Key Highlights

• Polish President Karol Nawrocki says the country discussed invoking NATO Article IV in response to Russian “drone attack.”
• Sebastien Lecornu will become prime minister of France ahead of nationwide mass protests.
• China’s finance minister pledges to “make full use of proactive fiscal policy” to support the economy as CPI drops to a six-month low.

Chart of the Day

POLISH EQUITIES REMAIN VERY STRONGLY HELD RELATIVE TO PEERS

^{Source: BNY}

Polish equities underperformed overnight due to an escalation in tensions with Russia, but another factor behind the selling is that the market itself has been one of the best performers this year, which tends to amplify selloffs. In iFlow, we have stressed for several months that the anchoring factor for PLN performance remains asset flows. Although some liquidation is starting to come through, we can see that overall flow averages in Polish equities and sovereign bonds remain comfortably positive, especially in August. There are some clear signs of month-end rebalancing, but the starting point is very high, especially for equities, so the risk of further mean reversion remains quite elevated. There was a sharp gain in Polish equity holdings in early August, which pushed the country’s aggregate exposure to 65% above the rolling 12-month average, before normalizing toward September. Matching against sectoral flow, this seems to be transaction-related, amid a similar inflow into EMEA consumer staples. Even disregarding the jump, Polish equity holdings are very high, at close to 40% above the rolling one-year average on a monthly smoothed basis. This puts it closer to some of the well-held industries and industry groups in DM EMEA, especially aerospace and defense. In a geopolitical context this should not come as a major surprise, given that Poland will benefit from European defense spending for many years to come. 

What's Changed?

The tech boom led risk-on sentiment overnight, as after hours Oracle forecast AI demand extending. Oracle shares jumped 30%, with revenue linked to cloud infrastructure up 55%. The traffic light holding back the bull run for equities starts with U.S. PPI and will likely finish with CPI tomorrow. Investors are continuing to obey the red-light/green-light rules, which require some caution in light of economic and political events. There are also the ongoing geopolitical concerns, but they didn’t really move markets yesterday and so can’t be seen curtailing equity gains today. The most notable part of the equity story today is in the ongoing modest volumes – if this is a “fear of missing out” trade, then there isn’t a crowd – with September so far below 50-day and 200-day moving averages. The role of bonds, which dominated last week, has been muted as well. The Japan 5y JGB sale saw the best demand since June, while, paradoxically, China’s CPI dropped to a 6-month low at the same time that its bond yields climbed to new highs. There is clearly a limit to the extent to which fiscal and monetary policy pushes can fix all ills for consumers, and this is the key risk for equities coasting on the “nothing really matters” momentum of ample liquidity and tariff normalization. While President Trump awaits the Supreme Court ruling on his trade policy, the lower courts have blocked his firing of Fed Governor Lisa Cook. This makes that upcoming meeting on September 16-17 more dramatic, with the expectation that Trump nominee Stephen Miran will secure Senate approval today. There is also the U.S. bond supply today, which most hope will go well; however, yields matter, and at below 4.10% there is less risk premium available. Throw in today’s U.S. economic data, and you have the makings of modest volatility, as investors rotate away from defense and prepare for more aggressive risk-taking after tomorrow. The factors holding back irrational exuberance are the same ones that are keeping the FOMC easing in 25bp increments. The caution on growth and inflation ahead are clouding the horizon, inhibiting a faster pace of investor risk-taking and monetary policy easing.

What You Need to Know

Poland shot down Russian drones that entered its airspace during an attack on Ukraine, marking what Warsaw called an “unprecedented violation” and the first such incident since Russia’s full-scale invasion in 2022. Prime Minister Donald Tusk said the joint operation with NATO allies neutralized the threat without casualties, describing it as a response to a “large-scale provocation.” Ukraine reported that at least eight Russian drones crossed into Poland amid a wider assault involving 415 drones and 40 missiles. Airports in Warsaw, Rzeszów and elsewhere were temporarily closed as air defenses were raised to their highest level of readiness. The incident comes days before Russia’s Zapad military exercises with Belarus; U.S.-led peace efforts remain stalled. WIG -1.282% to 105274.6, EURPLN +0.29% to 4.2598, 10y PGB +2.7bp to 5.466%.

France’s President Emmanuel Macron has appointed defense minister Sébastien Lecornu as prime minister, after François Bayrou was ousted in a confidence vote over his €44bn fiscal package of tax hikes and spending cuts. Lecornu (39), a close Macron ally and the only minister to serve continuously since 2017, is tasked with consulting political forces to secure a 2026 budget deal. His appointment comes amid heightened instability, with two premiers ousted in less than a year. Opposition parties, including Marine Le Pen’s Rassemblement National and the Socialists, have signaled resistance unless concessions are made. The move coincides with planned nationwide strikes and protests over spending cuts, with 80,000 police deployed. CAC40 +0.827% to 7813.44, EURUSD -0.111% to 1.1695, 10y OAT +0.2bp to 3.472%.

China August CPI dropped into negative territory at -0.4% y/y, but higher core inflation of 0.9% y/y is encouraging. Both headline and core CPI were flat 0% m/m, while YTD y/y figures show the headline rate at -0.1% and core rate at 0.5% y/y. The drop in the headline rate is linked to lower pork prices (-0.5% m/m, -16.1% y/y), fresh vegetable prices (8.5% m/m, -15.2% y/y) and traffic and communication components (-0.3% m/m, -2.4% y/y). Overall, food was down -4.3% y/y and non-food up 0.5% y/y, with consumables down -1% y/y and services +0.6% y/y. The rise in core inflation is a tentative sign of recovery in domestic consumption. Elsewhere, China’s August PPI deflation narrowed from -3.6% y/y to -2.9% y/y. The breakdown showed PPI for mining and quarrying excavation, raw material and processing at -11.5% y/y, -4.1% y/y and -2.2% y/y, respectively. PPI for consumer goods was down -1.7% y/y, with the food, daily use articles and durable consumer goods measures coming at -1.7% y/y, 0.4% y/y and -3.7% y/y, respectively. CSI 300 +0.205% to 4445.37, USDCNY -0.022% to 7.1223, 10y CGB +2.5bp to 1.826%.

What We're Watching

U.S. August PPI final demand index is expected to be unchanged at 3.3% y/y but to slow to 0.3% m/m from 0.9% previously; PPI ex-food and energy is seen easing from 3.7% y/y to 3.5% y/y.

U.S. July final wholesale inventories and sales forecast at 0.2% m/m, 0.1% m/m from 0.1% m/m, 0.3% m/m, respectively.

U.S. Treasury sells $65bn in 17-week bills and $39bn in a 10y notes reopening.

What iFlow is Showing Us

Mood: iFlow Mood has further normalized, with a faster pace of reduction in demand for core sovereign bonds and increasing appetite for the equities complex.

FX: ILS and SGD posted the most outflows, while HUF, HKD, ZAR and KRW saw the most inflows. Flows in G10 were mixed and light, with USD and EUR outflows against AUD, GBP and JPY inflows. Elsewhere, FX were better bid in the EMEA, LatAm and APAC regions.

FI: Strong demand in G10 was led by Eurozone government bonds, U.K. gilts and U.S. Treasurys. Elsewhere, iFlow showed broad buying in LatAm, against selling in EMEA led by Poland. For APAC, notable flows were buying in Chinese government bonds versus selling in Singapore government bonds.

Equities: The asset allocation shift from developed markets to emerging markets continues. Brazil, Peru and South Africa posted the most inflows, while the Eurozone, Colombia and Switzerland saw the most selling. 

Quotes of the Day

“Caution is the eldest child of wisdom.” – Victor Hugo

“Distrust and caution are the parents of security.” – Benjamin Franklin

Economic Details

Italy’s industrial production rose 0.4% m/m in July 2025 in seasonally adjusted terms, while the May-July average was up 0.2% q/q. Energy fell 7.8% m/m, but consumer goods rose by 2.1%, capital goods by 1.6% and intermediate goods by 0.7%. Calendar-adjusted output increased 0.9% y/y, with gains in consumer goods (+3.0%), capital goods (+2.8%) and intermediate goods (+0.3%), while energy declined 5.2%. The strongest annual growth was in coke and refined petroleum products (+10.8%), computers and electronics (+6.4%) and food, beverages and tobacco (+5.7%). The largest falls were in electricity, gas, steam and air supply (-9.4%), chemicals (-2.7%) and rubber and plastics (-1.6%). FTSEMIB +0.331% to 42147.39, EURUSD -0.111% to 1.1695, 10y BTP -1bp to 3.47%.

Spain’s July industrial production index rose 2.5% y/y in calendar and seasonally adjusted terms, following a 2.3% increase in the original series. On a monthly basis, output fell 0.5% when adjusted for calendar and seasonal effects. By sector, energy posted the strongest growth at 5.8%, followed by intermediate goods at 2.0% and consumer goods at 1.9%. In contrast, capital goods production shrank by 1.6%. In the unadjusted series, energy rose by 5.6%, intermediate goods by 3.0% and consumer goods by 2.2%, while capital goods fell 1.1%. IBEX 35 +0.852% to 15158, EURUSD -0.111% to 1.1695, 10y Bono -1.3bp to 3.237%.

Sweden’s July GDP fell 0.2% m/m in seasonally adjusted terms, while calendar-adjusted GDP rose 2.0% y/y, according to the preliminary GDP indicator. The decline was partly attributed to weaker production in goods industries and lower net goods exports. Before reconciliation, use-side data suggested a 1.1% y/y increase and production-side data indicated a 2.9% y/y rise, which were balanced to produce the final 2.0% figure. July had the same number of working days as the prior year. Household consumption rose 0.2% m/m in July in seasonally adjusted terms and 2.4% y/y in constant prices and working-day-adjusted figures. Over the latest three-month period, consumption increased 2.1% y/y. By sector, retail trade, mainly food and beverages, rose 2.3% m/m and recreation and culture gained 0.4%, while transport including motor vehicle sales and services fell 2.6% and housing, electricity, gas and heating declined by 0.7%. Recreation and culture recorded the largest y/y gain at 8.5%, followed by transport and motor vehicles at 2.8% and retail trade, mostly food and beverages, at 1.5%, while housing, electricity, gas and heating was flat vs. July 2024. OMX +0.362% to 2642.462, EURSEK -0.234% to 10.9586, 10y Swedish GB -0.1bp to 2.548%.

Sweden’s private sector production fell 1.7% m/m in July 2025 but rose 3.8% y/y in calendar-adjusted terms. Industrial production declined 4.7% m/m but was 3.8% higher y/y, with motor vehicles posting the sharpest m/m fall of 13.6% and an 18.3% y/y drop, while other transport equipment rose 1.1% m/m and 25.2% y/y. Services output was broadly flat, up 0.2% m/m and 4.7% y/y, led by education, health and social work activities (+1.9% m/m) and information and communication (+8.8% y/y). Construction fell 4.0% m/m and 4.5% y/y. Industrial orders decreased by 2.4% m/m and 1.4% y/y, with domestic orders down 5.5% m/m and 1.3% y/y, while exports fell 1.6% m/m and 1.4% y/y. Cumulatively, January-July orders were up 5.0% y/y.

Norway’s August CPI rose 3.5% y/y, easing from July’s 4.0%, while prices fell 0.6% m/m. The CPI-ATE, which excludes energy and taxes, increased 3.1% y/y but declined by 0.7% m/m. Food and non-alcoholic beverages posted the sharpest rise at 5.4% y/y, despite a 1.8% m/m decrease, while housing, water, electricity, gas and fuels rose 6.3% y/y and 1.2% m/m. Alcohol and tobacco increased by 4.1% y/y, clothing and footwear fell 2.5% y/y and furnishings dropped 0.9% y/y. Services prices grew 3.7% y/y but slipped 0.6% m/m, with labor-dominated services nearly flat at 0.9% y/y. Transport rose by 2.7% y/y but decreased by 1.5% m/m, while restaurants and hotels advanced 3.8% y/y. OSE +0.063% to 1642.12, EURNOK -0.443% to 11.6358, 10y NGB +1.8bp to 3.91%.

South Korea’s unemployment rate rose to 2.5% in August, from a low of 2.5% in July. The economically active population grew by 0.7% y/y, while the employment/population ratio eased slightly to 63.3%. Despite the overall growth, the manufacturing and construction sectors remained sluggish. The manufacturing sector, often considered the backbone of the South Korean economy, shed 61k jobs vs. a year earlier in August, extending its downturn to a 14th consecutive month. The construction industry also continued to struggle, losing 132k jobs and continuing its decline, now in its 16th straight month. Last month’s overall job growth was largely driven by hiring among older adults. KOSPI +1.671% to 3314.53, USDKRW +0.036% to 1388.95, 10y KTB -3bp to 2.827%.

South Korean government to launch 15 public-private taskforces to drive “super-innovation economy.” The government will establish 15 taskforces made up of public and private sector representatives to lead individual projects aimed at creating new growth engines. The government views the next five years as the last golden time to achieve significant breakthroughs to achieve sustainable growth, aiming to produce tangible results by 2030. The finance ministry emphasized the urgency of structural transformation, citing challenges such as population decline, reduced investment and stagnant productivity, which are contributing to a projected decline in the country’s potential growth rate. With a goal of raising the country’s potential growth rate to 3%, the government will push forward innovation projects in sectors such as energy, new materials and K-food.

South Korea August bank lending to households rose ₩4.1tn to ₩1,168.3tn. Household loans extended by South Korean banks grew at a faster pace in August than in the previous month, driven by a recent increase in housing transactions, despite government regulations. Home-backed loans rose by ₩3.9tn to ₩930.3tn in August, compared with a ₩3.4tn increase logged in July. Unsecured and other types of household loans grew by ₩300bn to ₩237.1tn, rebounding from a ₩600bn decrease the previous month.

New Zealand July provisional estimates of annual net migration showed a y/y increase of 13,100 (±1,400) for the 12 months to July 2025 and an absolute net gain of 63,600 (±200). Within these figures, migrant arrivals were 140,500 (±1,000), down 20%, and migrant departures were 127,400 (±1,100), up 14%. Elsewhere, overseas visitor arrivals to New Zealand in July 2025 were 236,600, an increase of 14,700 from July 2024. The biggest changes were in arrivals from Australia (up 17,700), China (down 3,700) and the U.S. (down 1,200). The 126,700 overseas visitor arrivals from Australia were a July record and coincided with the Australian school holiday period. The total number of overseas visitor arrivals in July 2025 was 93% of the 255,600 recorded in July 2019 (i.e., before the COVID-19 pandemic). NZX 50 +0.17% to 13276.24, NZDUSD +0.203% to 0.5939, 10y NZGB +2.8bp to 4.337%.

The Philippines July unemployment rate spiked from 3.7% to 5.3% y/y, the highest since August 2022. The labor participation rate dropped to 60.7% from 65.7%, its lowest level since July 2023 (60.1%). The employment rate was 94.7%, while underemployment stood at 14.8%. In July 2025, the services sector accounted for the largest share of total employment at 62.8%, followed by industry with 18.7% and agriculture with 18.5%. The three subsectors with the highest employment were wholesale and retail trade, repair of motor vehicles and motorcycles (19.2%), agriculture and forestry (16.0%) and construction (10.0%). The five sub-sectors posting the highest annual decreases in the number of employed people were agriculture and forestry (-1.38mn), wholesale and retail trade, repair of motor vehicles and motorcycles (-897k), fishing and aquaculture (-173k), construction (-147k) and accommodation and food service activities (-69k). PSEi -0.043% to 6120.09, USDPHP +0.255% to 57.13, 10y PHGB +2.3bp to 5.902%.

Indonesia’s August consumer confidence stood at 117.2, down slightly from 118.1 in July but remaining in optimistic territory. The current economic condition index fell to 105.1 from 106.6, driven by weaker perceptions of job availability at 93.2, while the current income and durable goods purchasing indexes remained optimistic at 116.9 and 105.1, respectively. The consumer expectation index stayed high at 129.2 vs. 129.6 in July, supported by income expectations at 136.7 points and business activity at 128.2 points, though job expectations eased to 122.8. Average propensity to consume declined to 74.8% from 75.4%, the debt-to-income ratio rose to 11.4% from 10.9% and the savings ratio was stable at 13.7%. By region, confidence fell in most cities, with sharp drops in Semarang, Banjarmasin and Pontianak, but rose in Bandar Lampung, Bandung and Pangkal Pinang. JCI +0.762% to 7686.708, USDIDR -0.085% to 16461, 10y IDGB -1.6bp to 6.423%.