Key Highlights

• Beijing states it is hopeful of a compromise after Mexico plans a 50% tariff on Chinese cars.
• IEA projects record 2026 oil surplus of 3.33 million barrels/day as OPEC+ and non-OPEC output rises.
• South Korean President Lee Jae Myung delays capital gains tax, Kospi stock index sets new record high.

Chart of the Day

EUR AND OAT FLOWS SHOW RESILIENCE AHEAD OF ECB MEETING

^{Source: BNY}

EUR is heading into the ECB decision on a relatively resilient note. Although the run-up to the French government confidence vote was characterized by firm outflows, recovery has been clear so far this week, generating a comfortably positive flow average heading into the decision, where no change is expected. However, there was a very large outflow in EUR spot. This is only the third time in the past six years that spot has seen an outflow above 2.0 in magnitude, and most surprisingly, it was largely driven by cross-border flows but outside of EURUSD and EURGBP, which are traditional drivers. Consequently, although general price action was stable across all Eurozone assets, this still points to the risk of large outflows coming through, but ultimately not enough to move prices materially. Overall EUR holdings are unchanged, and we note that on a cross-border basis hedges are also stable at 20% above the rolling 12-month average. For asset allocation trends, equities are continuing to struggle but sales levels are now at smaller magnitudes and the rotation into underlying bonds is clear. Even if this is not the meeting where the ECB will deliver on additional easing, markets appear to be positioned for far looser financial conditions through the bond channel, and such pre-emptive flows are helping to limit the spread risk in OATs. Surge flows in OATs were prevalent on Tuesday as Sebastien Lecornu was appointed prime minister. This is not so much recovery flow as business as usual, given that there have been no signs of liquidation throughout the recent confidence vote process and that a similarly large inflow was seen a week ago. Given current trends, we suspect that a definitive end to the ECB’s easing cycle will be a much greater risk to OAT flows than any domestic political risk, for now.

What's Changed?

The rally in global shares continues, but with some trepidation as to the makeup of the ECB decision ahead and the complexion of the U.S. CPI. ECB President Christine Lagarde is widely expected to acknowledge economic resilience despite tariffs and geopolitics, before facing a grilling over political turmoil and budget debates. Comparing tans may feature in the debate for the post-summer policy mix, but so too may solemn remembrance of the tragic events of 9/11 in the U.S. The focus in the U.S. on political violence may also taint the mood. Economic data will still matter, with the U.S. CPI driving expectations of FOMC rate cuts after the surprisingly weak PPI report. The market is now pricing in nearly three 25bp cuts, but USD is holding steady today. The U.S. markets’ focus continues to be on AI and its implications for growth, jobs and productivity, with money flows keeping the economy resilient enough. Just how much wealth feeds through to households will be one report to watch today, as the Fed presents the Q2 household balance sheet, with a keen focus on financial conditions driving consumer sentiment. The ongoing supply of debt will also be in play today, as the U.S. 30y bond sale tests duration appetites heading into the Fed meeting. There is a logical inconsistency between the equity market’s benign growth views and the more pessimistic fixed income markets pricing in six Fed cuts in rapid succession to prevent a recession. The role of AI in central bank decision-making is nascent – just ask the BoJ or RBA – but the agentic debate for the Fed looks political and problematic for the dots ahead. For the day, investors look resilient to risks around the data, with room to put money to work; the key barometer will be the color of the ECB outlook as a predictor of the Fed and BoJ decisions to come and what that does to bonds everywhere. 

What You Need to Know

The International Energy Agency has projected a record global oil surplus for 2026, with supply expected to exceed demand by an average of 3.33 million barrels per day, 360,000 more than estimated a month earlier. The agency anticipates a surplus of about 4 million barrels/day in the first half of 2026, driven by increased OPEC+ production and rising output from non-OPEC+ producers, particularly the U.S., Brazil, Canada and Guyana. OPEC+ recently agreed to restore supplies earlier than planned, while non-OPEC+ nations are set to add 1.4 million barrels/day this year and just over 1 million in 2026. Despite slightly stronger demand growth, inventories had risen by 187 million barrels YTD by July, with China absorbing about one-third of the build-up. Brent -0.178% to 67.37, WTI -0.236% to 63.52.

China is preparing measures to address a large backlog of unpaid bills owed by local governments to the private sector, with arrears estimated at over ¥10tn, equivalent to about 7% of GDP. In the first phase, state lenders and policy banks such as China Development Bank may extend loans to local authorities to cover at least ¥1tn ($140bn) of overdue payments, with the goal of completing repayments by 2027. President Xi Jinping has warned that delayed payments risk undermining trust and crippling private businesses. While relief would support contractors, risks would shift onto state banks that are already under pressure from rising bad loans, with China’s largest lenders setting aside ¥3.51tn in provisions in H1, up nearly 6% from end-2024. CSI 300 +2.31% to 4548.04, USDCNY +0.036% to 7.1235, 10y CGB -1.2bp to 1.812%.

Mexico will impose a 50% tariff on Chinese cars, more than double the current 15-20%. This is the maximum allowed under WTO rules and represents the largest import category affected by a draft bill covering about 1,400 products. The move comes amid U.S. pressure on President Claudia Sheinbaum to curb Beijing’s influence and preserve Mexico’s privileged access to the U.S. market under the North American free trade deal, which faces review next year. Mexico is currently the world’s biggest buyer of Chinese-made cars, ahead of the UAE and Russia. While the tariffs aim to strengthen domestic production and secure U.S. trade ties, they risk higher prices and inflationary pressures at home. Beijing stated that it “firmly opposes coercion” and is “hopeful for a compromise” in response. BMV IPC -0.314% to 60489.19, USDMXN +0.195% to 18.6372, 10y M-Bono -4.8bp to 8.847%.

Japan’s central bank is preparing a strategy to gradually sell its ¥37tn ($251bn) in exchange-traded fund holdings, a key step in unwinding more than a decade of monetary stimulus. The Bank of Japan, which stopped ETF purchases last year, has not set a timeline, with political uncertainty following Prime Minister Shigeru Ishiba’s resignation complicating decisions. Deputy Governor Ryozo Himino recently signaled progress, suggesting sales will be conducted in small increments, drawing on experience from past stock disposals that took 20 years. The BoJ’s balance sheet now equals 125% of GDP, the largest among major central banks. Officials stress sales must avoid losses or market disruption, though the timing remains unresolved. Nikkei +1.22% to 44372.5, USDJPY +0.238% to 147.81, 10y JGB +1bp to 1.581%.

What We're Watching

European Central Bank is expected to keep the deposit rate unchanged at 2.0%, while releasing updated forecasts and scenario analyses.

U.S. August CPI forecast to rise to 0.3% m/m, 2.9% y/y from 0.2% m/m, 2.7% y/y, while the core ex-food and energy measure is seen unchanged at 3.1% y/y.

U.S. weekly initial jobless claims expected at 235k versus 237k the previous week, with continuing claims at 1.95 million, from 1.94 million.

U.S. August federal budget balance is expected to show a -$340bn deficit, from $-380bn in July.

U.S. Treasury sells $100bn in 4-week bills, $85bn in 8-week bills and $22bn in a 30y bond reopening.

What iFlow is Showing Us

Mood: iFlow Mood continues to normalize toward neutral levels. Equity demand is steady, while demand for core sovereign bonds is fading.

FX: Broad inflows across the iFlow universe except for notable outflows in USD, MXN, ILS, TRY and SGD. JPY, HUF, HKD and KRW posted the highest inflows.

FI: Strong demand for Eurozone government, U.S. Treasurys and U.K. gilts continued, followed by Colombia government bonds. Elsewhere, EMEA and APAC government bonds were biased toward outflows, especially in Poland, Hungary and Indonesia.

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

Quotes of the Day

“Fall seven times, stand up eight” – Japanese proverb

“I can be changed by what happens to me. But I refuse to be reduced by it.” – Maya Angelou

Economic Details

U.K. August RICS house price balance came in at -19%, from -13% in July. The feedback to the August 2025 RICS Residential Market Survey signaled a continued slowdown in sales market activity, with most parts of the U.K. now seeing decreases in new buyer inquiries. Forward-looking sentiment also points to this subdued backdrop remaining in place over the coming months, while the consensus view among respondents for the year ahead has turned largely flat. Looking at the new buyer inquiries indicator, the August net balance of -17% marks a further deterioration versus the -7% reading returned last time. This measure therefore suggests the fall in buyer demand has gathered impetus over the month, with most parts of the U.K. now seeing a negative trend emerge. FTSE 100 +0.458% to 9267.63, GBPUSD -0.097% to 1.3516, 10y gilt +0.3bp to 4.636%.

In Norway’s latest Regional Network survey, 35% of firms reported full capacity utilization, unchanged from earlier in 2025, while 25% faced labor shortages, slightly higher than in previous rounds. Companies expect production growth to remain steady from Q3 to Q4, supported by stronger household purchasing power and increased housing construction, though uncertainty around international trade barriers persists. Firms plan to raise employment through the autumn, with investment projected to exceed last year’s level and continue growing in 2026. Annual wage growth is expected to come in at 4.5% in 2025 and 4.0% in 2026, while overall profitability has improved compared with a year earlier. OSE +0.228% to 1656.95, EURNOK -0.111% to 11.6109, 10y NGB +1.8bp to 3.943%.

Sweden’s August CPI inflation rose to 1.1% y/y from 0.8% in July, while the CPIF stood at 3.2% y/y, up from 3.0%, and CPIF excluding energy eased to 2.9% from 3.2%. On a m/m basis, CPI fell 0.4%, compared with a 0.6% decrease in the same period last year. Higher prices for electricity, food and non-alcoholic beverages, restaurant visits, personal care and rents contributed to inflation, with notable increases in dairy, confectionery and ice cream. Offsetting factors included lower interest expenses on owner-occupied and tenant-owned housing, contributing -1.8 percentage points, alongside cheaper fuel, particularly 95-octane gasoline. Electricity prices rose 25% y/y, while fuel prices were down 8.8% y/y. Prices of package holidays, international flights and car rentals also fell, in line with normal seasonal patterns. OMX -0.194% to 2624.065, EURSEK +0.038% to 10.9412, 10y Swedish GB +0.9bp to 2.561%.

Sweden’s unemployment rate stood at 7.0% in August, up from 6.8% a year earlier, with 371,000 people registered as unemployed, according to Arbetsförmedlingen, the Public Employment Service. Youth unemployment remained unchanged at 8.4%, affecting 45,000 individuals aged 18-24. While more people have found jobs for nine consecutive months, this partly reflects a larger pool of unemployed compared with last year. Most people leaving unemployment have at least upper secondary education. Layoffs fell to 2,500 from 4,100 a year earlier, though officials cautioned against reading too much into one month’s data. Arbetsförmedlingen expects a slow recovery, with improvements expected from 2026 but unemployment likely to remain above pre-downturn levels at the end of that year.

Japan’s weekly portfolio update as of September 5, 2025 showed muted interest in foreign bonds (net bought ¥245bn) but increasing buying momentum for foreign stocks (¥891bn vs. ¥482bn the week prior). For Japanese assets, foreign investors sold ¥605bn of JGBs and put an end to two weeks of Japanese equity selling, recording light buying of ¥109bn. Note that seasonal patterns make further selling of Japanese equities likely in the coming weeks. In other figures, Tokyo average office vacancies dropped to 2.85% from 3.16% y/y, the lowest figure since July 2020 (2.77% y/y). Rent per tsubo is trending higher, up 0.57% m/m, the biggest monthly increase since March 2025. Nikkei +1.22% to 44372.5, USDJPY +0.238% to 147.81, 10y JGB +1bp to 1.581%.

Japan Q3 BSI survey (large, all industries) rose strongly to 4.7 from -1.9, its highest value since Q4 2024. Looking into the details, both large manufacturing and non-manufacturing rose to 3.8 (Q2: -4.8) and 5.2 (Q2: -0.5), respectively. Looking ahead, the outlook for large industry in Q4 25 and Q1 2025 is stable at 4.3 and 4.7, respectively. The rebound in the BSI survey bodes well for GDP recovery momentum. August PPI rose from 2.5% y/y to 2.7% y/y but fell -0.2% m/m. The export price index (contract currency basis) fell -0.1% vs. 0.4% m/m in July, while the import price index (contract currency basis) was unchanged on the month after a 1.1% m/m gain in July.

South Korea’s exports went up 3.8% in the first ten days of September on solid demand for semiconductors and vessels. Outbound shipments reached $19.2bn in the September 1-10 period, compared with $18.5bn a year earlier, according to data from the Korea Customs Service. The daily average volume of exports shrank by -8.7% y/y. The number of working days during this period was 8.5, compared with 7.5 days a year earlier. Imports jumped 11.1% y/y to $20.4bn during the period, resulting in a trade deficit of $1.2bn. By item, exports of semiconductors surged 28.4% y/y to $4.45bn. Chip exports accounted for 23.2% of the country’s total exports over the period, up 4.5% y/y. Vessel exports skyrocketed 55.3% to $900mn. By destination, exports to the United States fell -8.2% to $2.96bn amid tariff measures. Exports to China, South Korea’s top trading partner, edged up 0.1% y/y to $3.92bn. KOSPI +0.895% to 3344.2, USDKRW +0.296% to 1392.6, 10y KTB +0.3bp to 2.83%.

Malaysia’s Industrial Production Index rose by 4.2% y/y in July 2025 (June: 2.9%), primarily thanks to the manufacturing sector, which grew by 4.4% (June 2025: 3.6%), while the mining sector rallied to 4.3% (June 2025: -0.01%). The electricity sector grew by 1.6%, remaining in positive territory, albeit growing more slowly than in June 2025 (2.3%). Month on month, the IPI recorded negative growth of -0.3%, in contrast to the positive 7.5% recorded in the previous month. KLCI -0.556% to 1581.9, USDMYR +0.072% to 4.2233, 10y MGB -0.1bp to 3.397%.

Malaysia July manufacturing sector sales increased by 3.5% y/y (June 2025: 3.3%), totaling MYR 162.5bn in July 2025. The growth in the value of manufacturing sector sales came mainly from the food, beverages and tobacco sub-sector, which expanded by 8.9% in July 2025 (June 2025: 14.7%). It was further supported by the electrical and electronics products and the non-metallic mineral products, basic metal and fabricated metal products sub-sectors, which posted rises of 6.9% (June 2025: 4.5%) and 3.8% (June 2025: 3.0%), respectively. The sales value was up 0.8% m/m, from MYR 161.2bn in June. Sales value growth in export-oriented industries, which accounted for 71.7% of total sales, grew by 2.7% in July 2025 (June 2025: 2.4%). Domestic-oriented industries recorded steady growth of 5.6% in July 2025.

Thailand’s consumer confidence fell for the seventh consecutive month in August to its lowest level in 32 months, with the University of the Thai Chamber of Commerce index dropping to 50.1 points, from 51.7 in July. The decline reflected concerns over sluggish economic recovery, political instability and U.S. tariffs. The survey was conducted before Anutin Charnvirakul was elected prime minister, with officials suggesting confidence may rebound under the new government. Thailand’s economy is forecast to expand by 1.8-2.3% this year, below last year’s 2.5% growth. While U.S. tariffs on Thai goods have been cut to 19% from 36%, uncertainty persists, and the baht has appreciated by 8% against the dollar this year. SET +0.667% to 1286.57, USDTHB +0.111% to 31.823, 10y TGN +0.4bp to 1.225%.