Even with strong capex, US nonfinancial corporations are generating more cash than they are investing

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

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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

Robert Brusca

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Japan, a usual early reporter, has not reported early this month. But among the seven reporters, five show improved monthly performance in September compared to August. The United Kingdom and Australia are weaker on the month. The euro area, Germany, France, India, and the United States are better on the month. Four of seven reporters show queue standings for monthly readings that are above their averages of the past 4½ years. The U.S. composite queue standing is exceptionally strong, with an 89.7 percentile standing for its composite index in September.

Ironically, India, which has the lowest queue-ranking index, has the second highest diffusion reading among the September reporters, at 56.5. It is second only to the U.S. at 58.4. That result for India simply underscores how well India’s economy has done over the past 4½ years compared to everyone else. To flesh that out, over the past 4½ years India’s composite average has been 58.1; the U.S., 53.6; the U.K., 52.4; the euro area, 51.3; Australia, 51.1; Germany, 50.9; and France, 49.9. France is the only reporter in the table to have averaged a composite index that shows a net decline over the whole period.

These average rankings give you some idea of how weak the past 4½ year period has been. Both Germany and France also log manufacturing readings below 50, indicating manufacturing sector contraction on average. In the euro area, the average reading was 50.9—above breakeven of 50 but by less than one diffusion point—obviously weighed down by France and Germany. Australia is the only country that has an average services reading weaker than its manufacturing reading for the full period.

Sequentially, the manufacturing data are improving from 12 months to six months to three months. Services are close to that same phenomenon but on relatively flat numbers. Over the past three months, the composite index, manufacturing, and services are all steadily progressing higher when a simple average of the seven responses is collected. There are three sectors and seven countries sketching out 21 comparisons each month. August and September each have eight weaker responses out of 21, while July had only three responses of ‘weaker’ out of 21.

The queue standings, which rank the current index levels across sectors for the last 4½ years, show 14 of 21 readings above their respective means, that is, with a standing of over 50%. India’s standing is the weakest with all readings below 50%, but that is much more a statement about past strength than about current weakness. The U.K. and Australia each have two sectors below 50% in standing. For Australia, it is the composite and manufacturing; for the U.K., it is the composite and services. However, for all countries, manufacturing performance in September is worse than it was in January 2021.

As of September, there is still a good deal of manufacturing weakness in play, with four of seven early reporters showing manufacturing weaker monthly in September. Only the U.K. and Australia have weaker service sectors month-to-month.

On balance, the S&P PMI readings show that the global economy is still getting stronger despite inflation, rate hikes, and challenges posed by war and geopolitical tensions. However, we should not assume that progress will continue apace. To some extent growth has been maintained by running down stocks of scarce goods, and some stocks of needed items may now be low. Winter is coming, and with it will come the demand for a winter energy source. It is no time to get complacent.

260923.jpg

S&P PMIs Five of Seven Early Reporters Show Stronger Output in September

Winnie Tapasanun

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The Chicago Fed National Activity Index (CFNAI) fell to -0.04 in August from an upwardly revised +0.08 in July (-0.08 initially) and a downwardly revised -0.01 in June (+0.06 previously), today’s report from the Federal Reserve Bank of Chicago showed, indicating that economic activity was below its historical trend for the third time in four months in August after slightly above the historical trend in July. The latest CFNAI was above a low of -0.50 in October 2025 and a reading of -0.36 in August 2025 but below a high of +0.39 in February 2025.

The index's three-month moving average (CFNAI-MA3), which smooths out the m/m volatility in the index, increased to +0.01 in August from an upwardly revised -0.01 in July (-0.04 initially), registering the second positive reading in three months. It was above a low of -0.39 in October 2025 and -0.14 in August 2025 but below a recent high of +0.08 in April. The CFNAI-MA3 is expressed in standard deviation units from zero (with a value of zero defined as trend real GDP growth). Research at the Chicago Fed indicates that an average reading of -0.70 or below is consistent with the economy being in a recession. Thus, the August reading suggested that the U.S. economy is not currently in a recession.

The August reading reflected m/m declines in two of the four CFNAI key components and one negative contribution. The contribution of the Production & Income index to the CFNAI decreased to -0.07 in August, the lowest reading since January, from a neutral value (0.00) in July and June; it was below a high of +0.37 in February 2025 but above -0.13 in August 2025 and a low of -0.61 in January 2024. The contribution of the Sales, Orders & Inventories index fell to a neutral 0.00 in August, matching the lowest level since May, from +0.15 in July; it was below a high of +0.16 in March 2025 but above -0.08 in August 2025 and a low of -0.20 in April 2025. The Employment, Unemployment & Hours index contributed +0.01 in August, the highest reading since April, up from -0.01 in July; it was above a low of -0.13 in February 2026 and -0.12 in August 2025 but below a high of +0.05 in January 2026. The contribution of the Personal Consumption & Housing index rose to +0.01 in August, the second positive reading in three months, from -0.06 in July; it was above -0.03 in August 2025 and a low of -0.14 in January 2025 but below a high of +0.10 in March 2025.

The CFNAI Diffusion Index—which measures the breadth of change in the component series and is also a three-month moving average—slipped to +0.02 in August, the sixth consecutive positive reading, from a downwardly revised +0.04 in July (+0.05 initially). A string of negative readings was posted during the March 2023 to February 2026 period. A reading of zero indicates that all of the indicators are growing at their long-term average. The August reading was above a low of -0.56 in October 2025 and -0.18 in August 2025 but below a high of +0.15 in September 2022.

The CFNAI is a weighted average of 85 indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

These figures are available in Haver's **SURVEYS** database.

- CFNAI down to -0.04 in Aug., negative for the third time in four mths.
- Two of four CFNAI components down m/m; one makes a negative contribution.
- CFNAI-MA3 up to +0.01, second positive reading in three mths.; above -0.70 (recession signal).
- CFNAI Diffusion Index down to +0.02, still positive for the sixth straight mth.

Chicago Fed National Activity Index Negative in August After July’s Upwardly Revised Positive Level

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The exhibits in this report feature a graph based on the RICS survey showing U.K. sales expectations for the next three months versus the last three months, while tabular data show Nationwide housing prices and how they are moving month-to-month as well as year-over-year. In addition, the table provides the recent GfK survey results on consumer confidence in the U.K. and presents rankings of housing prices and consumer confidence.

These statistics paint a somewhat mixed picture of the U.K. economy although clearly they paint a picture of an economy that is not firing on all cylinders. The ranking on year-over-year house price changes in the Nationwide survey and the ranking for the GfK consumer confidence index give highly similar relative signals, with both of them around the 30th to 40th percentiles in their historic queues of data extending back to 1992.

Housing prices are still advancing more slowly than they did in previous years. While consumer confidence is still low, it has shown improvement in recent months, and the last two readings showed year-over-year improvement in the monthly data. The RICS chart on the pace of sales shows some improvement, if not yet outright gains. Still, housing conditions are weak, and the question of whether they are limping back into the black, whether prices are holding on for small gains, or whether there is a more solid recovery taking place remain unanswered. So far, at least, it does not look like backsliding.

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The Bank of England just met last week. Although the inflation background was poor and the inflation numbers before the BOE meeting were worse than expected, the bank did not move to hike interest rates. In part, the realization is that an interest-rate hike is not going to solve the international problem of high and rising energy prices, but they are still a reality that the central bank has to deal with. The central bank will want to take steps to head off knock-on effects even if it can't push back on the reason that prices are rising. One reason for hesitancy among Bank of England Monetary Policy Committee members is that, so far, they have not seen evidence that oil price effects are broadly being spread through the system, and there's concern about the fragility of the economy. The BOE is being wary about taking steps to stop the spread of inflation that isn't occurring. However, at some point, it may be forced to deal with spreading inflation even if the economy is not on solid footing.

These are the risks that the central bank is dealing with and the sorts of conditions, perceptions, and subtleties that are the bread and butter of monetary policy. Monetary policy is not simply a matter of asking: What's growth? What's inflation? What's the unemployment rate? And here's the solution. Many judgments need to be drawn about these variables and more. It's a central bank’s job to make the best decisions that it possibly can to generate the best of economic environments so that the economy can deliver its top level of performance. The decision made by the Bank of England this week, which you can understand by looking at the 200-word essays made by MPC members after the bank’s meeting, gives you real insight into the conditions that policymakers are dealing with and the difference among monetary policy committee members about how to handle these complexities. Whether the bank needs to deal with the inflation problem now or whether it can kick the can down the road and deal with it later or hope it will not have to deal with it at all, these are the options for action and inaction.

United Kingdom

U.K. Housing Surveys and Consumer Sentiment Support the View of Weak Growth

Tian Yong Woon

This week, we assess whether Asia is really moving away from the dollar by examining its US asset holdings, reserves, gold purchases and trade settlement. We then turn to Japan’s monetary normalisation. Asia’s presence in US portfolio markets has declined since the early 2010s (chart 1). Japan's share of foreign holdings of US long-term securities has halved, and mainland China's has fallen further still. The euro area and the UK have absorbed most of that ground. Even so, Japan is still the largest foreign holder of Treasuries, and a reshuffling among creditors need not mean an exit from dollar assets. Official reserves tell a similar story (chart 2). The dollar's share is down close to 6 percentage points over eight years, to 57.1%, yet no single currency has picked up all of it. The residual group of other currencies gained most, which points to diversification rather than substitution. Gold fits that reading (chart 3), with Singapore, India, Thailand and China all adding heavily in volume terms. Reserve growth alone may explain part of the rise. Trade settlement has moved least of all (chart 4). South Korea still settles about 84% of exports and 79% of imports in dollars, and broader studies point the same way. Moving to Japan, the central bank raised its policy rate to 1.25% last week, with Governor Ueda striking a hawkish note (chart 5). The spread to Fed, ECB and Bank of England policy rates has narrowed to about 2 percentage points. The yen, meanwhile, has rebounded from a record low after coordinated intervention, while the 10-year JGB yield has touched 3% (chart 6).

**Gold, the US, and the US dollar**
Asia's footprint in US portfolio markets has thinned considerably since the early 2010s (chart 1). Japan's share of overall foreign holdings of US long-term securities has roughly halved, from a peak near 14.5% in 2012 to about 8% in July 2026. Mainland China's slide is starker, from 13.4% at the start of 2012 to roughly 3%. The euro area has absorbed most of that ground, rising from about 19% to around 26%, while the UK sits at a record 10.6%. Japan nonetheless remains the largest foreign holder of Treasuries at USD 1.1tn, while China's holdings have slipped to USD 618bn, the lowest since September 2008. A reshuffling among creditors is not always the same as an exit from dollar assets. Japan also remains Asia's largest holder on both sides of the ledger, accounting for about 8.6% of US holdings of foreign securities.

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The de-dollarisation debate has a second front in the currency composition of official reserves (chart 2). The dollar's share has fallen by close to 6 percentage points over the past eight years, to 57.1% in the first quarter of 2026. The more revealing question is where that share went. No single currency has picked up all of it. The yen gained less than 1 percentage point, the Canadian dollar and the renminbi around half a point each, while the euro barely moved. The largest beneficiary was the residual group of other currencies, up some 3.7 points. That looks like diversification rather than a search for one alternative, and the renminbi's 2.0% share underlines the point.

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The same message shows up in gold, where volumes rather than values are the cleaner measure (chart 3). In volume terms, Singapore has added more than 60% to its holdings over the past eight years. India and Thailand are up by more than half, and China by close to 30%. Japan, Indonesia and Malaysia have made smaller additions, while the Philippines has cut its stock by about a third over two major bouts. Exceptions aside, and given the seemingly concerted accumulation of gold among Asian central banks, diversification is one reading. A simpler explanation, which may hold at the same time, is that reserves have grown overall, and gold holdings have had to rise in proportion.

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**South Korea and trade settlement**
Holdings are only part of the picture. Trade settlement, dollar funding and hedging practice matter just as much, and they shift far more slowly. South Korea, one of Asia's most important trade nodes, still settles about 84% of its exports and 79% of its imports in dollars (chart 4). The export share has barely budged in a decade. The import share has drifted down from a 2022 peak near 83%, but the decline is muted and remains within its ten-year range. South Korea is only one case, though broader work, including recent IMF studies, points the same way. The dollar's continued dominance in trade settlement does not chime with the de-dollarisation narrative.

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**Japan**
Turning to Japan, the central bank (BoJ) lifted its policy rate by 25 basis points to 1.25% last week (chart 5). Two details stand out. The vote was split 7 to 2, with Asada and Sato, both appointed this year, preferring to hold at 1%. Governor Ueda also struck a hawkish note. He said the BoJ should act pre-emptively rather than be forced into rapid hikes later. He added that the price trend is close to the bank's 2% target, and that authorities must ensure inflation does not overshoot. Even so, Japan remains the outlier among major central banks, though less of one than before. The gap to the average policy rate of the Fed, the ECB and the Bank of England is about 2 percentage points. That gap stood near 5 points in early 2024. The average is rising again, with the Fed and the ECB both tightening this month.

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Turning to the yen, the currency's recent rebound has been abrupt (chart 6). On a trade-weighted basis, it weakened at the end of July to a record low, based Haver’s proprietary calculations. It has since regained about 4% to 5% and now sits closer to its end-2025 level. The trigger was rare coordinated intervention by Tokyo and Washington, with Treasury Secretary Scott Bessent backing the effort to correct what he termed a substantial undervaluation. Japanese authorities reportedly spent a record JPY 15.4tn across July and August. Yields have carried part of the load. The 10-year JGB yield touched 3% at the start of September, a level last seen in 1996, having begun the year near 2.1%. The climb is part of a global repricing driven by energy-led inflation and fiscal supply, with Takaichi's spending plans adding a domestic premium. The yen slipped again after the BoJ decision, a reminder that intervention buys time rather than a trend.

Economy in Brief: 2005

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