setup.iss file is not generated

Another option is to explicitly state where you want the setup file generated, using the /f1 option:

Setup.exe /r /f1"C:\your\path\here\setup.iss"

Documentation on this can be found here, but here is a summary from that link:

Using the /f1 option enables you to specify where the response file is (or where it should be created) and what its name is, as in Setup.exe /s /f1"C:\Temp\Setup.iss". Specify an absolute path; using a relative path gives unpredictable results. The /f1 option is available both when creating a response file (with the /r option) and when using a response file (with the /s option)

Ok I found the problem, and a workaround:

The problem was that my msi project was a Basic MSI Project, as opposed to InstallScript and InstallScript MSI projects. This kind of project does not support reading a response file (aka setup.iss). However, there is a way to perform silent installation for the .msi / setup.exe file:

Setup.exe /s /v"/qn"

will do the trick.

All of this information can be found here