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Benchmark revision shows less worrisome US inflation

Jonathan Basile

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The U.S. Consumer Price Index (CPI) rose 0.6% month-over-month (MoM) in September. Historically speaking, how rare is a 0.6% MoM increase? Monthly gains of 0.6% or larger took place about 15% of the time in the postwar period; that number drops to a 3% hit rate since 2000. More recently, there were twelve occurrences in 2021 (after the COVID-19 pandemic) and 2022 (after Russia’s invasion of Ukraine). For 2026, besides September, there were two others at the onset of the Iran War in March and April 2026.

Energy was a big part of the sequential performance, while food was not. The CPI for energy increased 5.2% in September following a 2.1% rise in August. Gasoline was a significant mover, posted a 9.1% MoM advance. This accounted “for over half of the monthly all items increase,” according to the Bureau of Labor Statistics (BLS). The CPI food index registered a flat reading in September, the first unchanged reading since March. The tame showing was generated by a 0.1% MoM decrease in Food at home, the second monthly drop in the last three months, while Food away from home rose at a lesser 0.2% MoM after back-to-back 0.3% gains.

Core CPI, excluding food and energy, rose 0.3% MoM in September matching August’s rise. Price pressures were propped up by both core goods (up 0.3% MoM from 0.1%) and core services (up 0.4% MoM versus 0.3%). The 0.3% core beat market expectations for a 0.2% increase and lifted probably for a Fed rate hike at the October 28th meeting to 44% from last Friday’s low of 17%.

On a year-over-year (YoY) basis, CPI inflation came in at 3.7%, up from the prior month’s 3.4%. CPI has posted a YoY inflation rate above 3% for the last seven months ended September. This hasn’t happened since the seven months ended May 2024. Core CPI inflation edged up to 2.6% YoY in September from 2.4% YoY in August. While core remains in a down channel of lower highs and lower lows, it remained above the key 2% level for the 65th month running. The last time core CPI inflation had a string above 2% for a similar duration, it was the latter half of the 1990s.

Core services inflation is to blame as it stubbornly stayed north of the 3% mark in September (at 3.1% YoY). After persistent easing from the post-pandemic peak to the 2.9% YoY rates in January/February 2026, no further progress has been made to the downside. Core goods inflation, on the other hand, has grinded lower to 0.7% YoY rates in both August and September, less than half the 1.5% YoY figures reported in August and September 2025.

Shelter is a key reason why core CPI inflation isn’t back in line with the Fed’s target rate. When shelter is excluded from the core, the underlying inflation picture is tepid. September’s 2.0% YoY rate echoed August’s, and June’s and July’s respective 2.1% and 1.9% YoY rates averaged 2.0%. These non-threatening results present a compelling argument against Fed tightening over the balance of the year.

The Consumer Price figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Energy drives headline gain.
- Food prices tame.
- Core shows underlying price pressures in both goods and services.

U.S. Consumer Price Index: Energy and Core Pressures Keep Fed Tightening Debate Active

Kathleen Stephansen, CBE

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Mortgage applications fell 2.7% w/w (-37.2% y/y) in the week ending October 9 for the sixth consecutive week, after declining 4.2% w/w (-36.6% y/y) in the week ending October 2, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house fell 4.0% w/w (-16.1% y/y) in the latest week, after declining 2.1% w/w (-14.9% y/y) in the October 2 week. Applications for loan refinancing edged down 0.4% w/w (-56.0% y/y) in the October 9 week following a decline of 7.5% w/w (-56.3% y/y) in the October 2 week.

The effective interest rate on a 30-year fixed-rate loan edged up 2bps to 7.75% in the week ending October 9 from 7.73% in the week ending October 2, remaining at its highest level since November 2023. The rate on 15-year fixed-rate mortgages rose 12bps to 7.09% in the October 9 week from 6.97% in the October 2 week. The 30-year Jumbo rate increased 15bps to 7.69% in the latest week from 7.54% in the October 2 week, while the rate on a 5-year ARM declined 9bps to 6.96% in the October 9 week from 7.05% in the October 2 week.

The share of applications for refinancing an existing loan rose to 37.7% of total applications in the week of October 9 from 37.0% in the week ending October 2. The adjustable-rate mortgage (ARM) share of activity rose to 10.5% in the latest week from 10.3% in the October 2 week.

The average size of a mortgage fell 2.0% w/w (-7.5% y/y) to $370,200 in the week ending October 9, after declining 1.7% w/w (-5.1% y/y) to $377,700 in the week ending October 2. The average size of a purchase loan declined 0.8% w/w to $444,700 in the October 9 week after falling 0.6% w/w to $448,400 in the October 2 week. The average size of a loan to refinance a mortgage fell 3.9% w/w to $247,200 in the week ending October 9 after declining 7.0% w/w to $257,200 in the October 2 week.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Applications for loans to purchase and applications for loan refinancing both declined in the latest week.
- Interest rate on 30-year fixed-rate loans edged up 2bps to 7.75%.
- Average loan size fell moderately in the October 9 week.

U.S. Mortgage Applications Fell in the October 9 Week

Robert Brusca

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The inflation chart and the table are unanimous on the inflation verdict for the European Monetary Union in September. No matter how you twist and turn it, unless you turn the chart upside down, there's no good news here on the inflation front.

**A really bad month for inflation, but not a surprise, part of a trend**
The monthly news is bad for the aggregate data. The monetary union inflation level, for both the headline and the core readings, looks worrying. Across the four largest economies, the monthly data are quite bad for the headline figures and not very good for the core or the ex-energy readings either.

**Trending higher**
The chart just sticks to year-over-year percentage changes. It doesn't get knee-deep in different sequential measures, but it's clear from the chart that year-over-year inflation is once again engaged in an upswing, and the year-over-year gains for each of the four largest countries are above the 2% mark that the European Central Bank has set for the community. While the ECB target is for the whole community, not for any individual country, with all four of the largest economies showing this kind of an excess, it clearly indicates bad news for the community at large.

**Sequential pressure**
The data in the table provide information on the sequential development of inflation. There we see the headline from 12 months to six months to three months, as we shorten the horizon, with accelerating trends from 3.8% over 12 months to 4% over six months to 6.5% over three months, all annualized rates. The core is better behaved but still shows acceleration from 2.5% over 12 months to 2.7% over six months to 3% over three months. Acceleration is the watchword.

**Large economies adverse trends**
Looking at individual members, the four largest economies show us excessive increases in September month to month, ranging from a 1% gain in Italy to a 0.5% gain in Germany. Sequential inflation shows acceleration for each of the large foreign economies, which is by itself rather disturbing, but the year-over-year rates are as low as 3.3% for Germany and as high as 5% for Spain, and with the three-month rates as low as, and let me repeat this–as low as–a 5.5% annual rate over three months in Italy and as high as a 9.1% annual rate for Spain. This is a very painful habitat for inflation over three months to range from 5.5% to 9.1% when the target is 2%.

**Inflation metrics**
There are three metrics for inflation: headline, core inflation, and ex-energy inflation. These numbers are a little more subdued but still over the top in terms of the ECB target of 2%. The month-to-month numbers are not as chilling, with Germany showing an ex-energy increase of just 0.2% and Spain showing 0.4% at the high end in September. But the sequential numbers show 12-month gains of 2.2% inflation in Germany ex-energy, a 1.5% gain in Italy, which leaves it below the ECB’s desired pace, and a 3.1% increase over 12 months in Spain. These core or ex-energy speeds step up over six months and then step up again over three months. Acceleration is broad-based. Over three months, we see a low pace of 2.4% for Italy, a high pace of 3.7% for Spain, with Germany at 2.6%. Progressing from 12 months to six months to three months, we lose the temperate inflation in Italy, which over three months moves up over the 2% mark, and we log inflation rates of 2.6% in Germany and 3.7% in Spain. The core inflation is lower than headline inflation by a good solid margin. In each of these cases, headline inflation over three months is at least twice the core (or ex-energy) three-month pace. However, core inflation is generally more stubborn and harder to get rid of. In the case of Germany, ex-energy inflation is at 2.6%; Italy logs a 2.4% pace. Those two are not too far above the 2% target, but Spain at 3.7% is much more troublesome.

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**Ubiquitous inflation**
These figures come out at the same time that the U.S. CPI has given us another unpleasant surprise and has shown more pressure in its headline and in its core as the Federal Reserve is getting prepared to meet later this month. Inflation clearly has become a global problem, and that can't help but make us wonder what the underlying cause is.

**The Blame Game**
The simple knee-jerk reaction is to blame it on oil prices, and that's certainly a good amount of it. Brent oil prices measured in euros rose by 3.3% in September, and year-over-year Brent oil prices are up by 31.6%. Clearly, oil has been cooking in the background. That's going to increase the headline inflation rates everywhere and in some cases by more depending on the exchange rate effect of translating oil from dollars into local currency units. But it's not just as simple as that. Unemployment rates globally are low, fiscal deficits are high, and the levels of fiscal debt are generally high and troubling. That's true in the United States, that's true in Japan, it's true in France, and it's true in the United Kingdom and other places. Germany has managed to keep its debt and deficits more restrained. But when we talk about inflation, we're talking about not just the forces that are currently at work, but we also have to talk about expectations for the future. One problem is that the oil prices relate to the war in the Middle East, and that remains as unsettled as ever. There are also some knock-on effects on the war between Ukraine and Russia where the U.S. has tried to bully Ukraine to stop attacking Russian oil facilities. Still, there's no assurance about the future or about oil prices. When are they going to transmit something more favorable to inflation in the future? There are also supply chain effects and then of course the concerns about the large fiscal deficits and not only the funding pressure that deficits put on markets and the load that places on interest rates but also the potential risk that it creates for central banks to step back to inflate their debt burdens away.

**The Future**
It's pretty clear this month that inflation has become a problem. It's a problem with legs, and it's a problem that's severe enough, and supported by various causes and themes, enough to make us worry about the impact on expectations and therefore of inflation on future inflation. Unless central bankers or fiscal authorities do things to eradicate inflation and the factors that are raising concerns about inflation in the future, we face some difficult times ahead.

Europe

Inflation in EMU Spikes. Yikes!

Winnie Tapasanun

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Existing home sales rose 1.5% m/m (-2.2% y/y) to 3.99 million units (SAAR) in September, the first monthly increase since May, after a 3.2% decline to 3.93 million in August (previously -2.0%; 3.98 mil.), according to the National Association of Realtors (NAR). Despite the latest m/m gain, August and September marked the two slowest months for home sales in 2026. The Action Economics Forecast Survey had expected September sales of 3.96 million units. Sales were 2.3% above a low of 3.90 million in September 2024 but 37.9% below a high of 6.43 million in January 2022 and 39.5% below a peak of 6.60 million in January 2021. The September gain coincided with a rise in the average 30-year fixed mortgage rate to 6.86%, the highest since January 2025, after increasing to 6.67% in August, according to Freddie Mac. The sales figures are based on closings of sales contracts signed over the past couple of months.

Existing single-family home sales rebounded 2.0% (-1.9% y/y) to 3.64 million units in September, the first m/m rise in four months, following a 3.3% decrease to 3.57 million in August, still 36.1% below a high of 5.70 million in January 2022. Sales of condos and co-ops fell 2.8% (-5.4% y/y) to 350,000 in September, matching the lowest level since May 2020, after registering at 360,000 in August and at 370,000 from February through July, remaining 52.1% below a high of 730,000 in January 2022.

Regionally, September existing home sales showed a mixed performance. Sales in the South rose 2.8% (-0.5% y/y) to 1.86 million in September, the first m/m increase since May, after a 3.2% decline in August. Sales in the West grew 2.8% (-5.2% y/y) to 730,000, the highest level since June, after falling 1.4% in August and July. Sales in the Northeast fell 2.1% (-4.1% y/y) to 470,000, the lowest level since May, on top of a 4.0% August slide. Meanwhile, sales in the Midwest held steady m/m (-2.1% y/y) at 930,000 after a 4.1% August drop, matching the lowest reading since March. Notably, the South remained the dominant region, accounting for 46.6% of total U.S. existing home sales.

The median price of all existing homes (NSA) fell 2.4% (+1.3% y/y) to $417,500 in September, the lowest since April, after a 2.0% decrease to $427,700 in August ($429,100 previously). Prices remained 15.7% above a low of $360,800 in January 2023. The median price of an existing single-family home slid 2.5% (+1.2% y/y) to $422,700 in September following a 2.0% decline to $433,600 in August. Both prices posted the third successive m/m fall and the lowest level since April. The median price of condos and co-ops, down for the third consecutive month, slipped 1.7% (+1.2% y/y) to $363,700, the lowest since February, after a 1.3% August decrease to $370,000. Regionally, overall prices fell m/m in September in the Midwest (-3.9%; +3.1% y/y), Northeast (-3.4%; +4.7% y/y), South (-1.4%; +0.2% y/y), and West (-0.9%; -0.3% y/y).

Inventories of homes for sale advanced to the highest level since November 2019. The number of existing homes for sale (NSA) climbed 1.9% (4.6% y/y) to 1.60 million units in September after registering at 1.57 million during the May to August period. The supply of homes on the market at the current selling rate (NSA) held at 4.8 months in September and August, the highest level since November 2015, up from 4.6 months in July and June. A record low in supply of 1.6 months was in January 2022.

The data on existing home sales, prices and affordability are compiled by the National Association of Realtors. The data on single-family home sales extend back to February 1968. Total sales and price data and regional sales can be found in Haver's **USECON** database. Regional price and affordability data and national inventory data are available in the **REALTOR** database. Mortgage interest rates can be found in the **WEEKLY** database. The expectations figure is from the Action Economics Forecast Survey, reported in the **AS1REPNA** database.

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- September sales +1.5% m/m to 3.99 mil., first m/m rise since May; -2.2% y/y, second straight y/y drop.
- Sales m/m up in the South (+2.8%) and West (+2.8%); down in the Northeast (-2.1%); flat in the Midwest.
- Sales y/y down in all four regions, w/ the steepest decline in the West (-5.2%).
- Median sales price -2.4% (+1.3% y/y) to $417,500, lowest since April.
- Unsold inventory +1.9% (+4.6% y/y) to 1.60 mil. units, highest level since Nov. ’19; 4.8 months' supply, highest since Nov. ’15.

U.S. Existing Home Sales Rebound in September

Tian Yong Woon

In this week’s Letter, we look past traditional drivers of exchange rates (e.g. interest differentials) to the real, and largely domestic, forces now shaping Asia’s currency and fixed income markets. Currency performance has diverged sharply this year, with the South Korean won (KRW), Chinese yuan (CNY), and Australian dollar (AUD) gaining on a trade-weighted basis while the Philippine peso (PHP), Thai baht (THB), Indian rupee (INR), and Indonesian rupiah (IDR) have lagged (chart 1). Daily moves against the dollar sort into two clusters (chart 2). One is a tight group of CNY, AUD, New Zealand dollar (NZD), THB, Singapore follar (SGD) [AC1.1]and Malaysian ringgit (MYR), reflecting a common dollar effect and the region’s close trade ties with China. The other, looser group links PHP, IDR and KRW. Yield differentials explain only part of this dispersion (chart 3). Across 13 economies, changes in 10-year spreads over the US account for a modest share of currency returns. Stripping out outliers improves the fit considerably, perhaps suggesting spreads still matter once idiosyncratic stories are set aside. In fixed income markets, economy-specific drivers have dominated. Indonesia, Australia, New Zealand and, most recently, India have tightened, yet real policy rates remain slightly negative in half the region (chart 4), leaving policy accommodative in real terms. Real bond yields have also climbed in Japan, Korea and Australia (chart 5), pointing beyond inflation expectations to heavier fiscal spending, the AI-driven export boom and tighter policy. Looking ahead, a strengthening El Niño, disrupted traffic through the Strait of Hormuz, the AI buildout and the risk of renewed US-China friction (chart 6) will shape the region’s fiscal and monetary planning. That, in turn, will steer the path of yields and currencies in the period ahead.

**Asia currencies**
Trade-weighted currency performance across Asia has been strikingly uneven this year (chart 1). KRW and CNY have each significantly appreciated against their trading partners[AC2.1], with AUD not far behind. At the other end, PHP, THB, INR and IDR have each lost much ground on the same basis. Between these extremes, SGD, MYR, JPY and TWD have moved by about 2% or less in either direction. Some of this relative performance reflects correlated trades, whether with commodity prices or with other currencies. Yet a range of other drivers has also been at work, including economy-specific domestic considerations such as inflation, policy settings and external balances. Against the US dollar alone, the spread is wider still, from a gain of about 7% for KRW to a loss of a similar size for INR (chart 3). The sections that follow take these drivers in turn, starting with how the region’s currencies move together.

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We start with the cross-currency correlations across Asian and major economies, measured on daily returns against the US dollar this year. Two main clusters emerge (chart 2). The first, and tighter, groups CNY, AUD, NZD, THB, SGD and MYR, with TWD attached to a somewhat lesser extent. The second, weaker cluster links PHP, IDR and KRW. The first cluster reflects a confluence of drivers. One is a common US dollar effect, since every pair is quoted against the dollar and so shares its swings. Another is the pull of CNY on the other currencies in the group, which likely reflects the region’s traditionally close trade ties with China. Stripping away these effects, some of the strongest remaining links are between AUD and NZD, and between SGD and MYR. In Singapore’s case the link is partly mechanical, since SGD is managed against a trade-weighted basket of its main trading partners’ currencies, which includes Malaysia’s.

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Yield differentials are a common gauge of currency performance but explain only part of the picture (chart 3). Regressing year-to-date currency returns against the US dollar on changes in 10-year spreads over the US gives an R² of about 0.2 across 13 economies. Carry logic would place economies in the top-right and bottom-left quadrants, with currencies strengthening as spreads widen and weakening as they narrow. Excluding borderline cases, only New Zealand, the euro area and India sit clearly within them, all in the bottom-left. Yet the fitted line slopes downward: economies whose spreads narrowed most have seen stronger currencies. Australia, Korea and India are vertical outliers, sitting far above or below the fitted line, so their currency moves owe little to their spreads. The Philippines is a leverage point: its extreme horizontal position gives it outsized pull on the fitted line itself. Its spread has widened about 1pp while the peso has fallen about 6%. Outside these cases, the R² rises to about 0.6 to 0.7. Even so, the inverted slope suggests something other than carry is at work.

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**Asia rates**
Asia’s rates environment this year has been shaped by economy-specific drivers alongside broad external developments, and several central banks have tightened (chart 4). The RBA has hiked four times to 4.60%, most recently in September, citing sticky core inflation and capacity pressures. Bank Indonesia raised its policy rate by a cumulative 100bp in May and June to 5.75%, to stabilise the rupiah amid volatility from the Middle East conflict. The RBNZ has added 50bp since July, with headline inflation reaching 4.1% y/y in Q2, largely on fuel prices. Most recently, the RBI raised its repo rate to 5.50% on 7 October, its first hike since February 2023. Even so, real policy rates remain slightly negative in half the economies charted, including the Philippines, Thailand and New Zealand, leaving policy there accommodative in real terms. Where real rates are positive, as in Indonesia at about 2.5%, central banks hold more buffer against further inflation shocks.

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Part of the recent surge in nominal yields reflects inflation expectations, given lingering price risks from the US-Iran conflict and, more recently, building food price risks from El Niño. Yet real yields have climbed too (chart 5), suggesting more than an inflation story. Japan’s 10-year real yield has risen to just under 1%, from around minus 0.5% in 2024. That rise has coincided with market concern over heavier fiscal spending, including a supplementary budget for energy subsidies financed by deficit bonds. Korea’s real yield has climbed to about 1.7%, from roughly 0.4% in mid-2025, as the AI-driven chip export boom has lifted growth and rate hike expectations. Australia’s has reached about 3%, its highest over the period shown, alongside four RBA hikes and persistent capacity pressures. In each case, higher real yields point to expectations of tighter policy and stronger demand for capital, whether from governments or from investment.

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**The road ahead**
The road ahead remains uncertain, with several forces still in play (chart 6). The Southern Oscillation Index has fallen deep into negative territory, consistent with a strengthening El Niño that threatens harvests across South and Southeast Asia. Trade volumes through the Strait of Hormuz collapsed after the conflict began in late February and remain a fraction of their 2025 level in the latest data. The AI capex and buildout phase is a third force, with its effects on growth, trade and bond markets still unfolding. US-China relations have also returned to the spotlight, following the recent summit. Global economic policy uncertainty, by contrast, has eased from its April 2025 peak. How these forces play out will shape domestic fiscal and monetary planning in the period ahead, and by extension the path of yields and currencies across the region.

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Asia

Economic Letter from Asia: Keeping it Real

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Initial claims for unemployment insurance dropped by 2,000 to 197,000 in the week ending October 3, from 199,000 in the week ending September 26, revised up from 197,000. The Action Economics/Haver Analytics Survey looked for 200,000 claims to have been filed. The four-week moving average was 198,000 in the October 3 week, down from 200,500 in the September 26 week, revised from 200,000.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—rose by 17,000 to 1.716 million in the week ending September 26, from 1.699 million in the week of September 19, revised down from 1.701 million. The four-week moving average was 1.711 million in the September 26 week versus 1.723 million in the prior week. The insured unemployment rate remained unchanged at 1.1% in the week of September 26.

In the week ending September 19, the highest insured unemployment rate was in New Jersey (2.02%), the only state above 2.00%. The lowest rates were in South Dakota (0.20%), Louisiana (0.30%), Florida (0.31%), Alabama and North Dakota (both 0.34%), North Carolina (0.36%), Arkansas (0.39%), Iowa (0.42%), Kansas and Tennessee (both 0.43%), Kentucky and Nebraska (both 0.45%), Idaho and Wyoming (both 0.46%), New Hampshire (0.48%), and Georgia and Virginia (both 0.49%). Among other notable states, the rate was 0.97% in Texas, 1.21% in Pennsylvania, 1.30% in Illinois, 1.42% in New York, and 1.69% in California. These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.


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- New claims dropped by 2,000 to 197,000 in the week of October 3.
- Continuing claims rose by 17,000 to 1.716 million in the week ending September 26.
- The insured unemployment rate was unchanged at 1.1% in the week of September 26.


U.S. Initial Unemployment Claims Dropped in the Week of October 3

Andrew Cates

**A lower bar, still cleared**
Job creation in the United States has slowed markedly over the past two years, to a pace that would once have been read as the approach of recession. The number of jobs required to hold unemployment steady has fallen alongside it. Tighter immigration and an ageing population have cut the growth of the labour force to a fraction of its pre-pandemic rate, so the economy now needs far fewer new jobs each month to absorb the people entering it. Hiring remains above that threshold, which is why unemployment has risen by less than the deceleration in payrolls alone would suggest. The awkwardness for policy is that weak employment numbers no longer carry the information about spare capacity that they used to, and the Federal Reserve must judge how much of the slowdown reflects faltering demand rather than a shrinking supply of workers.

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**France at the front of the queue**
French government bonds have borne the brunt of Europe's political strain, with the premium over Germany climbing above the Italian equivalent as a minority government struggled to secure agreement on a budget intended to narrow the deficit. The difficulty is not confined to Paris. A parliamentary defeat over housing measures in Spain has prompted a snap election, and regional gains for the far right have left the German coalition under pressure. Different economic circumstances have produced a common problem: assembling durable support for expensive choices. Voters want relief from rising living costs and better services, defence and energy security require more spending, and governments must refinance debt issued when interest rates were far lower. Rising interest bills leave less room to reconcile those demands just as the cost of failing to do so increases.

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**Consent follows living standards**
The roots of that difficulty extend well beyond the latest parliamentary arithmetic. Across the advanced economies, countries that have delivered stronger gains in output per person since 2019 have tended to preserve more of their political stability, with Germany and Greece marking the two extremes. The association does not establish causation, and the United States stands conspicuously outside it, combining rapid growth per head with a sharp deterioration in stability. Yet it is a reminder that governments find it easier to ask for restraint when households believe their prospects are improving. One reason the past five years have been so unforgiving is that the inflation surge flattered the arithmetic of public debt while many voters experienced it as a loss of purchasing power. Better ratios have not brought a stronger mandate to govern, and the familiar division between a dependable core and a vulnerable periphery has become harder to sustain.

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**Real, not imagined**
Government bond yields have risen almost everywhere this year, but the composition of the move differs in ways that matter. In the United States almost all of the increase has come from real yields, which is what one would expect of an economy drawing in capital to finance investment at a pace the rest of the world cannot match. In Germany and the UK a larger share reflects compensation for expected inflation, with less of the rise attributable to the real return required to fund productive capacity. The distinction matters for the cost of adjustment. A real yield that rises because investment demand is strong is easier to live with than an inflation premium that rises because energy and wages are expected to keep pushing prices up, particularly for governments already struggling to reconcile their budgets with their politics.

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**Pressure without surprise**
Supply chains are tightening again. The New York Fed's gauge of global supply chain pressure, which measures freight costs and delivery delays against their historical norms, has climbed back to levels last seen in 2022. Rerouted shipping, sanctions and the strategic reordering of trade are doing to logistics what they have done to the oil market, raising the cost of moving goods for reasons that have little to do with the strength of demand. What has not followed, so far, is the proclivity of inflation to surprise. Global price data have surprised forecasters barely at all in recent months, a marked contrast with 2021, when the two moved closely together. The benign reading is that firms hold better inventories and wield less pricing power than they did then, and that spare capacity in the goods-producing economies is absorbing the shock. The less comfortable one is that the pass-through is merely slow. Delivery costs took the best part of a year to reach consumer prices last time, which is a long enough lag to catch a central bank out.

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**Alone in the top corner**
The September PMI surveys reinforced the impression of an uneven global expansion. The data suggest that activity in the United States is both the strongest and still accelerating, while the euro area and the United Kingdom have improved, but from a considerably lower base. Japan, China, India and Brazil have moved in the other direction. The global composite remains comfortably in expansion, but it is being held there in large part by a single economy, and that potentially has consequences for everyone else. A country growing faster than its own saving can finance will tend to draw in capital from the rest of the world, and it will usually do so by offering a higher real return. The rise in American real yields may therefore not be a purely domestic matter. It could help to set the terms on which governments and companies elsewhere must borrow, whatever the state of their own economies, and arguably at an awkward moment, with several of them already struggling to reconcile weak growth with heavy debts. The difficulty for much of the world may not be a shortage of demand so much as the cost of the capital needed to raise productive capacity. That cost is probably being shaped, at least in part, in a market where one borrower is currently bidding hardest.

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Equity markets in the United States pushed to fresh highs again this week, with implied volatility close to the lows of the year, the dollar firmer than it was a month ago and gold some way below its late-August peak. Capital is being pulled towards American investment rather than away from risk. The economic news beneath that is less comfortable. US hiring has slowed a long way, though the number of jobs needed to keep unemployment from rising has fallen with it, which leaves the American labour market cooler without being as weak as the headline numbers suggest (chart 1). Europe has offered no such ambiguity. French borrowing costs have moved above Italy's relative to Germany as a minority government struggles to assemble support for a budget, with a snap election in prospect in Spain and the German coalition under growing pressure from the right (chart 2). The deeper difficulty is that political stability across the advanced economies has eroded roughly in step with the growth of output per person since 2019, which makes the familiar division between a solid core and a fragile periphery harder to sustain (chart 3). Bond markets have repriced almost everywhere this year, but for different reasons: the American move has been almost entirely real, while in Europe a larger share reflects compensation for expected inflation (chart 4). Much of that compensation is geopolitical in origin, with oil back towards the upper end of its range, defence and energy security absorbing more public money, and trade being rearranged on strategic rather than commercial grounds (chart 5). The expansion that results is respectable but narrow, resting on one economy and, within it, on a single investment boom (chart 6).

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Charts of the Week: The Political Premium 

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Mortgage applications fell 4.2% w/w (-36.6% y/y) in the week ending October 2, the fifth consecutive weekly decline, after declining 6.0% w/w (-37.0% y/y) in the week ending September 25, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house fell 2.1% w/w (-14.9% y/y) in the latest week, after declining 4.3% w/w (-14.2% y/y) in the September 25 week. Applications for loan refinancing dropped 7.5% w/w (-56.3% y/y) in the October 2 week, the seventh consecutive weekly decline, following a decline of 8.7% w/w (-56.4% y/y) in the September 25 week.

The effective interest rate on a 30-year fixed-rate loan jumped 21bps to 7.73% in the week ending October 2 from 7.52% in the week ending September 25, reaching its highest level since November 2023. The rate on 15-year fixed-rate mortgages rose 16bps to 6.97% in the October 2 week from 6.81% in the September 25 week. The 30-year Jumbo rate increased 12bps to 7.54% in the latest week from 7.42% in the September 25 week. The rate on a 5-year ARM rose 13bps to 7.05% in the October 2 week from 6.92% in the September 25 week.

The share of applications for refinancing an existing loan fell to 37.0% of total applications in the week of October 2 from 38.3% in the week ending September 25. The adjustable-rate mortgage (ARM) share of activity was unchanged at 10.3% in the latest week.

The average size of a mortgage fell 1.7% w/w (-5.1% y/y) to $377,700 in the week ending October 2, after rising 0.9% w/w (-5.8% y/y) to $384,200 in the week ending September 25. The average size of a purchase loan declined 0.6% w/w to $448,400 in the October 2 week after rising 0.9% w/w to $450,900 in the September 25 week. The average size of a loan to refinance a mortgage fell 7.0% w/w to $257,200 in the week ending October 2 after declining 0.6% w/w to $276,700 in the September 25 week.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.


- Applications for loans to purchase and applications for loan refinancing both declined in the latest week.
- Interest rate on 30-year fixed-rate loans jumped 21bps to 7.73%.
- Average loan size fell moderately in the October 2 week.


U.S. Mortgage Applications Fell in the October 2 Week

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Industrial production (IP) rose a more-than-expected 0.7% m/m in September after increases of 0.1% in August (0.0% initially) and 0.2% in July (unrevised), data from the Federal Reserve Board showed, indicating industrial activity remained on an upward trend. A 0.4% m/m September increase had been expected in the Action Economics Forecast Survey. The latest reading marked the sixth straight m/m rise and the seventh in eight months. The year-on-year growth rate accelerated to 2.2% in September, the highest since January, from 1.4% in August (1.6% in September 2025). The September IP index at 104.0 was 4.7% above a low of 99.3 in November 2024 and 4.8% above a low of 99.2 in January 2024. On a quarterly basis, IP rose 0.7% q/q in Q3 ’26 (1.7% y/y), the sixth quarterly rise in seven quarters, after a 1.2% gain in Q2 ’26 (1.5% y/y), with the annualized growth rate moderating to 2.8% in Q3 from 4.8% in Q2.

By **industry groups**, manufacturing production grew 0.3% (1.1% y/y) in September, the seventh m/m increase in eight months, after a 0.2% decline in August (-0.3% initially) and a 0.1% uptick in July (+0.2% previously). Durable goods production edged up 0.1% (3.7% y/y) in September, the eighth m/m gain in nine months, following a 0.5% slide in August. Within durables, most categories rose m/m in September, led by a 1.6% rebound (1.3% y/y) in primary metals, followed by rises of 1.4% (6.9% y/y) in machinery, 1.3% (5.4% y/y) in electrical equipment, appliances & components, 0.9% (2.2% y/y) in nonmetallic mineral products, 0.6% (3.3% y/y) in fabricated metal products, 0.5% (4.4% y/y) in aerospace & miscellaneous transportation equipment, 0.1% (9.5% y/y) in computer & electronic products, and 0.1% (2.1% y/y) in miscellaneous durable goods. To the downside, durable goods categories for motor vehicles & parts (-3.0%; -0.8% y/y), furniture & related products (-1.2%; -4.1% y/y), and wood products (-0.1%; +1.5% y/y) posted m/m output decreases in September. Notably, aircraft & parts production fell 0.5% (+5.9% y/y) after a 1.3% August decline and six consecutive m/m increases.

Nondurable goods production rose 0.4% (-1.1% y/y) in September following no change in August and a 0.4% decline in July. The September output rise was led by a 1.9% recovery (-2.2% y/y) in printing & related support activities, followed by gains of 1.0% (-1.3% y/y) in chemicals, 0.7% (0.9% y/y) in petroleum & coal products, 0.4% (-1.5% y/y) in food, beverages & tobacco, and 0.1% (4.3% y/y) in apparel & leather goods. In contrast, nondurable goods categories for paper (-1.1%; -3.2% y/y), plastics & rubber products (-0.9%; +0.7% y/y), and textiles & product mills (-0.6%; 0.0% y/y) registered m/m output declines in September.

Utilities output advanced 3.5% (8.7% y/y) in September, the fifth m/m rise in six months, after a downwardly revised 1.5% increase in August (+1.8% initially), reflecting a 3.7% jump (9.6% y/y) in electric utilities output and a 2.1% rebound (3.1% y/y) in natural gas utilities output. Mining activity moved up 0.2% (2.8% y/y), the sixth straight m/m gain and the seventh in eight months, on top of an upwardly revised 0.5% August rise (+0.1% initially).

By **market groups**, construction supplies production rebounded 1.0% (1.6% y/y) in September, the fourth m/m rise in five months, following a 0.7% decrease in August. Materials production climbed 0.7% (2.6% y/y), the sixth successive m/m increase and the seventh in eight months, after a 0.3% August rise. Consumer goods output rose 0.7% (-0.1% y/y) after no change in August and July, reflecting a 1.5% decline (-2.8% y/y) in durable consumer goods and a 1.2% gain (0.7% y/y) in nondurable consumer goods. Meanwhile, business equipment output was virtually unchanged m/m (+6.7% y/y) after a 0.1% August easing and eight straight m/m increases.

In **special classifications**, factory output of selected high-tech industries advanced 1.5% (17.5% y/y) in September, the sixth consecutive m/m rise and the 11th in 12 months, adding to a 1.1% gain in August. Manufacturing production excluding selected high-tech industries rose 0.2% (0.7% y/y) following a 0.3% decline in August and no change in July. Manufacturing production excluding selected high-tech and motor vehicles & parts grew 0.5% (0.8% y/y), the third m/m increase in four months, reversing a 0.3% August decrease.

Capacity utilization rose to 76.9% in September, the highest since December 2023, from 76.4% in August (76.3% initially) and 76.4% in July (76.3% previously). The Action Economics Forecast Survey forecasted 76.5%. The September reading was 2.5 percentage points below its long-run (1972–2025) average. Manufacturing capacity utilization inched up to 75.9% in September from 75.8% in August (75.7% initially). The September rate was 2.3 percentage points below its long-run average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- September IP +0.7% (+2.2% y/y), sixth consecutive m/m increase; on an upward trend.
- Manufacturing +0.3% (+1.1% y/y), seventh rise in eight mths., w/ durables +0.1% and nondurables +0.4%.
- Selected high-tech +1.5%, sixth straight m/m gain; motor vehicles -3.0%, third successive m/m drop.
- Utilities +3.5% (+8.7% y/y), fifth rise in six mths., led by a 3.7% jump in electric utilities output.
- Mining +0.2% (+2.8% y/y), up for the sixth month running.
- All key categories in market groups gain m/m except business equipt. (0.0%).
- Capacity utilization up to 76.9%, highest since Dec. ’23; mfg. capacity utilization up to 75.9%.

U.S. Industrial Production Tops Forecasts in September; Manufacturing IP Rebounds

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