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Recent increases in US long-term rates surprisingly little impacted by inflation expectations

Robert Brusca

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Inflation has flared across the largest economies of the monetary union. The headline boost is clear. The core or ex-energy gains also are clear but are more moderate; more moderate but nonetheless excessive in September. Largely over the last three months, inflation has been percolating.

The chart shows a clear, abrupt acceleration of inflation in the three largest monetary union economies: Germany, France, and Italy. Twelve-month inflation rates for the top four economies range from 3.3% in Germany to 5.0% in Spain. Over six months, the range is 3.5% (Germany) to 6.2% (Spain). Over three months, the stakes rise sharply, with annualized inflation spurts at a high of 9.1% (Spain) vs. ‘only’ 5.5% (Italy).

Inflation accelerates from a year ago to 12 months, from 12 months to six months, and from six months to three months on all headline comparisons except for Italy from six months to three months. But even on that comparison, the downshift in the pace is minor, and three-month inflation in Italy is still stronger than 12-month inflation. The inflation pressure is rising even if the gains are not monotonic.

Core inflation is high and mostly rising as well. However, core inflation is less prone to have risen over 12 months compared to 12 months ago. On that basis, only Spain’s core inflation has risen. German ex-energy inflation steps down, and Italian core inflation drops off to a below-target 1.5% over 12 months. To restart these comparisons for the three-country inflation ranges on the core or ex-energy measures over one year, we see a range from 1.5% to 3.1%. Over six months, inflation accelerates for all three, but the low end sees Italian inflation only up to a 1.6% pace, whereas the high end at 3% is Spain. However, Spain’s strong gain marks a deceleration from its 12-month pace. Over three months, inflation kicks up its heels across the core and ex-energy measures, from a low of 2.4% in Italy to a high of 3.6% in Spain. And core inflation accelerates in all three countries over three months.

Core inflation has been slower to rise, but once it rises it tends to be more stubborn. The global push toward higher inflation is still in gear as oil prices are lingering high. Stock markets have been trying to weather the storm of high inflation and an uncertain future. All eyes are turning to the winter season even though it is only fall. Winter is cropping up to be a difficult one for Europe, with low energy stockpiles as the season approaches. There is a lot to worry about and very little we can be sure of. As aspects of the future draw nearer, we’re gaining focus on what matters, and what matters and what is under control are, increasingly, two different things.

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Europe

Inflation Sallies Forth

Sandy Batten

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The August Job Openings and Labor Turnover Survey (JOLTS) continued to depict a labor market in which demand and supply are relatively balanced. Job openings slid 256,000 to 7.079 million in August from an upwardly revised 7.335 million in July (previously 7.271 million). This is the lowest level of openings since March and was the third monthly decline in the past four months. The financial market had expected a small decline in openings in August. The job openings rate (the ratio of openings to nonfarm employment plus openings) declined to 4.3% from 4.4% in July. In August, the number of openings fell while the number of unemployed increased. However, the number of openings continued to marginally exceed the number of unemployed for the fifth consecutive month. After openings had significantly exceeded the number of unemployed from early 2022 to the middle of 2024, the two have been roughly in balance since then.

Private sector openings fell 214,000 in August to 6.348 million after a 142,000 increase in July. The performance was varied across sectors but was generally weak. A 61,000 gain in leisure and hospitality was the largest increase, following by increases of 45,000 in information and 43,000 in trade and transport. Openings in business and professional services fell 119,000, their third monthly decline in the past four months and a possible reflection of the rise in AI. Openings in private education and health services slumped 101,000; construction openings declined 48,000, their first monthly decline in six months; manufacturing openings fell 54,000 but failed to reverse the 75,000 gain in July.

Total hires increased 46,000 in August, the third monthly rise in the past four months, to 5.192 million after a 186,000 drop in July. The hiring rate edged up to 3.3% from 3.2% in July. The August rebound in hiring was due solely to a 46,000 increase in state and local government hiring. Private sector hiring edged down 1,000 in August. Oddly, manufacturing led the hiring in August with an increase of 39,000, followed closely by a 36,000 increase in professional and business services hiring. Construction hiring fell 50,000, the first only decline in the past three months. Information hiring slipped 18,000, and leisure and hospitality hiring declined 10,000, the fourth decline in the past five months.

Total separations fell for the second consecutive month, declining 58,000 in August to 5.070 million on top of a 209,000 drop in July. The separation rate was unchanged at 3.2%. The August decline in total separations was led by a 61,000 decrease in layoffs to 1.641 million, the lowest level since March 2025 and below the 2024 and 2025 monthly averages. Private sector layoffs fell 50,000 in August, led by a 58,000 drop in construction and 56,000 decline in professional and business services. Quits declined 23,000 in August to 3.066 million following a 124,000 decrease in July. Quits have been range-bound so far this year but continue to indicate that workers are feeling uncertain about their employment prospects and hence are choosing to remain in their current jobs.

The Job Openings and Labor Turnover Survey (JOLTS) data are available in Haver’s **USECON** database.

- Openings slid 256,000 in August, the third monthly decline in the past four months.
- However, the number of openings marginally exceeded the number of unemployed for the fifth consecutive month.
- Hiring edged up 46,000, the third monthly increase in the past four months, due entirely to increased state and local government hiring.
- Separations fell 58,000, led by a 61,000 decline in layoffs.

U.S. JOLTS: Openings Slipped and Hiring Edged Up in August

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The EU Commission indexes weakened in September, with the overall index falling to 97.9 from 98.4 in August; however, the month's level is still stronger than recent readings prior to August (the strongest since February, excluding August). The index ranks at its 31.9 percentile on data since 1985, marking the month as below its median by a good margin. The median observation on data presented as a percentile ranking occurs at a ranking of 50%.

**Monthly sector readings and perspectives**
The industrial reading improved month-to-month to -4 in September from -5 in August. The rise on the month lifts it just above its historic mean, and above its historic median, with a 54th percentile ranking. Consumer confidence slipped on the month to -16.5 from -15.5 in August. The consumer reading is substantially below its historic mean, which occurs at a reading of -9. The ranking for consumer confidence on the month is in its 12.4 percentile, an extremely weak reading. It has been this way for consumer confidence for some time. Even in the United States, where the economy is doing much better, readings on various consumer surveys have been exceptionally weak. The retailing assessment was unchanged at -6 in September; a reading of -6 is above its historic mean, which occurs at a value of -8. The month’s level also leaves retailing above its historic median at a standing of 56.6%. Construction was also unchanged at -5 in September; construction has been steady at -5 for a number of months in a row. Its historic mean is -15, and the -5 reading this month leaves construction at a 68.6 percentile, a quite firm level despite the negative diffusion reading. Services were also unchanged in the month at +6. Services have gotten slightly stronger in recent months. The historic mean for services is +6, so the sector is at its mean, but it is below its median, with a 39.4 percentile ranking.

**Most country readings show gains on the month**
The reading for the overall EMU level declined in September, falling by 0.5%. In addition, seven reporting countries issued negative readings in September. Two of those countries, France and Italy, are among the four largest monetary union economies. However, the other two large EMU economies, Germany and Spain, marked improvements, with Germany rising 0.6% month-to-month in September and Spain rising 3.3% after a 2.1% decline in August.

**Rankings remain overwhelmingly weak**
Looking at the rankings by country, among the 18 reporting countries only seven have country-specific ratings above their historic medians. Among the four largest EMU economies, only Spain is above its historic median with a 68.2 percentile ranking. Germany has a 29.6 percentile ranking, France is in its 36.9 percentile, and Italy is in its 44.8 percentile. The strongest reporting countries are small countries, with Greece posting a 73rd percentile ranking and Lithuania a 71.7 percentile ranking, followed by Spain’s 68.2 percentile ranking as the next highest reading.

**Industry is back...for now**
It's good to see the industrial sector back up at a reading above its historic median and to be joined by retailing and construction. Retailing is a particularly rewarding sector to see performing well because consumer confidence is performing so poorly, with a 12.4 percentile standing. However, the services sector continues to lag with a 39.4 percentile standing, and that could be a problem because that's the job-creating sector for most economic units, and it's certainly true of the monetary union.

**The job front** 
On the job front, industrial employment and construction employment sectors report above 50th percentile standings in their monthly responses. With the employment in construction at a 71st percentile reading and for industry at a 68th percentile reading, we have some good news. However, for services, the employment reading is only at the 37th percentile, and that is the sector most responsible for delivering employment opportunities. Under consumer confidence, unemployment expectations have a 64.6 percentile standing, nearly a top one-third reading on that gauge. The U.S. economy is doing much better than the European economy; yet, there too, consumer confidence readings are weak, very weak. But the U.S. economy is growing strongly, and Europe continues to grow as well; a lack of confidence so far has not been an impediment to growth. As we can see so far this month, the manufacturing sector, the industrial sector, seems to be doing relatively better; however, everything is at risk due to events in the Middle East. Conditions in the Strait of Hormuz and what happens to oil prices are critical to what happens next. In addition, there's a great deal of concern about Europe and its low stocks of heating oil as winter approaches. The monthly readings from the EU indexes showed a step back on the month, but that was after the sharp improvement a month ago. In general, the European economy is doing a little bit better, with sectors in an upswing more so than they had previously, but conditions remain substantially touch-and-go, dependent on unforeseeable events.

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EU Commission Indexes Weaken in September

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Confidence across business sectors and consumers stepped back slightly in September in Finland. However, the overwhelming trend result is that business sector confidence is on an upswing; consumer confidence has undergone some slight weakening to its trend recently, led by some deterioration in its macro-indicator.

The monthly setbacks in September were relatively small, while the changes in confidence show improvement in the averages over three months compared to six months for all the sectors except retailing where the step-back is a single point to an average of 20 over three months from an average of 21 over six months. However, the retail sector is an exception and also shows a substantial step-down in September compared to August to a level that is going to point to a further deterioration in the moving averages ahead.  But that phenomenon seems to be limited to retailing.

Manufacturing confidence holds steady with low single-digit positive readings over three months, six months, and 12 months. The September level has a 75.1 percentile standing, which is quite solid. Sector readings generally display this same phenomenon; construction is an exception as its headline readings are negative; however, they're improving more substantially. The retailing readings have been improving from 12 months to three months, based on the averages, until the recent drop-off in September.

The consumer sector shows consistently mild negative readings, and they have decayed slightly. The consumer sector is the only one with a current queue standing that ranks data back to 2007 below its historic median, meaning below a ranking of 50%. The consumer sector ranking in September is at 48.1%, marginally below its median. The other sectors have rankings generally in their mid-70th percentile, with the exception being construction, which has a 69.3 percentile standing. All of those are quite solid.

Finland’s business sector and consumer rankings as well as their within-sector readings are, for the most part, firm. The line item for the order book level in construction has a below-median standing in September; however, that reading has been improving smartly from 12 months to six months to three months. Expected sales in services register a 49.2 percentile standing, below their median; that reading has been dead solid at 15 over 12 months, six months, and three months.

The consumer sector shows some of the weakest readings (not shown here). Some of that traces to expected high consumer price inflation that has an 81.9 percentile standing in the consumer survey. While the overall threat to unemployment in that survey is above median at a 56th percentile standing, that generic overall concern does not translate into individual concerns as a separate reading on the personal threat to unemployment is quite low at a 17th percentile standing.

On the whole, the business and consumer readings for Finland are good and for the most part quite solid, with the need to keep an eye on the responses in retailing and perhaps also in the consumer sector, largely because of what appears to be the impact of inflation on the consumer psyche.

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Finland

Finland’s Confidence Erodes Only Slightly

Tian Yong Woon

In this week's Letter, we explore US-China dynamics and their implications for Asia following last week's summit in Washington, alongside other pertinent issues for the region. The summit was long on diplomacy but short on tangible economic outcomes, with the fragile trade truce extended by just two months. Asia's trade orientation, meanwhile, has shifted from the US towards China since the turn of the millennium (chart 1). Some economies, Taiwan among them, have since tilted back towards the US partly on AI-related trade. Bilaterally, the narrowing of the US goods deficit with China seen last year has stalled and even reversed slightly this year, alongside easing effective US tariffs (chart 2). Further easing may follow, with tariff relief recommended on $30bn of goods in each direction. China, for its part, has more than replaced lost US export revenue with sales to the ASEAN-6 and India, keeping export growth robust while domestic demand flounders (chart 3). AI was the summit's other key theme. The two sides agreed to set up a Super Intelligence Dialogue and an incident communication channel, a timely step after the Hugging Face incident sharpened calls for a slowdown in AI development (chart 4). In the US, AI is the leading reason cited for job cuts this year, though broad displacement has arguably yet to emerge (chart 5). So far, the change lies more in how people work. Meanwhile, AI-related hiring continues to grow across much of the world, including Asia (chart 6), though the productivity gains from wider adoption are still awaited. Across both trade and technology, the US-China relationship remains the thread shaping Asia's outlook.

**Asia’s trade situation**
The US-China summit in Washington concluded last week, with mutual diplomacy on full display, including China sending a pair of giant pandas to the US. Tangible economic outcomes, however, were few. The fragile trade truce was extended by just two months, short of the six months or longer that many had expected. Both sides also moved to operationalise the US-China Board of Trade and Board of Investment, which were agreed at the May summit in Beijing. Asia's trade picture continues to evolve nonetheless (chart 1). At the start of the millennium, Asian economies' trade was weighted more heavily towards the US. Over the following decades, their ties with China grew steadily closer. Some economies have since tilted back towards the US, Taiwan among them, in a shift driven partly by AI-related trade.

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**US-China trade**
The US-China trade relationship itself is also shifting. Relations have thawed this year, as the two summits so far attest, a marked change from the tone struck in 2025, the first year of President Trump's second term. On trade, the US goods deficit with China narrowed sharply last year against a backdrop of surging US tariffs, to levels last seen around two decades ago (chart 2). This year, however, the narrowing has stalled and even reversed slightly, alongside an easing in the effective US tariff rate on Chinese goods. More easing may follow if the thaw holds. The latest summit yielded recommendations for more favourable tariff treatment on $30bn of non-sensitive goods in each direction, from US farm exports to toys and small appliances. These are recommendations rather than signed cuts, so their effect on the balance will hinge on implementation.

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**China’s trade with Asia**
Chart 3 brings charts 1 and 2 together. It shows that export revenue lost in the US market has been more than replaced by sales elsewhere, particularly to the ASEAN-6 and India. This has allowed China's overall exports to sustain robust growth. The latest customs data bear this out: exports rose 25% y/y to $401.4bn in August, with shipments to ASEAN reaching USD 74.4bn and to India USD 14.6bn. That resilience feeds into headline growth, which matters all the more while China's domestic sectors continue to flounder. Retail sales rose just 0.4% y/y in August, while fixed asset investment contracted 7.2% y/y in the first eight months, weighed down by the prolonged property downturn. For now, external demand is doing much of the heavy lifting.

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**Artificial Intelligence**
AI was another key topic at the summit. The two presidents diverged on the approach to AI regulation but agreed to establish a US-China Super Intelligence (SI) Dialogue, due to meet by November. They also agreed to set up a communication channel for AI-related incidents. The timing is apt. Calls to slow AI development to manage security risks have grown, coming not only from the public but from those working at the frontier itself. The heads of Anthropic and OpenAI both backed calls this month to pace the frontier of AI development. These calls follow the so-called Hugging Face incident, disclosed in July. AI agents under test at OpenAI escaped their sandbox, accessed the internet and breached the systems of Hugging Face, an AI platform company. OpenAI has since acknowledged dozens of further incidents involving its test agents, adding a new dimension to reported AI incidents and controversies (chart 4). All this unfolds even as investment and competition in AI intensify between the US and China, the two frontier economies.

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Beyond these risks, fears of mass worker displacement continue to run high. They are partly justified, given the surge in US job cuts attributed to AI, especially in knowledge-based sectors and white-collar work (chart 5). Challenger data show AI cited in 116,175 announced job cuts in the first eight months, about 22% of the total and the leading reason year to date. Even so, AI slipped to the fourth most cited reason in August, ending a five-month run at the top. So far, there is arguably little sign of such displacement on a broad scale, although entry-level positions appear to have been affected. What we are seeing instead is a shift in how people work, as capable AI tools cut the effort needed for lower-level tasks, the so-called grunt work.

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The ongoing shift also brings opportunities. LinkedIn's AI hiring index shows AI-related hiring continuing to grow across much of the world, including Asia (chart 6). Broader US hiring intentions have also firmed: Challenger reports that announced hiring plans were up 37% y/y in the first eight months. Technology, the largest source of announced cuts this year, also led hiring plans through July. Challenger's own reading is that AI is reshaping the labour market rather than dismantling it. Taken with chart 5, this signals that we are entering a brave new age. We are wrestling with both the benefits AI offers and the displacement it may bring. Beyond the pivot towards AI-related expertise, however, we are still waiting on the so-called productivity gains associated with more pervasive AI adoption.

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Asia

Economic Letter from Asia: Beyond the Summit

Winnie Tapasanun

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New orders for durable goods were virtually unchanged m/m in August to $338.6 billion after rises of 0.9% in July (+1.1% initially) and 0.6% in June, according to today’s advance report from the U.S. Census Bureau. The Action Economics Forecast Survey had expected a 0.3% m/m August decline. The latest reading was still up 21.3% from a low of $279.1 billion in November 2022. The year-on-year rate decelerated to 8.5% in August from 11.8% in July (7.7% in August 2025), remaining positive since January 2025 except for May (-3.0%). Excluding transportation, durable goods orders grew 0.3% (11.2% y/y) in August, the 16th straight m/m increase, after a 0.7% rise in July. Durable goods orders excluding defense inched up 0.1% (7.9% y/y), the fourth m/m gain in five months, following a 1.4% July advance.

The m/m flat reading in August durable goods orders reflected a 4.3% m/m decrease in orders for nondefense aircraft & parts, following a 12.0% jump in July and a 2.9% decline in June. Orders for defense aircraft & parts rose 5.9% (-9.2% y/y), the first m/m rise since May, after drops of 13.0% in July and 7.0% in June. Orders excluding aircraft edged up 0.1% (11.2% y/y), the ninth successive m/m gain, after a 0.5% July increase.

Durable goods orders for transportation fell 0.6% (+3.4% y/y) in August, the third m/m fall in four months, following a 1.2% gain in July. In addition to August’s m/m decrease in nondefense aircraft orders and rise in defense aircraft orders, motor vehicles & parts orders slid 0.6% (+9.4% y/y) after a 0.8% July rebound. Orders for fabricated metal products dropped 1.3% (+8.6% y/y), down for the second time in three months, reversing a 0.3% July increase. Orders for computers & electronic products were essentially unchanged m/m (+16.5% y/y) following a 0.7% July decline and two consecutive m/m rises. To the upside, orders for primary metals climbed 1.2% (20.1% y/y), up for the ninth straight month, adding to a 2.1% July increase. Machinery orders grew 1.1% (15.1% y/y) on top of a 1.5% July rise, continuing a string of gains since March 2025. Orders for electrical equipment, appliances & components rose 1.1% (7.6% y/y) following a flat July reading and four successive m/m increases. Orders for all other durable goods were up 0.4% (4.0% y/y), the 12th straight m/m gain, after a 0.6% July rise.

Capital goods orders grew 0.7% (10.1% y/y) in August, the fifth m/m rise in six months, following a 0.6% increase in July. Nondefense capital goods orders rose 1.2% (6.0% y/y), up for the fourth time in five months, after a 2.3% July rise. Core capital goods orders (i.e., nondefense capital goods orders excluding aircraft) advanced 1.6% (14.1% y/y), the sixth m/m gain in seven months, following a 0.6% July increase. Defense capital goods orders, however, fell 1.5% (+34.6% y/y), the third m/m decline in four months, after a 6.4% July drop. Notably, core capital goods shipments (core capex shipments)—a reliable coincident indicator of business spending on equipment in the national accounts—rose 0.6% (11.4% y/y), the 11th m/m gain in 12 months, adding to a 1.4% July increase and pointing to a solid contribution to Q3 2026 GDP from business equipment spending.

Shipments of all manufactured goods held steady m/m (+8.6% y/y) in August following a 0.8% increase in July and no change in June. Durable goods shipments slipped 0.2% (+8.6% y/y), the first m/m decline since November 2025, after a 0.9% July rise. Nondurable goods shipments increased 0.3% (8.6% y/y), the eighth m/m rise in nine months, building on a 0.6% July gain.

Unfilled orders of durable goods climbed 0.6% (8.8% y/y) in August after rising at the same pace in July and June. Excluding transportation, unfilled orders rose 0.9% (7.1% y/y) after a 1.0% July gain. Both series posted the 13th consecutive m/m increase.

Manufacturing inventories advanced 0.5% (2.6% y/y) in August, up for the 10th month running, on top of a 0.4% rise in July. Durable goods inventories grew 0.5% (3.0% y/y), the 11th straight m/m increase, after rising at the same rate in July. Nondurable goods inventories rose 0.5% (1.9% y/y), up for the sixth time in seven months, following a 0.3% July rebound.

Manufacturers’ orders and shipments of durable and nondurable goods, along with unfilled orders and inventories, are compiled by the U.S. Census Bureau. They are available in Haver’s **USECON** database. The Action Economics forecast data are in the **AS1REPNA** database.

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- August headline orders unchanged after two straight m/m rises; +8.5% y/y, positive since Jan. ’25 except for May; still up 21.3% from a Nov. ’22 low.
- Nondefense aircraft & parts -4.3% m/m vs. July’s +12.0%.
- Transportation orders -0.6%, third fall in four months; orders ex transp. +0.3%, 16th consecutive m/m increase.
- Core capital goods shipments +0.6%, 11th gain in 12 mths., pointing to a solid contribution to Q3’26 GDP from business equipt. spending.
- Durable goods shipments -0.2% (+8.6% y/y); unfilled orders +0.6% (+8.8% y/y); inventories +0.5% (+3.0% y/y).

U.S. Durable Goods Orders Flat in August on Nondefense Aircraft Weakness

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Globally, money growth is easing but the U.S. has become an exception to global trends.

In the EMU, money growth has been slowing within the last year as 12-month growth at 4.3% turns to 2.8% over six months and to 2.4% over three months. In addition, speaking more broadly, the three-month and six-month growth rates are slower than the cumulative pace over three years and two years.

The performance of credit growth in the EMU runs along very similar lines, with greater easing within the 12-month span and growth being broadly weaker over three months and six months than over the last two years and three years cumulatively.

EMU money growth in real terms—real money balances—show not just slower growth but contraction over both three months and six months. They show a broad slowing, with some irregularity compared to longer periods.

The U.K. is not a clear read on money trends, but its three-month nominal growth rate is weaker although there is a small pickup over 12 months and six months compared to previous periods. U.K. real money balances also show contraction over three months but have speeded up over six months and 12 months from very weak rates of growth in their performance in earlier periods.

Japan shows clear slowing in nominal growth from 12 months on. Its recent growth rates are slower than its already slow rates over two years and three years. Japan’s real balance growth also shows real balance contraction over three months and six months as well as more broadly.

The U.S. is an outlier, with slightly weaker three-month nominal growth but with accelerations over 12 months and six months, and with three-month growth that is stronger than over the longer horizons of two years and three years. Growth in real money balances in the U.S. has accelerated and is accelerating within the last year and over the longer horizon as well. U.S. real balance performance shows monetary stimulus running flat-out, marking the U.S. as a clear monetary outlier.

While tracking and relying on monetary signals has fallen “out of fashion,” a lot of that is because of monetary innovation. It is not clear that the finding that U.S. real balances are accelerating should be treated as a benign event. Money growth in the U.S. is strong in real and nominal terms.

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**Our convoluted future**
Oil prices (WTI in dollars) have broken lower over three months. But in “real time” oil has pressed higher. The contribution of oil to an incipient inflation rate may not have broken lower as much as this table suggests. It’s still a good time to remain wary about inflation. We are hearing all sorts of interpretations on this from people who are warning that diesel prices are going to stoke much more inflation to people who are convinced of the opposite that the push up in various prices will quickly weaken the economy, constrict supply, and lead to eventual Fed rate cuts. What seems clear is that inflation will come first. What is contentious is how much monetary policy should react to a supply shock and try to limit knock-on effects. Frankly, everyone has their own opinion, but it is really hard to nail down the consensus.

**Inflation is multi-dimensional**
In addition to those concerns, there are concerns about the availability of diesel, heating fuel for Europe this winter, and specialty synthetic oils needed by modern cars, as well as many other supplies, including ingredients for fertilizers for farmers. If ever you wanted an example of how little we really know about inflation, read the papers today. And that, of course, is all on top of arguments being made that fiscal policy will make monetary policy potentially ineffective if it is not brought to heel. Analysis has gotten wild and very open-ended on the economic front; beware. If you are not dogmatic about it, it should not be surprising to note that many different things feed into the inflation process. Money supply is important, as are interest rates, fiscal policy, and the economy’s ability to deliver goods & services as expected. But the precise weighting and calibration of these things remain contentious among economists and policymakers. On occasion, occasions like this one become sticking points.

Money Supply Growth Slows Except in the U.S.

Andrew Cates

**The Plumbing Tightens Again**
Euro area manufacturers reported a further lengthening of suppliers’ delivery times in this week’s flash survey, taking the index to its most stretched since the disrupted trading conditions of 2022. Dry bulk freight rates have risen in step, and the coincidence is not accidental. Neither series is signalling strong demand. Vessels diverted away from Bab el-Mandeb and the Gulf are sailing considerably further to deliver the same cargo, which absorbs tonnage, extends voyage times and tightens the freight market without any increase in the volume of goods actually being moved. Manufacturers meet the same phenomenon as delay, and respond by ordering earlier and holding more, which tightens it further. Delivery times of this kind fed producer prices with a lag of two to three quarters after 2021, and there is little reason to expect a different sequence now. The more awkward feature for firms building plans for next year is that the friction is a function of route length rather than of order books, so it will not ease simply because activity slows.

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**A Very Narrow Base**
Consensus forecasts for growth this year have been marked down only modestly since February, which looks surprising set against six months of disrupted energy supply. The aggregate conceals an unusual degree of dispersion. Economies at the centre of the semiconductor supply chain have been upgraded substantially, Taiwan by several percentage points and Korea by more than one, on the strength of an investment boom in artificial intelligence whose physical apparatus they build. Almost everywhere else the revisions run from flat to negative, with Germany, France, Canada and Australia absorbing the energy shock without any equivalent windfall. Strip the chip exporters out and the world number reads considerably worse. That matters for anyone using the global aggregate as an input, because this year it carries less information about the typical economy than usual, and the handful of observations doing most of the work are levered to a single investment cycle.

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Sources: Blue Chip Economic Indicators, WTO and Haver Analytics

**Spending the Buffer**
The world has kept itself supplied with fuel through six months of disruption by drawing on the oil it had already stored, and the scale of that drawdown has no parallel in the available record. The starting position helped, since stocks were built up rapidly through late 2025 and the conflict arrived with storage unusually full. Two things follow. Inventories are a stock rather than a flow, and can be run down only once. And the apparent mildness of the macroeconomic damage so far has been bought with a buffer that is now largely spent, which leaves the system materially less able to absorb whatever arrives next. Some caution is warranted in reading the series, since implied stock change is the residual between estimated world supply and estimated world demand and therefore collects the measurement error in both. Neither the direction nor the magnitude is easily dismissed on those grounds.

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Sources: US Energy Information Administration and Haver Analytics

**Three Disturbances at Once**
Central banks are usually content to look through a commodity shock, and the justification for doing so rests on an assumption that the move will reverse. What has happened since February fits that description less well than usual. Crude and coal have risen because of the Middle East. Cereals, beverages and agricultural raw materials have risen because the World Meteorological Organization put the odds of an El Niño event near ninety per cent at the beginning of June, and West Africa, Southeast Asia and eastern Australia all dry out during the warm phase. Base metals have risen because artificial intelligence and rearmament have made them contested. Three disturbances of broadly comparable size, with different origins and little correlation between them, are therefore running at the same time. That is not a commodity cycle, in which the complex rises and falls together and a policymaker can reasonably wait. It is a queue of supply failures, each arriving before the last has cleared the annual comparison, and a queue is considerably harder to distinguish from a persistent inflation problem — for the policymaker, and for the public whose expectations the policymaker is trying to anchor. Assigning each sub-index to a principal source is a judgement rather than a decomposition, but the point about correlation survives any reasonable redrawing of the categories.

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**Where the Strain Registers**
Labour demand is the clearest evidence so far that the shock has reached the real economy, and it has reached it selectively. Online job postings in the United States drifted lower through last year but have stabilised and turned modestly higher since the spring. In the United Kingdom and Germany they have kept falling, and the British decline has been steep enough to leave postings far below where they began 2025. The official statistics point the same way. German unemployment has been above three million for most of this year, with the Federal Employment Agency describing labour demand as weak even as fiscal policy turns sharply expansionary, while British recruiters have reported falling permanent placements for months. The divergence follows the distributional logic of an energy shock. Economies that import their energy have transferred real income to those that produce it, and firms facing higher input costs and an uncertain demand outlook adjust first by not hiring rather than by dismissing, which is why the deterioration shows up in postings well before it shows up in unemployment. Loosening of this kind would ordinarily argue for easier policy. With the inflation coming from the supply side, it has not.

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**France Steps Away from the Core**
The French premium over Bunds crossed one hundred basis points last week for the first time since the euro crisis of 2011 and 2012, and it now trades wider than Italy’s. Spain, once the standard measure of peripheral stress, sits at less than half the French spread, and that reordering of the currency union’s credit hierarchy is the more telling development. The proximate cause is domestic. Public debt has reached around 119 per cent of output, the deficit remains close to twice the European ceiling, and the Lecornu government is attempting a consolidation of some fifty-four billion euros through a parliament that has already censured two of its predecessors, with a draft budget due at the end of this month. With a presidential election in 2027 and no obvious centrist majority beyond it, what investors are pricing is not the arithmetic of the deficit but the political capacity to act on it. The German side of the spread is no longer still either. Bunds stand at seventeen-year highs, reflecting a borrowing programme that runs to a five-hundred-billion-euro infrastructure fund and defence spending exempted from the debt brake above one per cent of output, and German politics has itself become much less predictable.

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Financial markets have spent this week weighing whether this year's energy shock has passed its peak, and have changed their minds more than once. Brent slipped below $99 as Hormuz shipments were reported recovering and Gulf leaders gathered in New York, only to recover above $100 within a day. The relief in the energy market has proved neither durable nor shared by the bond market. The Federal Reserve raised rates last week for the first time in three years, the ECB has tightened alongside it and the Bank of Japan has moved again, leaving ten-year Treasury yields at levels last seen in 2007 and Bunds at seventeen-year highs. This week’s flash purchasing managers’ surveys help explain the discomfort, with European supply chains lengthening once more as dry bulk freight rates climb (chart 1). The aggregate global growth picture has nonetheless held up better than the geopolitics would imply, though the latest Blue Chip consensus survey continues to suggest that this resilience is concentrated in only a small group of semiconductor exporters rather than shared across the world economy (chart 2). Part of the explanation for the wider containment lies in the oil balance, where a drawdown in stocks without precedent in the available record has substituted for the spare capacity that once cushioned disruptions of this kind (chart 3), and part lies in the character of the commodity shock itself, which now has at least three unrelated sources (chart 4). Labour markets are where the strain has begun to show, and it is showing very unevenly across the advanced economies (chart 5). In European bond markets, meanwhile, the consequences have turned political, with the premium demanded on French debt over German reaching levels not seen since the euro crisis (chart 6).

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Charts of the Week: Narrow Shoulders

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The ISM U.S. manufacturing PMI unexpectedly dipped to 54.5 in September from 54.6 in August and 55.6 in July, according to data from the Institute for Supply Management. The September reading, above the 50 expansion-contraction threshold, indicated the U.S. manufacturing sector expanded for the ninth consecutive month, albeit at a marginally slower pace. A reading of 55.0 for September had been expected in the Action Economics Forecast Survey. The latest manufacturing PMI, while above a contractionary 48.9 in September 2025 and a low of 47.0 in October 2024, remained below a peak of 63.8 in March 2021.

The production index declined to 56.7 in September from 58.3 in August, indicating production expanded for the 11th straight month but at the slowest rate since June. The index was above a low of 44.8 in April 2025 but below a peak of 66.5 in March 2021. In September, 25.4% (NSA) of respondents reported higher production while 11.9% reported lower production. The new orders index rebounded to 55.3 in September from 53.7 in August (the lowest reading since March), signaling new orders grew for the ninth consecutive month following four successive months of contraction. The index remained well above a low of 41.8 in January 2023 but below a high of 67.0 in May 2021. In September, 23.4% (NSA) of respondents reported higher new orders while 15.5% reported declines. The inventories index fell further to 48.6 in September—the first contraction since May and the lowest level since March—from 50.6 in August, returning to the broader contractionary trend in place since May 2025. The index was below a high of 52.7 in March 2025 but above a low of 43.8 in October 2024. Meanwhile, the supplier deliveries index edged down to 59.0 in September from 59.3 in August, indicating slowing delivery performance for the 10th straight month after faster deliveries in November 2025. In September, 21.4% (NSA) of respondents reported slower delivery speeds while 3.4% reported faster speeds.

On the labor front, the employment index rebounded to 52.7 in September from 51.2 in August, showing employment expanded for the third consecutive month, at a stronger pace, following 33 months of contraction. The index was above a low of 44.1 in November 2025 but below a high of 56.5 in March 2022. In September, 15.3% (NSA) of respondents reported higher employment while 14.5% reported lower hiring.

On the pricing front, the prices paid index advanced to 77.9 (NSA) in September from 71.1 in August and 71.1 in July, indicating raw materials prices rose for 24 months running and at the fastest rising pace since May. The index remained well above a low of 39.4 in December 2022 but below a high of 87.1 in March 2022 and a peak of 92.1 in June 2021. In September, 58.6% (NSA) of respondents reported higher prices while only 2.8% reported price declines.

In other ISM series not included in the composite index, the new export orders index decreased to 50.9 in September from 53.2 in August, indicating new export orders grew for the fourth time in five months, albeit at the lowest level since June’s contractionary 48.5. The index was up from a low of 40.1 in May 2025 but down from a peak of 57.1 in February 2022. The imports index slipped to 51.0 in September from 52.5 in August, suggesting imports expanded for the eighth successive month but at the weakest rate since April. The index was above a low of 39.9 in May 2025 but below a peak of 61.0 in June 2021. The order backlog index climbed to 56.4 (NSA) in September from 51.8 in August, showing backlog levels grew for the ninth straight month and at the fastest pace since February’s high of 56.6. The index was well above a low of 37.5 in May 2023 but below a peak of 70.6 in May 2021.

The ISM figures are based on responses from over 400 purchasing and supply executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These data are diffusion indexes where a reading above 50 indicates expansion; below 50 indicates contraction. The ISM Manufacturing PMI is a composite index based on the diffusion indexes of five of the indexes (seasonally adjusted) with equal weights: New Orders, Production, Employment, Supplier Deliveries, and Inventories. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

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- ISM Mfg. PMI down slightly to 54.5 in Sept.; ninth straight month of expansion.
- Production (56.7) lowest since June; still expanding for the 11th consecutive mth.
- New orders (55.3) growing at a faster pace; ninth successive mth. above 50.
- Employment (52.7) expanding for the third straight mth., at a faster rate, after 33 mths. of contraction.
- Prices Index (77.9) highest since May, indicating prices rising for 24 mths. running.
- Exports (50.9) lowest since June and imports (51.0) lowest since April; both still expanding.

U.S. ISM Manufacturing PMI Still Expansionary in September; New Orders & Employment Accelerating; Production Moderating

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U.S. ISM Manufacturing PMI Still Expansionary in September; New Orders & Employment Accelerating; Production Moderating

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