Investor sentiment worldwide is positive, especially in AI-led Asia

Sectoral shift in US job openings

Meteoric rise in AI-related semiconductor exports fueling South Korea's export boom

Regional Fed surveys showing further manufacturing acceleration in August

Sharp drop in China demand for oil helping to limit impact of Middle East conflict on the price

Decades high real price of copper posing physical challenge to investment boom

Rising US long-term real yields point to strong demand for investment funding

US retail sales accelerate even as consumers remain gloomy

Retail gasoline price still well above pre-conflict level and now rising again

PMIs showing widespread revival of global economy

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

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Kathleen Stephansen, CBE

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Mortgage applications dropped 2.7% w/w (-19.2% y/y) in the week of September 4, after rising 0.8% w/w (-9.2% y/y) in the week ending August 28, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house edged down 0.2% w/w (-6.9% y/y) in the latest week following a rise of 2.2% w/w (-0.6% y/y) in the August 28 week.  Applications for loan refinancing fell 6.2% w/w (-32.1% y/y) in the September 4 week, after a drop of 1.1% w/w (-18.8% y/y) in the August 28 week.

The effective interest rate on a 30-year fixed-rate loan rose 7bps to 7.05% in the week ending September 4 from 6.98% in the week ending August 28, remaining at levels not seen since July/August 2025. The rate on 15-year fixed-rate mortgages rose 4bps to 6.40% in the September 4 week from 6.36% in the prior week. The 30-year Jumbo rate rose 6bps to 6.93% in the latest week from 6.87% in the August 28 week. The rate on a 5-year ARM dropped by 5bps to 6.13% in the September 4 week from 6.18% in the August 28 week.

The share of applications for refinancing an existing loan fell to 40.9% of total applications in the week of September 4 from 41.8% in the week ending August 28. The adjustable-rate mortgage (ARM) share of activity rose to 8.5% in the latest week from 8.0% in the August 28 week.

The average size of a mortgage rose 2.1% w/w (-5.2 % y/y) to $380,200 in the week ending September 4 after falling 0.9% w/w (-3.2% y/y) to $372,500 in the week ending August 28. The average size of a purchase loan rose 1.5% w/w to $445,600 in the September 4 week, following a decline of 1.1% w/w to $439,200 in the August 28 week. The average size of a loan to refinance a mortgage rose 2.1% w/w to $285,800 in the week ending September 4 after edging down 0.8% w/w to $279,800 in the week ending August 28. 

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.

- Both applications for loans to purchase and applications for loan refinancing declined in the latest week.
- Interest rate on 30-year fixed-rate loans rose to 7.05%.
- Average loan size rose in the September 4 week.

U.S. Mortgage Applications Declined in the September 4 Week 

Robert Brusca

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Early reports for industrial production showed declines in Europe, with German industrial production falling 1.1% in July, French output falling 0.8%, and Portuguese output falling 0.2%. Nonmonetary union members Sweden and Norway both showed increases in July. The German IP report was released on Monday during the U.S. holiday; the Portuguese IP was released on September 1, while the French IP was reported today.

German production shows relatively steady declines over 12 months, six months, and three months of around 1% or a little bit more at an annual rate. Outputs of consumer goods and capital goods on all three horizons show declines. Intermediate goods output shows declines over 12 months and three months, with an intervening increase over six months at a 2.2% annual rate.

German manufacturing output fell by 2.3% in July, showing steady declines over 12 months, six months, and three months, the same as headline output. However, German manufacturing orders in real terms increased by 2.5% in July, showing an accelerating pattern from 12 months to six months to three months. Current real manufacturing sales fell by 1.5% in July and may still be holding back output. There is a sequential deceleration in real sales, with sales falling by 0.3% over 12 months, by 3.5% over six months at an annual rate, and by 7.3% over three months at an annual rate. Presumably, that pattern is about to be dominated and reversed by the strength in real orders.

Other German indicators from ZEW, IFO, and the EU Commission showed improvement in July compared to June, although the sequential readings are less reassuring since only the EU Commission index shows persistent improvement.

French industrial output fell by 0.8% in July, showing accelerating output declines from 12 months to six months to three months. Similarly, Portugal showed a 0.2% decline in July, with accelerating output declines from 12 months to six months to three months.

The nonmonetary union members Sweden and Norway not only showed strong output increases in July but also sequential acceleration from 12 months to six months to three months.

The EMU begins the quarter to date with weak results as German, French, and Portuguese outputs show declines, while Sweden and Norway are showing very strong increases. For the European Monetary Union members, it's a poor start to a new quarter.

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Europe

German, French, and Portuguese IP Fall 

Winnie Tapasanun

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The NFIB Small Business Optimism Index slipped to 98.7 in August after a 2.4-point gain to 99.8 in July, according to the Small Business Economic Trends survey from the National Federation of Independent Business, indicating small business sentiment cooled slightly from July’s 11-month high. The decline was driven by weaker expected business conditions as well as decreases in earnings trends and plans to increase employment. The index was above its 52-year average of 98.0 for the second consecutive month and above a low of 88.5 in March 2024, albeit below 100.8 in August 2025 and a peak of 105.1 in December 2024. Six of the 10 index components fell, two rose, and two were unchanged. The NFIB Small Business Uncertainty Index declined to 89 in August following a two-point increase to 91 in July, remaining well above its historical average of 68. The index was up from its recent low of 84 in December 2025 and a low of 65 in November 2023, while below its record high of 110 in October 2024.

The outlook for business conditions in the next six months, while down in the August survey, remained positive for the 22nd straight month. The net balance of respondents expecting the economy to improve fell to 10% in August, the lowest level since May, following a two-point increase to 15% in July; these readings were far below a high of 52% in December 2024 but significantly above a record low of -61% in June 2022. Expected real sales dipped to a net 6% in August, a three-month low, from 7% in July; the latest result was below a high of 22% in December 2024 but above a low of -18% in August 2024. A net -9% of respondents reported higher nominal sales in the past three months, down from -4% in July and June and marking the lowest reading since November 2025; the measure remained above a low of -20% in October 2024 but below the recent positive reading of 1% in February and a peak of 9% in June 2021.

Plans to expand the business held at 12% in August and July, the highest level since February; the latest figure was below a high of 20% in December 2024 but above a low of 2% in March 2023. Plans to make capital outlays edged down to 24% in August from 25% in July (the highest reading since December 2024); these numbers were below a high of 28% in November 2024 and a peak of 31% in October 2021. Expected credit conditions improved to -2% in August from -4% in July; this result matched a high of -2% in December 2024 and remained above a low of -11% in November 2023. Meanwhile, a net -1% of respondents viewed current inventory stocks as “too low” in August, slightly up from -2% in July; the series had been negative since June 2025, with zero readings only for two months (June 2026 and August 2025); the positive reading of 1% was recorded in May 2025.

On the labor front, 47% of respondents reported that qualified workers to fill job openings were hard to find in August, down from 51% in July and June (the highest level since September 2024). These numbers were above a low of 43% in August 2025 but below a high of 56% in August 2024 and a peak of 62% in September 2021. A net 17% planned to increase employment in August, down from 20% in July (the highest level since October 2022); it remained above its most recent low of 9% in May but below a peak of 32% in August 2021. Notably, 35% reported positions not able to be filled in August, slightly down from 36% in July (the highest reading since June 2025); these figures remained below a high of 51% in May 2022.

Overall earnings trends had remained in negative territory since December 2019. The measure fell to -19% in August following a four-point increase to -16% in July. These readings were below the most recent high of -14% in February and a high of -5% in June 2021 but above a low of -37% in August 2024.

On the pricing front, actual and expected selling prices remained at an inflationary level, indicating continued inflationary pressures. The net percent of firms raising their average selling prices held at a still-elevated 31% in August and July, the lowest level since April, after a two-point increase to 38% in June. The latest reading was up from a low of 20% in August 2024 but well below a peak of 66% in March 2022. The percentage planning to raise prices registered at 28% in August and July, also the lowest since April, following a two-point decline to 32% in June; these readings remained above a low of 21% in April 2023.

Wage inflation remained relatively high in the August survey. A net 31% of respondents raised compensation during the last three months, unchanged from July and equaling May’s reading. It was above a low of 26% in November 2025 but below a high of 46% in February 2023 and a peak of 50% in January 2022. A net 18% of firms planned to raise worker compensation in the next three months, down from 19% in July (the highest level since February); this remained below highs of 28% in November 2024, 30% in November 2023, and 32% in October 2022.

Labor quality was cited as the single most important problem facing small businesses, as reported by 23% of NFIB members in August, down from 27% in July (the highest since October 2025). Taxes ranked second as the next most important problem (alongside inflation), as reported by 16% of respondents in August, unchanged from July and representing the lowest since November 2025. Inflation also remained a key challenge for small businesses, as reported by 16% of respondents in August, up from a four-month low of 14% in July; these readings were well below a peak of 37% in July 2022. Other concerns (in August vs. July) included poor sales (10% vs. 8%), government requirements (9% vs. 7%), insurance cost/availability (8% vs. 8%), labor costs (7% vs. 8%), and competition from large businesses (4% vs. 7%).

According to the Small Business Administration, there are 33 million small businesses in the United States, which employ 62 million workers. The NFIB surveys anywhere from 500 to 2000 respondents each month and the typical firm employs 10 people and reports gross sales of about $500,000 a year. The NFIB figures can be found in Haver’s **SURVEYS** database.

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- NFIB Small Business Optimism Idx down 1.1 pts. to 98.7 in Aug., still above its 52-year avg. of 98.0.
- Uncertainty Idx down 2 pts. to 89, remaining above the historical avg. of 68.
- Expectations for economy down 5 pts. to 10%, lowest since May.
- Hiring plans down 3 pts. to 17%; earnings trends down 3 pts. to -19%.
- Expected real sales down 1 pt. to 6%, a three-month low.
- Plans to expand business unchanged at 12%, highest since Feb.
- Firms raising avg. selling prices steady at 31%, lowest since April.
- Top three business concerns: labor quality (23%), taxes (16%), and inflation (16%).

U.S. NFIB Small Business Optimism Cools in August Amid Lower Business Expectations

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Japan's economy watchers are not in a state of bliss, but they have gradually been improving their outlook after suffering a severe setback when the attacks on Iran began.

The current index for economy watchers, which is a diffusion index, at 46.4, is below 50 and therefore indicates some deterioration in attitudes about the economy. However, the reading reflects an improvement, and there has been an ongoing improvement in the current situation.

The future reading, similarly, has been improving; in August, the future index is at 48.3, also indicating some deterioration, but less than a month ago, with an ongoing improvement visible there as well.

**Standings**
The percentile standings of the current index and the future index show slightly stronger readings for the future than for current assessments. The future index has a 49.4 percentile standing, placing it near its median for the evaluation period that goes back to August 2005. The current situation has a standing at its 43rd percentile, about 7 percentile points below its median for that period.

**Current Index**
The current index shows three readings above their 50th percentile standings: eating & drinking places, corporations, and corporate manufacturers. However, even so, all of the current readings in August have diffusion values below 50, indicating that all are showing deterioration, although less deterioration than in the previous month.

**Future Index**
The future reading itself is below its 50th percentile; however, six components are above their 50th percentiles. These include the overall assessment of households, the reading for eating & drinking establishments, services, corporations, including both manufacturers and nonmanufacturers as separate readings. The future reading for housing is extremely weak, with a 29.2 percentile standing, and employment has only a 36th percentile standing in the future index; that's similar to its weak 33rd percentile standing in the current index.

The lagging performance of employment in both indexes is certainly worrisome because that's the basis for jobs and spending. On the other hand, the future reading for households is above its 50th percentile. Households in the current index show a 44.7 percentile standing, below their median as well as below 50 overall, but not weak in a way that is especially worrisome.

The graph shows that there is an ongoing improvement in the assessments by the economy watchers. Their assessments dropped very sharply at the time of the Middle East conflict and the threat to oil supplies. Those assessments have since been recovering quite steadily and have moved to positions back closer to neutral, although still not to the point of registering growth. Among the current and future readings, only the reading for the service sector of the future shows a diffusion value in August above 50, indicating actual expansion; at least there's one, and that's a start.

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Japan

Japan’s Economy Watchers Regain Faith Steadily

Tian Yong Woon

In this week's Letter, we weigh Asia's building supply-side inflation risks against the AI export boom still powering regional growth. The US-Iran conflict has escalated once again, lifting crude prices and keeping geopolitical risk elevated (chart 1). Should oil hold at current levels without advancing further, base effects should eventually pull that impulse out of inflation. A second price risk is now building, and it is El Niño, an event already under way (chart 2). Drier conditions in parts of Southeast Asia and redistributed rainfall elsewhere stand to disrupt crops and lift food prices. Markets have started to price these risks in through higher yields. Japanese government bond yields have surged alongside global peers, also pushed by fiscal concerns as the budget is drawn up. Domestic buyers have reduced their net sales of JGBs, with the 10-year yield now flirting with 3% (chart 3). Set against these pressures, advanced Asia's AI buildout continues to run apace. Producers of critical AI chips in Japan, Taiwan and South Korea are posting double and triple-digit export growth (chart 4). The focus is also broadening from AI infrastructure towards physical applications such as humanoid robots. China has benefited too, with integrated circuits and computer equipment contributing about half of its export growth (chart 5). The remainder has come from other goods, including EVs, amid a still-robust overall export trend. By region, ASEAN-6 and India have driven that growth, offsetting the steep fall in shipments to the US (chart 6). That success, however, has again deferred China's longer-term rebalancing towards consumption.

**US-Iran tensions: No let up**
The US-Iran situation has escalated once again with a familiar headline, as both sides traded strikes over the weekend, with no clear resolution in sight. The latest strikes have brought the conflict well into its sixth month, pushing crude oil prices higher and keeping measures of geopolitical risk elevated (chart 1). All of this continues to give policymakers reasons to worry. With that said, while elevated oil prices have been pushing inflation upwards, that impulse should eventually fade. If prices stay at current high levels for at least another six months without advancing substantially further, base effects will pull them out of inflation calculations.

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**El Nino to the fore**
With Asia already grappling with still-high oil prices, even as much of it benefits from the ongoing AI boom. A further inflation risk is now building, and that risk is El Niño. This is not a forecast but an event already under way, which many authorities have touted as probably the biggest one yet. Indicators of the event, among them the Southern Oscillation Index (SOI), have been signalling it strongly for months (chart 2). The impacts are already showing through, including via rising sea surface temperatures and increased wildfire risks in parts of Southeast Asia. Rainfall is also being redistributed, greatly increased in some areas and greatly reduced in others. All of this stands to disrupt crop production, thereby bringing about an adverse food supply shock. That shock could send food price inflation surging soon, adding to policymaker woes. It is one to watch in the coming months, as more news of disrupted agricultural production starts to unfold.

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**Japanese government bonds**
The recent rise in global bond yields looks driven less by inflation than by real yields, as markets confront the prospect of heavier fiscal spending, capex-intensive investment paths and the issuance needed to fund them. Inflationary risks are compounding that repricing rather than leading it: oil prices have surged, and El Niño effects are ongoing and strengthening, building pressure from both energy and food. Japan is a case in point. JGB yields have surged alongside those of global peers, with the added impetus of the government's deliberations over next year's budget and what they imply for future fiscal outlay. The 10-year yield is now flirting with 3%, a level not seen since the 1990s, and high enough to have turned the tide for domestic buyers, who have cut their net sales of JGBs (chart 3) as the yields on offer become harder to pass up.

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**Advanced Asia**
Inflation risks and firmer yields aside; the AI buildout has continued to gather pace in advanced Asia. Producers of critical AI chips continue to benefit from massive export growth, which has in turn supported overall growth. These economies, including Japan and Taiwan, have kept posting dizzying double-digit growth in their exports of related goods, such as semiconductors and integrated circuits (chart 4). In South Korea's case, growth has run into triple digits, showing just how much the AI-related boom has already run. The picture is also shifting, and the focus is no longer only on infrastructure supporting newer, front-end AI models. It is increasingly taking shape in the physical realm, such as in humanoid robots, where recent weeks have unveiled growing capabilities.

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**China**
The advanced Asian economies above have not been the only ones in Asia to benefit from the ongoing AI boom. China too has continued to reap export benefits via its shipments of integrated circuits and computer-related equipment. Together, those two categories have contributed about half of overall exports growth in recent months (chart 5). The rest speaks to a broader story, as much of China's exports growth has also been driven by other goods. Those include motor vehicles, such as EVs, and come amid a still-robust upward trend in overall exports. These export revenues matter for growth at China's current juncture. The economy continues to undergo a two-speed dynamic, in which domestic growth drivers remain weak whilst external, export-oriented sectors supplement overall growth.

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By region, much of China's export growth continues to be driven by shipments to ASEAN-6 and India (chart 6). Shipments to the advanced Asian economies of Japan, South Korea and Taiwan have leaned close to the broader overall trend. On China's exports to the US, we saw a steep fall after President Trump began his second term in 2025, when trade tensions returned to the fore. Trade has since improved mildly in 2026, albeit remaining far from the end-2024 baseline. The overarching theme is that even with a stark pivot in exports away from the US, China has found alternative destinations. Those markets have not only made up for the US shortfall but also delivered robust growth alongside it. However, that continued pursuit of export-driven growth has once again deferred China's longer-term aim to rebalance towards a more consumption-driven economy.

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Asia

Economic Letter from Asia: Shock and Boom

Economy in Brief: December 2021

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