Key Highlights

• Stagflation, Iran and U.S. political concerns resurface risk narratives.
• Nvidia-led AI and technology earnings volatility testing rotation into value and cyclicals.
• Curve steepening, private credit and month-end flow expectations spotlight rates and credit markets.

What you need to know

The return of soft-landing or no-landing economic expectations drove money flows in the shortest trading week of the shortest month. The Q4 GDP miss and the Supreme Court ruling against Trump tariffs should shift the narrative again to stagflation, given below-trend growth and above-trend inflation. Rates markets are repricing long-term debt sustainability worries through a curve steepening trade.

Nevertheless, last week was a reprieve after three weeks of selling in U.S. equities. Global holidays kept trading volumes modest, while geopolitical worries rose, particularly around U.S.-Iran tensions. Oil beat gold as the risk barometer of choice, with the USD rallying. Bonds remain nervous about front-end rates, with FOMC minutes and data supporting a longer pause in policy easing. The key equity themes of AI as a zero-sum game against software, insurance and wealth management stalled slightly, with a new focus on value and growth.

The week ahead brings the usual month-end focus on rebalancing and economic data releases, as well as the key earnings report on Nvidia, the largest company by market capitalization. The role of AI investments in driving global asset volatility stands out in February. It matters whether Nvidia’s earnings report will deliver some clarity and certainty over the next quarter and year.

Additional factors include U.S. President Trump’s State of the Union Address, ongoing talks between the U.S. and Iran, Ukraine and Russia, heavy campaigning for the upcoming elections on March 5 in Nepal and March 8 in Colombia, and U.S. primaries on March 3 in Texas and North Carolina.

The known unknowns of these events clash with the relative calm of the last week. The success of the great rotation trade out of technology into other sectors, particularly materials, industrials and energy, stands out. There has also been a notable global diversification push. The ability of portfolios to withstand a rush of correlation shifts in response to surprises rests on the flexibility of policy responses and current conditions. We start 2026 with the lowest level of actual stock market volatility in decades, even while single-name shares have seen significant price shifts.

EXHIBIT #1: U.S. IT SECTOR SHORTS, LONGS AND CREDIT

_{Source: BNY, Bloomberg}

Our take: Long and short holdings are supposed to be negatively correlated, as they are in the tech sector. However, sometimes investors simply sell out of their holdings, as was the case in 2022 and in April 2025. It is important to remember this when assessing risk and how much more selling in the IT sector could follow larger shocks. The price of the “Magnificent 7” basket of big tech companies is off 3.6% YTD and 16% y/y. The current rotation trade has been notable. The volatility of the S&P 500 remains tame, with the overall index up 0.25%, while the equal-weighted index is up 5.4% YTD. Looking at the actual ranges and volatility of open-to-close in 2026, this is one of the quietest starts to any year since 1986. However, the turbulence of 1987 followed that year, and investors worry about the cost of capital in the current environment. Next week’s Nvidia earnings will be critical for calming concerns about cash and future demand.

Forward look: Credit focus shifted to private credit companies last week, with Blue Owl seen as a potential canary in the coal mine. Concerns are likely to shift from equities to rates and credit market responses to further investment-grade (IG) issuance, month-end relocation pressures and the level of the U.S. dollar. IT investments have seen outflows but not panic. The relative calm of the market reflects a delicate balance between long and short positioning against the cost of capital and expected returns.

What we are watching

North America: U.S. focus on housing and State of the Union

EXHIBIT #2: U.S. HOUSE PRICES

_{Source: BNY, Bloomberg}

Our take: : Last week was active with U.S. macro data. Results ended mixed, especially Friday, with a weaker GDP print and a stronger PCE inflation print dampening rosier reports. This week doesn’t offer many top-tier releases, with the highlights being several regional PMIs and producer prices for January, along with several housing market indicators.

Forward look: Several non-data events will keep us occupied. U.S. President Trump will offer his State of the Union address on Tuesday, and the Supreme Court has decision days on Tuesday and Wednesday. The Trump administration's reaction to the (International Emergency Economic Powers Act) IIEPA tariff decision will also be important, with other tariffs and tools available to maintain revenue and international agreements. Escalating tensions with Iran and potentially more policy reactions to the economy (such as home affordability actions) are also on the radar.

Fed speakers of note include Governor Christopher Waller (Monday and Tuesday) and Boston Fed President Lisa Cook, a voting member of this year’s FOMC. Given the lack of high-end data and the limited number of key Fed speakers, we expect headlines and political developments to dominate the week. 

EMEA: Volatility in inflation expectations likely to rise amid conflicting signals

EXHIBIT #3: FULL-YEAR HICP OUTLOOK BASED ON ENERGY AND EXCHANGE RATE ALTERNATIVE SCENARIOS

_Source: BNY

Our take: We have been extensively discussing the impact of EURUSD moving above the European Central Bank’s (ECB) own projections and how that could trigger a policy response. In January, the initial EURUSD surge through 1.20 was well above the 75th percentile in terms of upside, which would lead to inflation falling below target through the ECB forecast horizon. ECB President Lagarde addressed the issue head-on and signaled a high bar for cuts as an offset. The December language highlighting inflation vigilance was essentially dropped. Now, with oil prices surging again and the “behind the curve” response from 2022 to 2023 still lingering in memory, we expect the ECB to become strongly attentive to the move in oil prices, especially if there is further escalation in the Persian Gulf, which would lead to a sharp gain in global energy prices, even if primary energy exposure for Europe is lower.

As with its FX assumptions, the ECB used option market densities to generate price assumptions. Because volatility in energy markets differs greatly from FX, the swings are larger, multivariate and asymmetric. For example, the 75^th percentile for energy prices in the eurozone means a 14.2% rise in oil prices and a 20% gain in gas prices, equivalent to a 15.2% gain in synthetic energy price indices from baseline. Furthermore, the ECB’s assumption is for some softness in baseline energy prices. Even if oil and gas prices remained constant, there would be a 2% to 4% gain in energy prices relative to baseline. In other words, there is a light inflationary bias already baked into the impact of energy prices.

If we compare the overall impact on inflation vs. FX (Exhibit #3), it is clearer that energy will trigger a far stronger policy response from the ECB. Even at the 75^th percentile, inflation is expected to remain clearly above target over the forecast horizon, and the gap vs. exchange rate pass-through (EPRT) introduced by a weaker EUR is softer. If we assume that geopolitically driven risk-off will generate downside risk in the EUR and higher oil prices, there could be a cumulative impact. Our base case remains downside price risk, given the eurozone’s current growth and demand outlook, but the bar is far higher for the ECB to react to such an outcome than to a sudden supply shock.

Forward look: In EMEA, Bank of Israel (BoI) and Hungarian National Bank (MNB) decisions this week are likely to yield cuts as central banks react to materially softer inflation and elevated exchange rate valuations. Pass-through is likely significant in both the Israeli and Hungarian economies, while strong fiscal impulse is also expected to soften, although still to elevated levels even by EM standards. The outlook for both central banks will be important as markets assess whether easing is precautionary or signals a more prolonged cycle, given their high starting points and capacity to cut, especially with Hungary.

Elsewhere, the data calendar is relatively light. We expect the focus to remain on geopolitics. Germany's preliminary February CPI is due and expected to stay on target at 2.0%. Forward surveys will also be released over the coming weeks, giving the market a chance to assess the impact of fiscal impulse. German Chancellor Scholz will visit Beijing. Much of German industry will push him to adopt a stronger tone toward Chinese exports, which are now becoming a critical source of pressure on German and broader European manufacturers. On the political side, U.K. Prime Minister Starmer faces a key by-election in Greater Manchester on February 26. An adverse result could once again raise questions over his premiership and prompt a commensurate reaction in gilt markets.

APAC: South Korea BSI, Singapore, Australia and Tokyo CPI, BSP and BoK policy meeting

EXHIBIT #4: SOUTH KOREA BUSINESS CONFIDENCE AND EXPORTS GROWTH

_{Source: BNY}

Our take: Asia Pacific (APAC) markets will return to full participation this week after many were closed for the Lunar New Year. While the data flow from China is relatively light, the regional macro calendar is centered on policy decisions and inflation releases, with clear implications for FX and front-end rates.

The key event risks are the Bank of Korea (BoK) and Bank of Thailand (BoT) meetings. Both are widely expected to remain on hold, but forward guidance will be critical. In South Korea, markets will scrutinize the BoK’s growth vs. financial stability trade-off alongside a dense data slate: February 1–20 export figures (following a sharp 44.4% y/y rise in the first 10 days of February and 33.8% y/y in January) and the Composite Business Survey Index, where manufacturing surged to 97.5 (the highest since June 2024), while non-manufacturing softened to 91.7. In Thailand, attention will focus on whether growth momentum can be sustained into 2026 after stronger-than-expected Q4 GDP (1.9% q/q, 2.5% y/y), with January exports and manufacturing production providing near-term signals. The BoT is likely to keep the door open for further easing if growth momentum falters.

Inflation will be another core theme. Australia’s January CPI, particularly the trimmed mean, will be pivotal for repricing the Reserve Bank of Australia's (RBA) rate path, while private-sector credit growth will offer insight into policy transmission. In Japan, the Tokyo CPI for February, together with January PPI, retail sales and industrial production, will test the durability of price pressures and likely keep JPY volatility elevated. Weekly portfolio flow data will also be closely monitored, given strong recent foreign inflows into Japanese equities and bonds.

Singapore’s January CPI and industrial production will guide SGD NEER dynamics and policy expectations. India’s Q4 GDP and January fiscal deficit data will shape INR performance and bond supply expectations. In China, the 1y Loan Prime Rate (LPR) is expected to remain unchanged, but any surprise rate adjustment would reverberate positively through CNY and broader regional risk sentiment. Taiwan’s January unemployment rate and the Philippines’ January data (exports, trade and lending) round out the week, providing incremental signals on domestic demand and external resilience across North and Southeast Asia.

Forward look: Regional fundamentals remain supportive, underpinned by accommodative monetary policy, proactive fiscal expansion, and an additional boost from AI- and semiconductor-led growth momentum. Export growth has accelerated across the region, not only in South Korea (January: +33.8% y/y) and Taiwan (+69.9% y/y), but also in Singapore (non-oil domestic exports: electronics +56.1% y/y), Malaysia (+19.6% y/y) and the Philippines (December 2025: +23.3% y/y). External-sector strength has been accompanied by firm equity market performance. MSCI Asia ex-Japan is up 10% YTD, led by gains of 37% in South Korea, 18% in Thailand and 16% in Taiwan, outperforming MSCI Europe (+4%) and MSCI North America (flat) over the same period.

Beyond external geopolitical risks and AI-related disruptions in the Software-as-a-Service (SaaS) industry, the near-term regional focus will be on China’s 14th National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), scheduled for March 4–5, where the official 2026 macroeconomic targets will be unveiled. Continued anchoring of the Chinese yuan and inflow-driven gains in the Shanghai Composite are likely to generate positive spillovers across the region. We are also closely monitoring oil price dynamics. Sustained and elevated crude prices would weigh on net oil importers via the trade balance channel, particularly THB, KRW, INR and JPY, in the near term. However, this is unlikely to alter the broader inflation trajectory at this stage materially.

Overall, while we remain mindful of heightened market volatility, there are plentiful relative-value opportunities across the region, anchored in monetary policy divergence, fiscal dynamics, foreign investor flows, and valuation differentials. We maintain a constructive stance on CNY, TWD, KRW and MYR, a neutral stance on SGD and IDR, and a cautious stance on INR, THB and PHP.

Bottom line

The week ahead presents a complex intersection of macro risk, political uncertainty and sector-specific volatility. While markets have enjoyed historically low index-level volatility to start the year, that calm masks growing cross-asset fragility. A softer growth backdrop, combined with firmer inflation pressures, has revived stagflation narratives, placing renewed emphasis on duration risk, curve positioning and credit resilience. Nvidia’s earnings will act as a barometer not only for AI capex sustainability, but also for broader equity leadership and risk appetite. Meanwhile, U.S. political developments, including the State of the Union and potential tariff responses, add policy-event risk that could abruptly shift correlations.

In EMEA and APAC, inflation dynamics and central bank signaling remain critical, particularly if oil continues to rise amid geopolitical tensions. Portfolio construction this week should emphasize liquidity, flexibility and awareness of cross-asset correlation shifts. With positioning relatively balanced but confidence fragile, the risk is less about known data points and more about how markets react to surprises.

Calendar for February 23 – February 27

Central bank decisions

Israel, BoI (February 23, Monday) – The BoI is expected to cut rates again to 3.75%, adding to the easing introduced in January’s surprise move. Inflation has struggled to register a positive sequential print over the past three months and is now expected to be anchored at below 2.0%. Domestic activity remains robust, but with USDILS struggling to rebound from multi-year lows, we doubt the BoI will take any chances, especially with minimal rate differentials between themselves and the Fed, which will restrict outflows, which traditionally help limit currency strength.

Hungary, MNB (Tuesday, February 24) – The MNB is now expected to cut rates by 25bp to 6.25% after the surprise January inflation print, which pushed annualized inflation to the lowest levels in almost eight years. Given the restrictive level of rates, markets are not treating the drop as a one-off, even though material concerns remain about the strong fiscal impulse. Nonetheless, the currency has also been a strong source of tightening, even though its performance has long since detached from rate differentials vs. the EUR. Markets will be highly attentive to the impending scale of the cycle as there remains ample room for significant cuts.

Thailand, BoT (February 25, Wednesday) - We expect the BoT to keep the policy rate unchanged at 1.25%, while leaving the door open for potential easing in 2026. Although additional rate reduction may ultimately be warranted, the recent improvement in growth momentum and sentiment supports a near-term “wait-and-see” approach. Market attention will center on the government’s anticipated fiscal stimulus measures. In the near term, policymakers are also likely to remain focused on currency strength, which has exerted disinflationary pressure and remains a headwind to the growth outlook.

South Korea, BoK to keep the policy rate unchanged at 2.50% and maintain a neutral stance. Economic momentum remains firm, led by the technology and semiconductor sectors, with January exports surging 33.9% y/y. Asset markets have also strengthened markedly, with the KOSPI up more than 30% YTD. At the same time, inflation has converged toward the 2% target, placing the BoK in a relatively comfortable policy position. Against this backdrop, we anticipate an extended pause, with the policy focus shifting toward safeguarding financial stability. In particular, the BoK is likely to remain vigilant over structurally elevated household debt, firm housing prices and potential downside volatility in the currency.

_{Source: BNY}

_{Source: BNY}

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