present, and markets could trade more defensively as a result. With CPI still running at well above 4% and wages in the high single digits, there is very limited room for maneuvering.

Indonesia, Bank Indonesia (Wednesday, Nov. 19): We expect Bank Indonesia (BI) to keep the policy rate unchanged at 4.75% while maintaining an easing bias. We see room for easing, but there is no urgency to do so. The central bank is likely to reiterate its “all-out pro-growth, while maintaining stability” strategy, signaling further rate cuts and expansionary policy and a three-prong strategy: intervention in spot FX, domestic non-deliverable forwards, government bonds and offshore rupiah (IDR). Monetary policy transmission is the key issue, and BI is expected to encourage lower lending rates and higher lending growth.

South Africa, South African Reserve Bank (Thursday, Nov. 20): Markets are looking for a 25bp reduction in the SARB benchmark rate to 6.75%. With the inflation target officially lowered to 3%, and the country expected to make steady progress in that direction, the rand (ZAR) and South African assets are among the better performers in carry-based EM trades in recent weeks, despite a challenging global environment. Mining production has strengthened, which is also supporting terms of trade. However, the SARB will be hoping that the October inflation report ahead of its meeting does not yield any material surprises to the upside. Core inflation is expected to remain at 3.2%, but a jump in headline inflation to 3.7% will continue to drive the need for caution on easing.

Data Calendar