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 fell 4.1% w/w (-40.2% y/y) in the week ending September 11, after declining 2.7% w/w (-19.2% y/y) in the week ending September 4, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house fell 0.8% w/w (-10.2% y/y) in the latest week, after edging down 0.2% w/w (-6.9% y/y) in the September 4 week. Applications for loan refinancing fell 8.8% w/w (-60.7% y/y) in the September 11 week following a decline of 6.2% w/w (-32.1% y/y) in the September 4 week.

The effective interest rate on a 30-year fixed-rate loan rose 13bps to 7.18% in the week ending September 11 from 7.05% in the week ending September 4, reaching its highest level since late January 2025. The rate on 15-year fixed-rate mortgages rose 15bps to 6.55% in the September 11 week from 6.40% in the September 4 week. The 30-year Jumbo rate rose 27bps to 7.20% in the latest week from 6.93% in the September 4 week. The rate on a 5-year ARM soared 46bps to 6.59% in the September 11 week from 6.13% in the September 4 week.

The share of applications for refinancing an existing loan fell to 39.4% of total applications in the week of September 11 from 40.9% in the week ending September 4. The adjustable-rate mortgage (ARM) share of activity fell to 8.4% in the latest week from 8.5% in the September 4 week.

The average size of a mortgage fell 0.5% w/w (-16.3% y/y) to $378,400 in the week ending September 11, after rising 2.1% w/w (-5.2% y/y) to $380,200 in the week ending September 4. The average size of a purchase loan declined 0.7% w/w to $442,500 in the September 11 week after rising 1.5% w/w to $445,600 in the September 4 week. The average size of a loan to refinance a mortgage fell 2.1% w/w to $279,800 in the week ending September 11 after rising 2.1% w/w to $285,800 in the September 4 week.

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

- Applications for loans to purchase a house and applications for loan refinancing both declined in the latest week.
- Interest rate on 30-year fixed-rate loans rose 13bp to 7.18%.
- Average loan size fell moderately in the September 11 week.

U.S. Mortgage Applications Declined in the September 11 Week

Winnie Tapasanun

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The Empire State Manufacturing Index of General Business Conditions fell sharply to a lower-than-expected 7.6 in September following a 5.0-point increase to 20.6 in August, according to the Empire State Manufacturing Survey released by the Federal Reserve Bank of New York. A reading of 14.1 for September had been expected in the Action Economics Forecast Survey. The positive September figure indicated that business activity in New York State expanded for the sixth straight month but at the slowest pace since June and well below August’s level (the highest since December 2021). Nevertheless, it was a sharp improvement from -7.0 in September 2025 and a low of -29.7 in January 2024. The percentage of respondents reporting an increase in general business conditions was 33.9% in September, down from 43.8% in August; the percentage reporting a decrease was 26.3%, up from August’s 23.1%. The latest survey was conducted between September 2 and September 10.

The headline index reflects the answer to a single question concerning the state of economic activity and is not calculated from the components. Haver Analytics calculates a composite index from the five major components, which is comparable to the ISM manufacturing index. This calculated index eased to 53.7 in September following a 2.1-point decline to 55.4 in August, representing the ninth consecutive expansion but at the slowest pace in three months; it was up from 46.1 in September 2025 and well above a low of 43.0 in January 2024. The index is the average of five diffusion indexes: new orders, shipments, employment, supplier deliveries and inventories, with equal weights (20% each).

In the latest survey, the new orders index fell to 2.0 in September after a 4.9-point decrease to 17.3 in August, marking the weakest of nine successive months of expansion; it was a sharp improvement from a low of -30.7 in January 2024 but a drop from a high of 19.6 in April 2023. The shipments index plunged to -3.2 in September following a 12.7-point fall to 11.7 in August, representing the first negative shipments reading since March; it was well above a low of -21.7 in April 2024 but below a high of 21.0 in June 2023. The unfilled orders index fell to 5.9 in September after a 10.5-point jump to 15.5 in August, indicating unfilled orders expanded for the eighth straight month but at a slower pace; the index reached a low of -24.2 in January 2024. The inventories index rebounded to 8.9 in September following a 9.2-point slide to -5.2 in August, signaling inventory growth at the strongest rate since May. Meanwhile, the delivery times index slipped to 18.8 in September from 20.6 in August (the highest reading since April 2022), with 25.7% of respondents reporting longer delivery times and 6.9% reporting shorter times, indicating that delivery times continued to lengthen.

On the labor front, the number of employees index rose to 10.6 in September after a 2.1-point decline to 9.3 in August, indicating employment expanded for the eighth straight month. The index remained well above a low of -9.3 in December 2023 but below a peak of 24.9 in February 2022. In September, 19.0% of respondents reported an increase in employment while 8.4% reported a decline. The average workweek index jumped to 17.0 in September from 6.9 in August, remaining positive for the eighth month running and at the strongest level since November 2021.

Inflation pressures remained elevated in September. The prices paid index advanced to 63.1 in September, the highest level since July 2022, after a 6.3-point rise to 58.6 in August. The index was above a low of 25.9 in December 2024 and a low of 19.9 in July 2023, albeit remaining well below a peak of 84.9 in April 2022. In September, 63.7% of respondents reported higher prices paid while only 0.6% reported lower prices paid. The prices received index increased to 28.1 in September, a three-month high, from 22.7 in August. The index was above a low of 7.5 in December 2024 and a low of 7.7 in July 2023 but far below a high of 51.9 in March 2022. In September, 30.6% of respondents reported higher prices received while 2.6% reported lower prices received.

Firms remained optimistic about the future business outlook in the latest survey. The index for future business conditions eased to 29.0 in September, the 17th straight month of positive readings, after a 4.2-point gain to 32.1 in August, with 50.5% of respondents expecting business conditions to improve over the next six months. Future new orders pulled back to 25.3 in September, the lowest level since April, from 37.1 in August; future shipments slid to 25.5, a five-month low, from 33.7. Growth in future employment decelerated to 20.0 in September from 28.2 in August (the strongest reading since March 2022). Capital spending plans remained positive for the 11th consecutive month in September, with the future capital expenditures index easing to 14.9, a three-month low, from August’s 16.5. Expected prices paid climbed to 67.3 in September, the highest level since June 2022, from 57.7 in August, while expected prices received declined to 42.3 from 48.7.

The indexes in this report are diffusion indexes and measure the percentage of respondents indicating an increase minus the percentage indicating a decrease with zero separating expansion from contraction.

The New York Fed survey data are contained in Haver’s **SURVEYS** database. The expectations series is in Haver’s **AS1REPNA** database.

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- General Business Conditions Index down 13.0 pts. to 7.6 in Sept.; sixth straight expansion.
- New orders (2.0), down 15.3 pts.; weakest level since Dec. ’25, still indicating expansion.
- Shipments (-3.2), down 14.9 pts.; first negative reading since March.
- Unfilled orders (5.9), down 9.6 pts. but staying positive; inventories (8.9), highest since May.
- Employment (10.6), up 1.3 pts.; eighth consecutive expansion.
- Prices paid (63.1), highest since July '22; prices received (28.1), a three-month high.
- Firms still optimistic: Future Business Conditions Index down to a still-expansionary 29.0; future prices paid rising to 67.3, highest since June ’22.

U.S. Empire State Manufacturing Index Cools Sharply in September

Robert Brusca

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The ZEW financial experts in September see broadly improving **macroeconomic conditions** in the euro area, Germany, the United States, and China. There are step-ups in each of these areas, mostly by modest increases of four to seven points month-to-month. However, Germany shows a month-to-month increase of 14 points, the largest gain of the group. The percentile standings of the readings show an above-median (which means an above 50th percentile reading) for the euro area at a 59.8 percentile and for China at a 77.3 percentile. Both Germany and the U.S. lag their medians, with Germany at a 38.9 percentile standing and the U.S. at a 44.5 percentile standing.

**Economic expectations** are little changed and mixed among the three countries: Germany, the U.S., and China. The U.S. sees a slight setback as its monthly reading falls by 3.2 points; German expectations edge up by 0.5; China’s reading falls by 4.1 points. Only the reading for Germany stands above its 50th percentile, at the 59th percentile standing.

**Inflation expectations** are probably the big story this month, with big changes in all the reporting units of over 20 points on the month and all of them jumping up well over their median estimates, with rankings ranging from a 52.3 percentile standing in the U.S. to an 81.8 percentile standing in China. The outlook for inflation has suddenly worsened largely on events in the Middle East, rising oil prices, and increased pessimism about prospects for peace in the Middle East anytime soon.

Because of this **short-term interest rate expectations** are also higher, rising by 39 points in the U.S., 19 points in the euro area, and over 13 points in China month-to-month. All the readings for short-term rate expectations are above their medians, well above their respective 50th percentiles, with standings ranging from a low of the 71st percentile for the U.S. to the mid-80th percentile for both the euro area and China.

There are smaller increases, although increases in each of the areas, for **long-term interest rate expectations**, with the largest increases for the U.S. at 11.5 points on the month, whereas Germany and China log increases of about 3.8 to 3.9 points. Percentile standings show that long-term rate expectations are only above the 50th percentile standing for China, whereas for Germany they are at the 37th percentile. For the U.S., they are at the 44th percentile. Though the sharp increase in inflation expectations seems to have caught short-term interest rates off guard, longer-term interest rates have followed suit with only relatively small adjustments, not jumping to draconian levels, at least not yet. This would suggest that, with the rise in short-term expectations, financial experts think that central banks are still in control of inflation developments. That’s good news.

Not surprisingly, against this background **stock market expectations** deteriorated in each region. The smallest decline was in Germany, a decline of 4.4 points, while the largest was in China, a decline of 11.8 points. Germany is the only area where the stock assessments are below their 50th percentile. The euro area just makes the 50th percentile mark at 50.5. The U.S. comes in at a 58.3 percentile, while China has a 62.1 percentile standing assessment for the month. Generally speaking, the acceleration of inflation expectations has created some setback on stocks but hasn't had a draconian impact there either.

**The outlook** is that the economic situation has improved slightly in the month and economic expectations have a mixed performance and are generally slightly subpar. Inflation expectations jump sharply and have had a big impact on short-term rates, a more moderate impact on long-term rates, and a modest impact on stock values. Because of the sharp one-month rise in inflation expectations, we're going to want to watch these developments very closely.

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ZEW Current Situation Improves; Inflation Expectations Jump!

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Japan’s industrial production rose in July largely on a jump in gas & electric utilities output. But manufacturing IP made a small move backward, with output falling by 0.1% month-to-month. Consumer goods output did turn sharply lower in July, dropping by 1.3% month-to-month, but intermediate goods output advanced by 0.2% as capital goods output continued to gear up, rising 3.2% month-to-month after rising 5.5% month-to-month in June. These gains in capital goods output followed a 3.1% drop in May.

Overall industrial output sequential gains show an accelerating output trend. The 12-month gain is 3.6%, the six-month annualized gain is nearly identical at 3.5%, and the three-month annualized gain is at a hefty 9.7%.

Sequential trends in manufacturing show more fluctuations and less of an arrow-straight trend. For manufacturing, 12-month growth is 4%, while three-month annualized growth is 8%. There is a lull in between, with six-month growth showing a 0.2% annual rate decline. Manufacturing sectors generally show a similar pattern, with solid 12-month growth, weaker growth over six months, and a pick-up over three months, with the three-month pace rebounding and turning sharply stronger than its 12-month pace.  We see that for intermediate goods and capital goods, with only consumer goods showing steady output deterioration from 12 months to six months to three months. Yet, as the graphic shows, retail sales are holding up and tracking with industrial output gains overall.

On a quarter-to-date basis, very early in Q3, output is rising at a 12.3% annualized rate over its Q2 level. Manufacturing output is up at a 7.6% pace. Consumer goods output is a drag, with output falling at a 5.1% annual rate, offset by a 5.4% gain in intermediate goods and capital goods output exploding at a 40.1% annual gain. Utilities & mining output also are rising clearly and strongly in the quarter.

However, Japan’s economy is still in recovery mode. As the table clearly shows, all IP measures are lower than they were one year ago. The economy is still digging out after retrenchment. Moreover, output is still broadly weaker than it was in January 2020 before COVID struck. That’s a long time for output to not have risen, 6½ years. On that comparison, only investment goods output and electric & gas utilities output are higher in July of this year than in January 2020, and in both cases it is by less than 2%.

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Japan is having an output revival. It looks real. The weakening of the yen may have given it a tailwind. Now the yen is stabilizing and gaining back some of that loss, but I do not look for yen appreciation to run far or fast.

For now, Japan manufacturing is reviving, and this is clear in the IP report as well as in the PMI surveys. The economy watchers don’t quite seem to see it yet. But motor vehicle production is back in gear, and the leading economic index is showing solid upward momentum. Japan, much like the U.S., is showing better industrial revival statistics than consumer confidence readings, which continue to lag. Income growth in Japan shows solid performance, and asset valuations are high, but consumers are not eager to spend, or so they tell surveys. Consumers also give their overall livelihood assessment a poor score. Still, consumers manage to spend enough to keep retail sales advancing after some significant retrenchment in 2025. Japan’s economy, like the U.S., seems to still be expanding and not under any real threat despite its irregularities.

Japan

Japan’s IP Shows Developing, Solid Uptrend

Tian Yong Woon

In this week's Letter, we examine the divergences running through Asia's inflation, monetary policy and currency performance. Headline CPI inflation has risen across much of the region, driven in large part by the closure of the Strait of Hormuz. Underlying dynamics nonetheless remain disparate, with China recording the region's lowest inflation rates and India facing renewed food and oil pressures (chart 1). China warrants closer attention still, since its producer price inflation now runs far ahead of consumer inflation (chart 2). Weak passthrough to domestic prices, soft demand and Beijing's campaign against destructive price competition all help explain that gap. Disparate inflation outcomes, in turn, are feeding divergent monetary policy stances, though that divergence has narrowed somewhat (chart 3). India has paused its rate cuts, while the Bank of Japan continues its gradual normalisation. Japan also sits at the centre of a protracted rise in yields, shared with its major-economy peers. A decomposition suggests real yields, rather than breakevens, have been the greater driver, amid concerns about fiscal policy and capex (chart 4). Divergence runs through currency performance too, with relative standings shifting repeatedly on a trade-weighted basis (chart 5). The Indian rupee has been the worst performer year-to-date, only recently ceding that position to the Philippine peso. At the other end of the table, the Chinese yuan has been dethroned by a resurgent South Korean won. Strong AI-driven export inflows had long been offset there by persistent portfolio outflows.

**Inflation divergence**
Headline CPI inflation has risen across much of Asia this year, on many measures. Surging energy prices, driven by the continued closure of the Strait of Hormuz, account for a large part of that rise. Underlying inflation dynamics within the region, however, remain quite disparate from one economy to the next. External forces such as oil prices and supply shocks are only part of the story. Domestic conditions matter too, notably the strength of domestic demand and each economy's dependence on imported goods, which is another way of describing its degree of self-sufficiency. China illustrates the point, with inflation still short of breaking conclusively above the low to no inflation region. That owes arguably in part to domestic demand conditions, which remain comparatively weak. It has once again logged the region's lowest inflation rates in recent months, reclaiming that spot from Thailand (chart 1). India sits at the other end, having ceded the top spot for headline CPI inflation to the likes of Vietnam and the Philippines since early 2025. Its recent resurgence in consumer inflation nonetheless points to a dependence on imported oil. Fresh risks have also emerged more recently from food and agricultural shocks, tied to ongoing and possibly worsening El Niño effects.

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China merits a closer look, with producer price inflation now running far above consumer price inflation (chart 2). Producer price inflation has staged a resurgence after a protracted stretch of deflation. Consumer inflation, however, improved only briefly before recent readings slipped back towards the low to no inflation region. Several factors lie behind the producer price pickup, starting with low base effects from prior periods. Rising energy costs have added to it, as has surging demand in certain sectors, such as tech and AI-related goods. Some passthrough to export prices is evident, but passthrough to domestic prices has been weak. That weakness owes in part to soft domestic demand and may be eating into margins, leaving producer price inflation running well ahead of consumer inflation. This ties into the two-speed dynamic in China's economy, where externally facing sectors continue to outgrow more domestically oriented ones. Looking further out, the authorities' clampdown on excessive producer price wars, termed "involution", may push producer prices higher still.

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**Monetary policy divergence**
Monetary policy stances remain divergent across Asian economies, although that divergence has narrowed somewhat. A shared impetus to hold or tighten on inflation risks accounts for much of that narrowing. Take India, which until recently had the highest main policy rate among major Asian economies (chart 3). It had nonetheless been easing for a time, until protracted currency weakness and resurgent inflation arguably led the central bank to pause its rate cuts. The Bank of Japan, by contrast, has long been pursuing gradual policy normalisation, given its delayed exit from the prior era of easy monetary policy. Prior yen weakness and still-wide interest rate differentials with major peers have also lent credence to its tightening bias.

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Japan has drawn attention in recent weeks for its protracted surge in yields, alongside its major economy peers. Chart 4 decomposes that increase into real and breakeven inflation components, arguably pointing to the former as the greater driver. Inflationary risks, granted, remain live and potentially the more potent of the two. Japanese real yields have nonetheless surged considerably in their own right. That would not be the case were the recent move in nominal yields driven by non-real aspects alone. Instead, investor concerns or expectations of higher real yields are possibly at work. An expected large upcoming fiscal bill and intense capex spending sit among the likely drivers. Eyes now turn to the Bank of Japan's meeting this week for further cues, with a 25 bps rate hike expected.

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**Currency divergence**
We turn now to divergences in Asia's currency performance and the recent drivers behind them. On a trade-weighted basis, relative standings have shifted repeatedly through the course of this year (chart 5). At the bottom of the table sits the Indian rupee, the worst-performing Asian currency year-to-date. Capital outflows have weighed on it, as has a hefty oil bill reflecting India's heavy import dependence. Only recently has the Philippine peso taken over from it as the prime laggard. The top of the table has proved similarly unsettled. The Chinese yuan held the leading spot for much of the year so far, before being dethroned by the South Korean won. That marks a spectacular turnaround for the won, from briefly being this year's worst performer to its best. It is a reversal worth dwelling on, and we take it up in the next segment.

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That reversal is worth unpacking, since the won had been on the back foot for some time beforehand. Exports growth through the year has been high and accelerating, driven mainly by AI-related goods. Those persistent and strong current account inflows nonetheless did little to prop up the currency. Working against them were portfolio outflows from South Korea, which ran persistently in the opposite direction. It was only recently, against that backdrop, that the won staged its turnaround. Behind it sits South Korea's building domestic growth story, alongside back-to-back rate hikes by the Bank of Korea. Whether this currency recovery still has legs is another question.

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Asia

Economic Letter from Asia: Same Shocks, Different Paths

Economy in Brief: September 2020

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