Breakfast Bites: Unalarming inflation drives markets higher
Global yields pull back; UK GDP signals stagflation; Container shipping update
Rise and shine everyone
It’s a relatively quiet morning, with US equities pulling back after hitting new highs yesterday. The Dow, S&P, and Nasdaq all closed at record levels as global 10-year yields continued to move lower, most notably in the US where the 10-year fell below 4% for the first time since the tariff shock in early April.
That move came despite August CPI printing mostly in line but showing some stickiness, and a sharp jump in weekly jobless claims to a four-year high. The Fed has been clear in recent weeks that it is more focused on the weakening labor market than on any persistent inflation risk.
In Asia, the momentum carried through. The Nikkei 225 opened at fresh record highs, while the Kospi led the region with a 1.9% jump. SK Hynix surged 7% after announcing it is preparing for mass production of the world’s first HMB4 chip. The Hang Seng gained 1.6%, supported by Alibaba up 8% and Baidu up 4% as investors backed their chip ambitions to rival Nvidia’s H20. Alibaba’s $3.2 billion bond issue also gave a boost as it looks to fund AI and cloud capex.
Last night brought a surprise from Beijing, with reports that the government will step in to help local authorities manage more than $1 trillion in bills. For context, that figure dwarfs the roughly $610 billion (CNY 4.4 trillion) in local government special bond quotas for all of 2025 and equals about 5.4% of China’s GDP. The move will provide cash flow relief for local debt suppliers in liquidity-strapped regions, though it amounts to balance sheet management rather than new fiscal stimulus.
On the trade front, President Trump is said to be withdrawing the nomination of China hawk Landon Heid for a key Commerce Department post. Analysts see this as a possible sign of a softer US stance heading into ongoing trade talks with Beijing. Treasury Secretary Bessent will accompany Trump on his state visit to the UK in the coming days, with a stop in Spain to meet Chinese counterparts beforehand. Meanwhile, China pushed back after Mexico raised tariffs on goods from Asia, including China, warning the decision could affect future enterprise investment in Mexico.
Japan moved in step with Western allies today, imposing additional sanctions on Russia just ahead of Europe’s expected announcement of further measures. Tokyo will lower the price cap on Russian crude from $60 a barrel to $47.60, effective immediately, while also freezing assets and tightening export controls. The Trade Ministry added restrictions on several foreign entities tied to Russia’s war effort, including six in China, two in Turkey, and one in the UAE. The moves come as the US continues to press G7 partners to impose higher tariffs on China and India over Russian oil purchases.
In the UK, economic signals are flashing stagflation. July GDP came in flat, with industrial and manufacturing production missing expectations. Inflation remains stubbornly above the BOE’s 2% target, last at 3.8% for core and 5.0% for services. Labor markets are softening, with unemployment projected to reach 5% by year-end amid tax changes from the prior budget.
Across Europe, the ECB’s latest decision was followed by President Lagarde signaling the end of the easing cycle. Growth risks are described as balanced, disinflation largely complete, and inflation projected to remain below target through 2027. In France, the CAC 40 slipped as investors braced for a potential downgrade. Societe Generale warned that a cut to A+ could heighten caution and keep sentiment defensive.
As we head into the weekend, today’s focus will be on the University of Michigan Preliminary Sentiment data at 10 am ET.
Chart of the Day - Container shipments
The charts highlight a widening divergence between China and the US in container trade dynamics. China’s exports have consistently grown faster than its imports and have outpaced overall global trade growth since 2022. In contrast, US container trade has been weakening.
So this also takes away from the re-routing argument, since we’re actively seeing all container shipments to the US fall. This could be a temporary slump because of stocking up earlier in the year. But without a turnaround, it has the potential to exacerbate inflation and reduce company profits.
Calendars
(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)
