DataTrack

2026-08-07

U.S. Keeps Coupon Treasury Issuance Steady as “T-bill and Chill” Deepens Reliance on Short-Term Debt and Refinancing Risks

U.S. government financing needs continue to rise, but the Treasury has chosen to hold off on expanding medium- and long-term debt issuance. In its quarterly refunding announcement released on August 5, 2026, the U.S. Treasury said it expects to maintain the current auction sizes of nominal coupon securities and Floating Rate Notes (FRNs) for at least the next several quarters, with additional financing needs to be met primarily through Treasury bills (T-bills) maturing within one year. “T-bill and chill” is a term used by market traders to describe this issuance strategy and is not an official Treasury policy name. With coupon security auction sizes temporarily held steady, a larger share of marginal financing needs is being absorbed by T-bills, while medium- and long-term Treasury issuance continues at the existing pace. As of August 5, 2026, total U.S. public debt stood at approximately US$39.83 trillion, including about US$32.10 trillion in debt held by the public, putting the US$40 trillion threshold within close reach. Greater reliance on short-term financing helps limit immediate pressure on the long end of the Treasury market, but it also shortens the maturity profile of government debt, requiring more frequent refinancing and making interest costs more responsive to Federal Reserve policy and money-market conditions. Rising Borrowing Needs Push More Financing Toward T-bills The Treasury’s unchanged issuance guidance covers nominal coupon securities ranging from 2-year to 30-year maturities, as well as 2-year FRNs. The August quarterly refunding totals US$125 billion, comprising US$58 billion of 3-year notes, US$42 billion of 10-year notes, and US$25 billion of 30-year bonds. After refinancing approximately US$96.3 billion of privately held securities maturing around the same period, the operation is expected to raise about US$28.7 billion in new cash. Quarterly refunding accounts for only part of the government’s overall borrowing needs. The Treasury estimates that it will need to borrow US$739 billion in privately held net marketable debt from July through September 2026, US$68 billion more than projected in May, mainly due to lower expected net cash inflows. Borrowing needs for October through December are estimated at US$628 billion. Treasury estimates provided to the Treasury Borrowing Advisory Committee show that, with auction sizes for nominal coupon securities, FRNs, and Treasury Inflation-Protected Securities (TIPS) held unchanged, T-bills would absorb a substantial share of incremental financing requirements. Period Privately Held Net Marketable Borrowing Net Non-Bill Marketable Issuance Assumed Buybacks Implied T-bill Financing Jul.–Sep. 2026 US$739 billion US$375 billion US$45 billion US$409 billion Oct.–Dec. 2026 US$628 billion US$361 billion US$50 billion US$317 billion Note: Non-bill marketable securities include nominal coupon securities, FRNs, and TIPS. Implied T-bill financing is calculated by the Treasury based on current auction-size assumptions and does not represent a predetermined issuance target. Strong Demand for Short-Term Debt Temporarily Eases Long-End Supply Pressure The Treasury’s preference for T-bills partly reflects the cost of long-term financing and the market’s capacity to absorb additional duration. Ahead of the quarterly refunding meeting, Treasury yields had risen significantly as markets repriced energy prices, inflation risks, and the Federal Reserve policy outlook. The Treasury Borrowing Advisory Committee (TBAC) noted that 10-year and 2-year Treasury yields had risen to approximately 4.6% and 4.2%, respectively, while markets also assigned a higher probability to future rate hikes. Read More at Datatrack Increasing the supply of 10-year or 30-year Treasuries when long-term yields are already elevated could require higher yields to attract sufficient demand and could raise mortgage, corporate bond, and other long-term financing costs through Treasury benchmark pricing. By comparison, T-bills have short maturities and high liquidity and are widely held by money market funds, banks, and corporate cash-management departments, making additional supply easier for short-term funding markets to absorb. T-bills also provide greater flexibility for cash management. The Treasury can frequently adjust auction sizes across different maturities in response to tax receipts, government spending, debt maturities, and cash balances. For example, the Treasury expects to reduce some short-term bill issuance in September as corporate and non-withheld tax payments flow in, before increasing issuance again in October as seasonal spending rises. T-bills Reach 22.2% of Marketable Debt, Increasing Refinancing and Repricing Risks Treasury materials show that T-bills accounted for approximately 22.2% of outstanding marketable Treasury debt as of July 31, 2026, above the upper end of the 15%–20% medium- to long-term range recommended by TBAC in 2020. The denominator for this ratio includes T-bills, nominal coupon notes and bonds, TIPS, and FRNs. It therefore differs from total public debt, which is approaching US$40 trillion and also includes intragovernmental holdings. A T-bill share above 20% does not imply that the United States is facing an immediate liquidity or default crisis. The expansion of money market funds, increased Federal Reserve holdings of T-bills, and strong demand for highly liquid assets continue to support the market’s capacity to absorb additional supply. The more relevant issue is that a shorter maturity structure forces the government to issue new debt more frequently to repay maturing principal. Fixed-rate 20-year or 30-year Treasuries can lock in borrowing costs for decades, while T-bills mature within one year and therefore reprice much more quickly according to prevailing market conditions. If the Federal Reserve raises rates or short-term funding costs increase, yields on newly issued T-bills would rise rapidly. If the Fed cuts rates, Treasury borrowing costs could also fall more quickly. “T-bill and chill” therefore gives the Treasury greater issuance flexibility at the cost of more frequent refinancing and greater volatility in interest expenses. Read More at Datatrack Changes in money market fund flows, bank reserves, or Federal Reserve balance-sheet policy could also affect demand. If such demand weakens, the Treasury may need to offer higher yields to maintain sufficient participation in bill auctions. The strategy reduces immediate long-end supply pressure while shifting more risk toward short-term rates and money-market liquidity. Issuance Language Shifts to “Changes,” Leaving Room for Higher Coupon Issuance in 2027 The Treasury maintained its guidance that nominal coupon and FRN auction sizes are expected to remain unchanged for at least the next several quarters, but its wording regarding future issuance changed. The May quarterly statement referred to evaluating potential future “increases” in auction sizes, while the August statement adopted the more neutral term “changes.” “Changes” could encompass increases, reductions, or a redistribution of issuance across maturities, providing the Treasury with greater policy flexibility than the previous wording. The shift does not indicate that the Treasury has already decided to alter long-term issuance. A more appropriate interpretation is that the Treasury is reducing the constraints created by its forward guidance and preserving room for potential issuance adjustments in fiscal 2027. Treasury meeting materials indicate that current auction sizes should be sufficient to meet financing needs through the remainder of fiscal 2026. However, based on the median primary dealer forecast for privately held net marketable borrowing, and assuming current coupon security auction sizes and privately held T-bill supply remain unchanged, the cumulative financing gap in fiscal 2027 and 2028 could reach approximately US$1.45 trillion. TBAC therefore believes that the Treasury may need to increase coupon issuance in fiscal 2027 and should update its forward guidance before making actual changes, giving the market sufficient time to absorb additional supply. Market participants expect that, if issuance ultimately needs to rise, the Treasury may initially adjust shorter points on the yield curve, such as 2-year, 3-year, or 5-year notes, to limit the direct impact on long-term term premiums. The Treasury has not yet announced specific maturities or the size of any future increases. Short-Term Financing Delays Long-End Pressure but Does Not Reduce Overall Funding Needs “T-bill and chill” allows the Treasury to use strong demand for short-term assets to absorb additional borrowing while avoiding a sudden increase in long-term debt supply when long-end yields are already elevated. It also makes it easier to manage seasonal fluctuations in tax receipts and government spending. However, the strategy addresses the timing and maturity composition of issuance without reducing the fiscal deficit or changing the government’s ultimate funding requirement. If borrowing needs continue to rise while coupon auction sizes remain unchanged for an extended period, the share of T-bills will continue to increase. If the Treasury eventually needs to close financing gaps after 2027, delaying adjustments could require larger and more concentrated increases in coupon issuance, potentially amplifying supply pressure in the Treasury market. The United States’ growing reliance on short-term debt represents a trade-off in maturity risk: higher refinancing frequency and greater sensitivity to short-term rates are being exchanged for lower immediate supply pressure at the long end of the yield curve. Whether this strategy can be sustained will depend on continued strong demand for T-bills, whether the Federal Reserve policy rate can decline, and whether the fiscal deficit gradually narrows. The next quarterly refunding announcement is scheduled for November 4, 2026, when markets will reassess the T-bill share and any signals of coupon issuance adjustments for fiscal 2027.

By DataTrack

2026-08-06

South Korea Raises Rates for the First Time in Three and a Half Years as the AI Chip Boom and Household Debt Drive Monetary Tightening

The Bank of Korea raised its benchmark interest rate by 25 basis points on July 16, 2026, from 2.50% to 2.75%, marking its first rate increase since January 2023. All seven members of the Monetary Policy Board unanimously supported the decision. The central bank said that stronger exports and investment had improved economic growth, inflation could remain above the 2% target for some time, and financial stability risks related to housing prices in the Seoul metropolitan area, household debt, and exchange-rate volatility continued to rise. It therefore remained necessary to maintain a policy stance consistent with further rate increases. The distinctive feature of this policy shift is that the AI chip boom has simultaneously increased South Korea’s capacity to withstand higher interest rates and intensified demand-side inflation and financial imbalances. Rapid growth in semiconductor exports, corporate earnings, and capital expenditure has reduced concerns that higher interest rates will significantly weaken the broader economy. At the same time, rising household lending and housing prices have made it more difficult for the central bank to maintain an accommodative policy environment. Indicator Latest Data Policy Implication Benchmark interest rate 2.75% Raised by 25 basis points on July 16 Real GDP preliminary estimate for 2Q26 Up 0.6% QoQ and 3.7% YoY Economic expansion remains intact CPI in July 2026 Up 2.8% YoY Lower than in June but still above target Core CPI in July 2026 Up 2.6% YoY Domestic price pressures remain persistent Preliminary semiconductor exports in July 2026 US$41.01 billion, up approximately 179% YoY AI and memory demand support exports Household credit outstanding at the end of 1Q26 KRW 1,993.1 trillion Debt stock remains close to KRW 2,000 trillion Preliminary current account balance in June 2026 US$49.73 billion surplus External financial buffers have expanded Data are current as of August 6, 2026. GDP, export, and current account figures are preliminary and may be revised. Read More at Datatrack Policy Reverses After Four Rate Cuts as Economic Growth and Financial Risks Both Support Tightening The Bank of Korea cut interest rates four times between October 2024 and May 2025, lowering the benchmark rate from 3.50% to 2.50%, before leaving it unchanged for more than a year. The July 2026 rate increase represents a shift in policy priorities from supporting economic activity toward controlling inflation and financial imbalances. The central bank has also not characterized the move as a one-off adjustment. Central banks generally face a trade-off between containing inflation and sustaining economic growth, but the policy conflict is currently less pronounced in South Korea. Real GDP increased by 0.6% quarter over quarter and 3.7% year over year in the second quarter, while real gross domestic income rose by 3.6% quarter over quarter, indicating that stronger export prices and improved terms of trade are raising domestic income. The central bank believes that the benefits of the semiconductor upcycle are gradually spreading from exports and corporate earnings to investment, income, and consumption, potentially increasing demand-side inflationary pressure. Chip Exports Strengthen External Accounts but Also Increase Sensitivity to the AI Cycle Continued global investment in AI infrastructure is supporting South Korean exports of memory and computer products. Exports reached US$98.89 billion in July 2026, up 62.8% year over year. Semiconductor exports totaled US$41.01 billion, increasing by approximately 179% and reaching around 2.8 times their level a year earlier. Computer exports also rose sharply on strong demand for enterprise storage products, while the monthly trade surplus reached US$30.32 billion. The current account surplus expanded to US$49.73 billion in June, setting a new monthly record. Large export and current account surpluses help reduce external financing needs and provide a buffer for the won and energy import costs, while giving the central bank more room to address domestic inflation and asset-market risks. However, the concentration of export growth in semiconductors also makes South Korea’s economy more dependent on global AI capital expenditure and memory prices. When chip demand remains strong, corporate income and investment can spread to domestic demand. If data center investment slows, exports, income, and capital expenditure could weaken at the same time. Headline Inflation Has Eased, but Core Inflation Continues to Support Further Rate Increases When the central bank decided to raise interest rates, CPI inflation stood at 3.2% year over year in June, while core CPI inflation was 2.5%. Oil and agricultural product prices increased cost pressures, while the earlier weakness of the won also raised import prices. At the same time, the central bank was concerned that stronger income and consumption generated by the semiconductor boom could cause inflation to spread from cost-related factors to domestic demand. The latest data show that CPI inflation fell to 2.8% year over year in July and declined by 0.2% from the previous month, mainly because of lower petroleum product prices and fuel-price measures. However, core CPI excluding food and energy rose from 2.5% to 2.6%, its highest level since December 2023, indicating that price pressures related to services and domestic demand remain persistent. The decline in headline inflation over a single month therefore reduces the urgency of consecutive rate increases but is not sufficient to reverse the tightening direction. Minutes released on August 4 showed that some board members believed one rate increase might not be enough to bring inflation back to target and that further preventive action should be considered depending on changes in growth, inflation, and financial risks. The Household Debt Ratio Has Improved, but Debt Levels and Housing Risks Continue to Rise South Korea’s household debt-to-GDP ratio fell to 85.3% in the first quarter of 2026, down 2.9 percentage points from the previous quarter, but the improvement mainly reflected rapid growth in nominal GDP. Household credit outstanding still increased by KRW 14 trillion over the same period to KRW 1,993.1 trillion, while household loans rose by KRW 12.9 trillion to KRW 1,865.8 trillion. A lower debt ratio does not mean that households are substantially repaying their principal. In the second quarter, both housing-related loans and other household loans increased significantly, while housing price growth in Seoul and surrounding areas continued to accelerate. The central bank said that household loans from financial institutions had recently been increasing by around KRW 8 trillion to KRW 9 trillion per month, reflecting continued strength in home-purchase and other borrowing demand. Household debt therefore creates two-way pressure on monetary policy. Higher interest rates can restrain new borrowing, housing prices, and leveraged investment, but they also increase the interest burden on borrowers with existing mortgages and personal credit loans, reducing household consumption. Although the central bank has reasons to continue tightening, the pace of rate increases must avoid causing a sudden deterioration in debt-servicing burdens. Further Tightening Remains Likely, but Its Timing Depends on Inflation, Housing, and the Chip Cycle The Bank of Korea’s next interest-rate meeting will be held on August 27. The decline in headline inflation in July gives the central bank room to wait for more data. However, higher core inflation, faster growth in household lending and housing prices in the Seoul metropolitan area, and the transmission of the semiconductor upcycle into domestic demand all support retaining the option of another consecutive rate increase. The future policy path can be assessed through four indicators: whether core and services inflation ease, the pace of housing price and household loan growth in the Seoul metropolitan area, international oil prices and the won exchange rate, and whether semiconductor export growth can be sustained. If core inflation, housing prices, lending, or depreciation pressure on the won rises again, the probability of an earlier rate increase will increase. If chip exports and domestic demand weaken significantly, the interval between rate increases may lengthen. The Bank of Korea has stated that it will determine the timing and scale of additional rate increases based on the latest data and will not pre-commit to a fixed policy path. This rate increase shows that the Bank of Korea is using the period of strong AI chip activity to address inflation, housing prices, and household leverage in advance. The chip boom has given South Korea greater capacity to withstand higher interest rates, but economic growth and income have also become more concentrated in a single industry cycle. The key question ahead is whether semiconductor earnings can translate into broader income and domestic demand growth while preventing capital from continuing to flow excessively into real estate and leveraged investment.

By DataTrack

2026-08-06

Brazil’s Nominal Fiscal Deficit Approaches 10% of GDP as High Interest Rates and Debt Costs Create a Self-Reinforcing Cycle

Brazil’s fiscal pressure intensified further in the first half of 2026. The latest data from the Central Bank of Brazil show that the consolidated public sector recorded a nominal fiscal deficit of BRL 1.318 trillion in the 12 months through June, equivalent to 9.99% of gross domestic product (GDP). This was higher than 9.62% in the 12 months through May and represented a significant increase from 7.3% in June 2025. It was the highest level since April 2021 and was approaching the double-digit deficits recorded during the COVID-19 pandemic, when emergency spending surged. However, a deficit approaching 10% of GDP does not mean that the Brazilian government spent an amount equivalent to 10% of GDP more than it collected during the period. The nominal deficit comprises the primary balance before interest payments and the nominal interest accrued on government debt. In the 12 months through June, interest payments amounted to 8.80% of GDP, while the primary deficit accounted for only 1.19%. This means that approximately 88% of the nominal deficit came from interest costs. Brazil’s most pressing fiscal problem is therefore the financing burden generated by a large debt stock in a high-interest-rate environment. Nearly 90% of the Nominal Deficit Comes From Interest, so the Fiscal Shortfall Cannot Be Attributed Entirely to New Spending The consolidated public sector measured by the Central Bank of Brazil includes the central government, state and local governments, and state-owned enterprises. In the 12 months through June 2026, the consolidated public sector recorded a primary deficit of BRL 157.2 billion, equivalent to 1.19% of GDP. Accrued nominal interest reached BRL 1.161 trillion, or 8.80% of GDP, bringing the nominal deficit to BRL 1.318 trillion. Fiscal Indicator Latest Data Significance Nominal deficit over the past 12 months BRL 1.318 trillion, or 9.99% of GDP Includes the primary balance and debt interest Primary deficit over the past 12 months BRL 157.2 billion, or 1.19% of GDP Reflects the government balance before interest payments Accrued nominal interest over the past 12 months BRL 1.161 trillion, or 8.80% of GDP The main component of the nominal deficit Nominal deficit in June 2026 BRL 166.0 billion Combined primary deficit and interest payments General government gross debt in June 2026 BRL 10.8 trillion, or 81.9% of GDP An important measure of the government’s overall debt burden Public sector net debt in June 2026 BRL 9.0 trillion, or 68.5% of GDP Public debt after deducting certain public-sector assets Note: The deficit figures above use the Central Bank of Brazil’s consolidated public-sector “below-the-line” methodology. Under the Brazilian National Treasury’s “above-the-line” methodology, the central government recorded a primary deficit of BRL 48.2 billion in June. The Central Bank’s consolidated public-sector primary deficit was BRL 55.3 billion. The two figures differ in both coverage and statistical methodology and therefore should not be compared simply by calculating the difference between them. In June alone, accrued nominal interest for the consolidated public sector reached BRL 110.7 billion, rising sharply from BRL 61.0 billion in the same month of 2025. The primary deficit was BRL 55.3 billion, bringing the monthly nominal deficit to BRL 166.0 billion. In addition to interest rates remaining elevated, the Central Bank’s foreign exchange swap operations shifted from a gain of BRL 20.9 billion in June 2025 to a loss of BRL 9.3 billion in June 2026, further increasing interest expenses for the month. The Debt Structure Allows Policy Rates to Pass Quickly Into Government Financing Costs The Central Bank of Brazil began cutting interest rates in March 2026 and delivered its fourth consecutive reduction of 0.25 percentage points on August 5, lowering the Selic benchmark rate from 14.25% to 14.00%. However, 14.00% remains a high interest-rate level, and reductions in the policy rate will not be reflected immediately or proportionately in total interest expenses because the repricing and refinancing of government debt occur with a time lag. The fiscal impact of high interest rates is closely related to the structure of Brazil’s federal public debt. As of June, federal public debt totaled BRL 9.268 trillion. Floating-rate instruments, which mainly move with the Selic rate, accounted for 49.32% of the total. Another 25.90% was linked to price indexes, while fixed-rate securities represented 21.04%. When interest rates and inflation remain elevated, the interest costs of the government’s existing debt also increase. In addition, approximately 20.1% of federal public debt will mature within the next 12 months, corresponding to repayment needs of around BRL 1.86 trillion. Among domestic federal government securities maturing within one year, floating-rate securities account for 40.4%. The government can use its liquidity reserves to repay part of the debt or issue new securities to refinance it. If new debt must continue to offer high yields, the elevated cost of funding will gradually be transmitted to the overall debt stock. This pressure is already reflected in debt-cost data published by the National Treasury. In the 12 months through June, the average cost of federal public debt rose from 12.31% in May to 12.68%, while the average cost of the outstanding stock of domestic federal government securities increased from 13.09% to 13.19%. Over the same period, the average cost of domestic federal government securities issued through public offerings was 14.20%, higher than the cost of the existing domestic debt stock. This indicates that new financing could continue to push up the government’s overall interest burden for some time. Interest Accumulation Is Outpacing the Diluting Effect of Economic Growth on the Debt Ratio Brazil’s general government gross debt rose to BRL 10.8 trillion in June, equivalent to 81.9% of GDP, an increase of 0.9 percentage points from May. Accrued interest raised the debt ratio by 0.8 percentage points during the month, while net debt issuance added another 0.6 percentage points. Nominal GDP growth reduced the ratio by 0.5 percentage points, but this was insufficient to offset the first two factors. Over the first six months of 2026, the general government gross debt-to-GDP ratio increased by a cumulative 3.3 percentage points. Accrued interest raised the ratio by 4.9 percentage points, while net debt issuance added 1.3 percentage points. Nominal GDP growth reduced it by 2.7 percentage points, and exchange-rate movements also provided a small offset. Nevertheless, the overall debt burden continued to increase. This shows that while economic growth can expand the denominator of the debt-to-GDP ratio, it has not been sufficient to keep pace with interest accumulation and new debt issuance. Federal public debt and general government gross debt are not the same indicator. Federal public debt mainly reflects the Brazilian National Treasury’s domestic and external market debt and totaled BRL 9.268 trillion in June. General government gross debt covers the federal government, the social security system, and state and local governments and totaled BRL 10.8 trillion. Both indicators show that debt continues to increase, but they have different coverage and should not be used interchangeably. Fiscal Concerns, Risk Premiums, and High Interest Rates Form a Self-Reinforcing Mechanism Brazil’s current fiscal difficulties are the result of interactions among fiscal policy, financial markets, and monetary policy. When government spending increases, the primary deficit persists, or the credibility of fiscal targets weakens, investors may become concerned that public debt cannot be stabilized over the medium term and consequently demand higher government bond yields. A rising fiscal risk premium may also put depreciation pressure on the Brazilian real, increasing import costs and inflation expectations. When inflation expectations remain elevated, the Central Bank has less room to cut interest rates quickly. A high Selic rate and elevated market yields then increase the cost of floating-rate debt and raise the price of issuing new securities and refinancing maturing debt, causing the nominal deficit and debt stock to continue increasing. The rise in debt subsequently reinforces market concerns about the fiscal outlook, creating a self-reinforcing cycle of rising fiscal risk, persistently high interest rates, increasing interest expenses, and continued debt accumulation. The Central Bank of Brazil has also repeatedly emphasized in its monetary policy communications that fiscal policy affects not only aggregate demand in the short term but also the term premium along the yield curve through expectations concerning debt sustainability. If fiscal discipline weakens, directed credit expands, or doubts emerge about debt stabilization, the economy’s neutral interest rate could rise, reducing the effectiveness of monetary policy in controlling inflation. The Economy Remains Resilient, but Growth Cannot Replace Fiscal Adjustment Brazil’s GDP grew by a seasonally adjusted 1.1% quarter over quarter and 1.8% year over year in the first quarter of 2026, reaching BRL 3.3 trillion. Agriculture expanded by 2.0% from the previous quarter, while industry and services grew by 1.0% and 0.5%, respectively. Household consumption and gross fixed capital formation increased by 1.0% and 3.5%. In July, Brazil’s Ministry of Finance maintained its forecast for full-year GDP growth in 2026 at 2.3%. Read More at Datatrack Economic growth helps increase tax revenue and nominal GDP, reducing the debt-to-GDP ratio, but it cannot automatically resolve fiscal problems. When the effective interest rate on government debt exceeds nominal GDP growth and the primary balance does not generate a surplus sufficient to offset part of the interest burden, the debt ratio will remain under upward pressure. Brazil’s Ministry of Finance also raised its 2026 forecast for the Broad National Consumer Price Index (IPCA) from 4.5% to 5.1%. The elevated inflation forecast means that even though the Central Bank has begun cutting rates, it will be difficult to return the policy rate rapidly to a lower level. If the government further expands subsidies, preferential financing, or tax cuts to support the economy, these measures may ease the impact of high interest rates on companies and households in the short term. However, they could also increase demand, slow fiscal consolidation, and constrain the scope for additional rate cuts. Improvement in the Primary Balance Will Determine When the Debt Cycle Can Reverse The Central Bank’s further rate cut in August will gradually reduce the cost of floating-rate debt and new financing, but debt repricing takes time, meaning that the government’s average financing costs could remain elevated in the near term. The key question is whether the primary balance can improve and whether the government can reduce the risk premium demanded by markets by controlling expenditure growth and improving the credibility of its fiscal targets. If fiscal adjustment, inflation control, and market confidence improve simultaneously, the Central Bank will have greater room to continue reducing interest rates, and debt costs can gradually decline. Conversely, continued interest accumulation could keep the nominal deficit and debt ratio elevated. Whether Brazil can break out of the cycle of high interest rates, high interest costs, and high debt will ultimately depend on whether the primary balance can shift to a level sufficient to stabilize the debt.

By DataTrack

2026-08-05

U.S. Plans to Invest US$874 Million to Strengthen the AI Computing Supply Chain, With Photonics, Memory, and Advanced Packaging Emerging as the Next Frontiers of Chip Competition

U.S. semiconductor policy is expanding beyond the buildout of domestic wafer manufacturing capacity to include data transmission, memory access, advanced packaging, materials, and supply chain security across AI computing systems. On July 29, 2026, the U.S. Department of Commerce announced that it had signed letters of intent with seven companies and planned to provide up to US$874 million in federal incentives under the CHIPS and Science Act to accelerate semiconductor research and development for next-generation computing and artificial intelligence. The funding remains at the letter-of-intent stage. The seven companies must complete the Department of Commerce’s due diligence and formal review process before signing final agreements, and the amounts ultimately approved and disbursed could be lower than the stated ceilings. The Department of Commerce will also receive minority, non-controlling equity stakes in the companies, distinguishing these projects from conventional one-way subsidies. The Three Largest Projects Receive Nearly 80% of the Funding, Directly Targeting AI System Bottlenecks The seven projects cover integrated photonics, AI memory, advanced packaging, new computing architectures, dielectric materials, supply chain verification, and optical interconnect components. GlobalFoundries, Kepler Computing Inc. (hereafter referred to as Kepler), and Multibeam Corporation are expected to receive a combined US$685 million, accounting for approximately 78.4% of the total. This shows that policy resources are primarily concentrated on three major AI computing bottlenecks: data transmission, memory access, and chip integration. Company Proposed Incentive Ceiling Main R&D Focus Problem the Project Seeks to Address GlobalFoundries US$300 million Silicon photonics, near-packaged optics, and co-packaged optics Increase AI chip interconnect bandwidth and reduce data transmission power consumption Kepler Computing Inc. US$245 million New AI memory combining 3D integration and ferroelectric technology Improve memory bandwidth, access performance, and energy efficiency Multibeam US$140 million Multi-chip assembly, stacking, and interconnection using thousands of wires Strengthen Chiplet and heterogeneous integration capabilities Extropic US$75 million Thermodynamic sampling units Use less energy for probabilistic computing, simulation, and optimization Thintronics US$50 million Ultra-low-loss interlayer dielectric materials Reduce signal loss in high-speed interconnects and advanced packaging OBSIDIA Semiconductors US$34 million Non-invasive component verification technology Identify counterfeit or maliciously modified electronic components Aeluma US$30 million Large-format, indium-phosphide-free substrate technology Support photodetectors, laser components, and AI optical interconnects Note: The amounts above are the maximum proposed amounts stated in the letters of intent and are not final approvals or disbursed funds. Silicon Photonics and Optical Interconnects Become the Largest Single Investment Area GlobalFoundries is expected to receive up to US$300 million, making it the largest individual project in the package. Through this funding, the U.S. Department of Commerce aims to accelerate the development of near-packaged optics (NPO) and co-packaged optics (CPO) in the United States by two to three years. Traditional AI servers mainly use electrical signals to transmit data among processors, memory, and switches. As transmission distances, bandwidth requirements, and computing cluster sizes increase, copper interconnects face growing pressure from signal attenuation, power consumption, and heat dissipation. Silicon photonics instead uses optical signals to transmit data and places optical components close to computing chips, shortening the electrical signal path while improving bandwidth density and energy efficiency. GlobalFoundries’ project covers next-generation silicon photonics wafers, new optical materials, 3D hybrid bonding, and advanced packaging. The related research and development will be conducted at the company’s facilities in Malta, New York, and Burlington, Vermont. The company stated that under a separate agreement, the Department of Commerce is expected to acquire an equity stake of approximately 1%, although the final ownership arrangement and incentive terms remain subject to confirmation in the final agreement. Optical interconnects have therefore moved beyond being merely a communications component issue and have become a core technology affecting AI data center computing density, heat dissipation, and electricity costs. As the energy consumed by moving data continues to rise, overall system performance may remain constrained by interconnect bandwidth and power consumption even when processor computing power improves. Memory and Advanced Packaging Determine Whether Computing Capacity Can Be Fully Utilized The second-largest project is expected to go to Kepler, with proposed incentives of up to US$245 million. The company plans to use 3D integration and ferroelectric technology to develop a new type of high-performance AI memory. The computing requirements of large AI models are increasing rapidly, but system performance does not depend solely on the theoretical computing power of GPUs or other accelerators. If memory capacity, bandwidth, and data access speeds fail to improve at the same pace, processors may be unable to operate at full capacity while waiting for data, creating the so-called “memory wall.” The U.S. government therefore hopes to cultivate new material and architectural approaches beyond existing high-bandwidth memory, reducing the time and energy costs associated with data movement. Multibeam is expected to receive up to US$140 million to develop multi-chip assembly, stacking, and high-density wire interconnection technologies. As the cost of advanced process nodes continues to rise, AI processors are increasingly relying on Chiplet designs and heterogeneous integration. Computing, memory, communications, and input-output functions are manufactured separately and then combined into a complete system through advanced packaging. Interconnect density, manufacturing yield, and heat dissipation in packaging will therefore directly affect product performance and mass-production costs. Materials, New Computing Architectures, and Supply Chain Verification Fill Upstream Gaps The remaining four projects address materials, optical components, new computing architectures, and supply chain security. Thintronics will develop ultra-low-loss interlayer dielectric materials to reduce signal loss in high-speed interconnects and advanced packaging. Aeluma will develop large-format, indium-phosphide-free substrate technology to support the production of photodetectors and laser components. Extropic plans to use natural thermal fluctuations to develop thermodynamic sampling units, with the aim of completing AI, simulation, and optimization tasks at lower power consumption. OBSIDIA Semiconductors will develop non-invasive component verification technology to identify counterfeit or maliciously modified electronic components. As AI chips are increasingly deployed in data centers, defense systems, and critical infrastructure, component origin, manufacturing history, and authenticity are becoming part of supply chain security. The CHIPS Act Shifts From Fab Construction Subsidies Toward Investment in Critical Technologies The initial policy focus of the CHIPS and Science Act was to attract companies to build or expand wafer fabs in the United States through subsidies, loans, and tax credits. Approximately US$39 billion was allocated to incentives for manufacturing facilities and equipment, while another roughly US$11 billion was directed toward the semiconductor R&D ecosystem. The US$874 million package is not primarily intended to expand existing wafer production capacity. Instead, it supports technologies that are not yet fully mature but could shape the architecture of next-generation AI systems. This indicates that implementation of the CHIPS and Science Act is extending beyond manufacturing capacity expansion toward critical research and development capabilities. The government’s acquisition of minority, non-controlling equity stakes also moves the role of public funding closer to strategic investment rather than one-way subsidies. If supported companies successfully commercialize their technologies, increase in valuation, or are acquired, the government’s equity holdings could generate returns for taxpayers. However, this model also makes policy implementation more complex. The government will need to manage equity valuation, exit mechanisms, and conflicts of interest while avoiding overlap among subsidy review, industry regulation, and shareholder interests. Commercialization Progress Will Determine the Actual Impact of the Policy Investment Most of the projects remain in the research or early commercialization stages. Their actual impact will depend on manufacturing yields, costs, system integration, customer validation, and mass-production capabilities. Subsequent reviews could also change the funding amounts, equity arrangements, or implementation terms of individual projects. Compared with the construction of large wafer fabs, the US$874 million funding package is limited in scale, but its investment direction sends a clear policy signal. As the standalone performance of advanced processors continues to improve, the focus of competition is gradually shifting toward chip-to-chip communications, memory access, packaging integration, and energy efficiency. The United States hopes to use government capital to shorten the development timelines of these critical technologies and retain domestic capabilities in photonics, memory, packaging, materials, and verification.

By DataTrack

2026-08-05

AI-Related Industries to Contribute More Than Half of Singapore’s Economic Growth, While Slower Wage Growth Highlights the Concentration of the Expansion

Global investment in artificial intelligence infrastructure continues to expand, driving demand in Singapore for semiconductors, server-related products, and semiconductor manufacturing equipment. The Monetary Authority of Singapore (MAS) expects technology-related industries to contribute the majority of Singapore’s economic growth in 2026, exceeding the approximately 50% share recorded in 2025. This figure refers to the technology sector’s contribution to the increase in annual economic growth, rather than its output accounting for more than half of GDP. Singapore’s economy remains strong, but its sources of growth are becoming increasingly concentrated. GDP grew 5.7% year over year in the second quarter, while manufacturing expanded by 12.2%. Growth in most service sectors and construction, however, slowed from the previous quarter. At the same time, year-over-year growth in average nominal monthly earnings eased from 4.4% in the fourth quarter of 2025 to 3.3% in the first quarter. This indicates that rapid growth in AI-related production and exports has not yet translated into broad-based wage increases and domestic demand expansion across industries. Read More at Datatrack Manufacturing Supported Second-Quarter Growth as Industrial Divergence Continued to Widen According to the advance estimate released by Singapore’s Ministry of Trade and Industry (MTI), GDP grew 5.7% year over year in the second quarter of 2026, down from 6.3% in the previous quarter. On a seasonally adjusted basis, GDP increased by 1.1% quarter over quarter. Manufacturing was the main growth engine during the quarter, with electronics and precision engineering benefiting from demand for AI semiconductors and related equipment and significantly outperforming other industries. Growth in construction, wholesale and retail trade, and most service sectors slowed from the previous quarter, while chemicals, biomedical manufacturing, and general manufacturing contracted. This shows that although Singapore’s economy continued to grow strongly, its momentum remained highly concentrated in AI-related supply chains. Table 1: Performance of Singapore’s Major Industries in the Second Quarter of 2026 Item Performance in 2Q26 Previous-Period Comparison Current Assessment GDP growth, year over year 5.7% 6.3% in 1Q26 The economy remained strong, but growth slowed slightly from the previous quarter GDP growth, seasonally adjusted quarter over quarter 1.1% 1.3% in 1Q26 Expansion continued, but momentum weakened slightly Manufacturing 12.2% 8.0% in 1Q26 Electronics and precision engineering were the main growth drivers Construction 6.2% 12.9% in 1Q26 Year-over-year growth remained high but slowed significantly Construction, seasonally adjusted quarter over quarter -2.1% 7.4% in 1Q26 Shifted from expansion to contraction Wholesale and retail trade, transportation and storage 6.3% 9.3% in 1Q26 Continued to grow, but at a slower pace Wholesale and retail trade, transportation and storage, seasonally adjusted quarter over quarter -0.3% 3.5% in 1Q26 Short-term momentum weakened Information and communications, finance and insurance, and professional services 3.9% 4.5% in 1Q26 Growth remained stable but did not accelerate significantly Accommodation and food services, real estate, and other services 2.7% 3.2% in 1Q26 Domestic service activity continued to expand, but at a relatively slow pace Table 2: Singapore Manufacturing Output Performance in June 2026 Manufacturing Segment Year-over-Year Growth Key Assessment Overall manufacturing 7.2% Overall output continued to grow, but internal divergence was significant Electronics 21.3% AI and semiconductor demand remained strong Precision engineering 14.9% Supported by semiconductor equipment and advanced manufacturing demand Chemicals -11.7% Weighed down by raw material supply and cost pressures Biomedical manufacturing -11.4% Affected by product mix and base effects General manufacturing -6.8% Faced weaker external demand and greater cost pressure Overall manufacturing, seasonally adjusted month over month -7.2% Year-over-year growth remained high, but monthly production was volatile Technology Accounts for About One-Fifth of GDP but Contributes Most of the Incremental Growth Technology-related industries accounted for approximately 22% of Singapore’s nominal GDP in 2025, but their growth rate was much higher than that of the overall economy. MAS therefore expects their contribution to economic growth in 2026 to exceed the approximately 50% level recorded in 2025. AI capital expenditure is not only increasing semiconductor and equipment output, but also supporting demand for data storage, communications products, wholesale trade, air freight, and warehousing. This structure allows Singapore to generate a relatively large increase in GDP from a technology sector that represents a smaller share of total output, but it also increases the economy’s sensitivity to the global AI investment cycle. If hyperscale cloud service providers maintain their investment in data centers and hardware, electronics manufacturing, precision engineering, and related trade services could continue to support growth in the second half of the year. If corporate earnings are unable to sustain the current scale of investment, however, the adjustment could quickly spread to production, exports, and logistics activity. The Second-Half Outlook Is Positive, but Business Optimism Remains Concentrated in the AI Supply Chain The latest survey by the Economic Development Board (EDB) showed that 24% of manufacturers expected business conditions to improve between July and December 2026, while 12% expected conditions to weaken, resulting in a net weighted balance of positive 12%. The net weighted outlook for precision engineering and electronics stood at positive 55% and positive 19%, respectively, while chemicals and general manufacturing recorded negative 25% and negative 13%. These figures represent the weighted difference between the share of firms expecting improvement and the share expecting deterioration, rather than output growth rates. Manufacturers’ overall net weighted expectation for third-quarter production stood at positive 26%, with electronics and precision engineering at positive 49% and positive 55%, respectively. The chemicals sector was affected by Middle East-related disruptions to raw material supplies and maintenance shutdowns, while general manufacturing faced weaker export demand and cost pressures. The outlook for the services sector also turned positive, with the net weighted balance rising from negative 4% in the previous survey to positive 13%, mainly supported by wholesale demand for AI servers and networking equipment, the peak travel season, and major events. The Labor Market Remains Resilient, but the Transmission to Resident Employment and Wages Is Weaker Total employment increased by 10,700 in the second quarter of 2026, marking the nineteenth consecutive quarter of growth. The overall unemployment rate remained at 2.0% in June, while the resident unemployment rate stood at 2.9%. Retrenchments increased from 3,830 in the first quarter to 4,500, mainly due to corporate restructuring in some externally oriented industries, but remained below levels typically seen during recessions. Employment growth was driven mainly by non-resident workers in construction and manufacturing. Resident employment continued to increase, but at a slower pace than in the first quarter and was concentrated in essential and public services such as transportation and storage, healthcare, public administration, and education. This means that the contribution of AI manufacturing to GDP and exports may not translate into resident employment gains of a similar magnitude. Average nominal monthly earnings grew 3.3% year over year in the first quarter, down from 4.4% in the previous quarter. MAS believes that labor supply and demand are gradually moving toward balance, with wage growth returning closer to the historical average of 3.7% recorded between 2010 and 2019. Core inflation and headline inflation stood at 1.6% and 1.9%, respectively, in June. Nominal income growth therefore remained above inflation, but wages did not accelerate in line with GDP, indicating that the transmission of strong growth to household income remained limited. Whether AI Momentum Can Broaden Will Determine the Quality of Singapore’s Growth Singapore’s economy is still expected to receive support in the second half of 2026 from AI capital expenditure, semiconductor equipment, and related trade services. The technology sector may also generate spillover effects through corporate profits, demand for professional services, and investment confidence, partly offsetting pressures from energy costs and U.S. tariffs. However, the fact that technology-related industries are contributing most of the incremental growth also means that the economy has become more dependent on a single global investment cycle. Going forward, attention should focus on whether AI orders can further support resident employment, corporate investment, and domestic services, as well as whether nominal income growth begins to accelerate again. If growth remains concentrated in semiconductors, equipment, and export-related supply chains, Singapore’s headline GDP figures may continue to look strong, while the breadth of the expansion and its impact on household income remain comparatively limited.

By DataTrack

2026-08-04

U.S. Growth Cools in the Second Quarter While the Euro Area Stabilizes, Temporarily Narrowing the Growth Gap Across the Atlantic

In the second quarter of 2026, the U.S. and euro area economies moved in different directions. U.S. real gross domestic product (GDP) growth slowed from an annualized quarter-on-quarter rate of 2.1% in the first quarter to 1.5%, below market expectations. Euro area GDP, meanwhile, shifted from no growth in the first quarter to a quarterly increase of 0.4%, while its year-on-year growth rate also rose to 1.0%. Because the United States reports an annualized quarterly growth rate while the euro area uses a non-annualized quarterly rate, the two figures cannot be compared directly. On a comparable basis, U.S. GDP also grew by approximately 0.4% in the second quarter, indicating that growth rates on the two sides of the Atlantic have moved significantly closer. Read More at Datatrack Read More at Datatrack However, the convergence in growth rates does not mean that the United States and the euro area have entered the same stage of the economic cycle. The United States is slowing from a relatively high growth level, mainly because of lower government spending and a drag from net exports. The euro area, by contrast, is recovering from stagnation, with its major economies all maintaining positive growth. The current pattern is better described as the United States cooling from a high level while the euro area stabilizes from a low base, with clear differences remaining in the foundations of their respective recoveries. Indicator United States Euro Area Initial estimate of real GDP in the second quarter of 2026 Annualized quarterly growth of 1.5%, equivalent to quarterly growth of approximately 0.4% Quarterly growth of 0.4% July manufacturing PMI final reading 53.9 51.9 Latest core inflation Core PCE inflation rose 3.3% year on year in June 2026 Core HICP inflation rose 2.5% year on year in the July 2026 preliminary estimate Latest policy rate Federal funds rate of 3.50%–3.75% Deposit facility rate of 2.25% Note 1: The initial estimates of second-quarter 2026 GDP for both the United States and the euro area were released on July 30, 2026. The United States uses a seasonally adjusted annualized quarterly growth rate, while the euro area uses a non-annualized quarterly growth rate. The U.S. annualized quarterly growth rate of 1.5% in the second quarter is equivalent to a non-annualized quarterly increase of approximately 0.4%. Note 2: The U.S. inflation data refer to the June 2026 PCE price index, while the euro area data refer to the preliminary July 2026 HICP estimate. The reference months, statistical indicators, and release stages differ, so the figures are mainly used to observe the latest inflation trend in each economy and should not be used to compare inflation levels directly. Data are current as of August 3, 2026. U.S. GDP Growth Slows, but Private Demand Has Not Yet Lost Significant Momentum U.S. GDP growth slowed to an annualized quarterly rate of 1.5% in the second quarter, mainly reflecting a shift in government spending from growth to contraction, slower investment and export growth, and a larger increase in imports than in the first quarter. Because imports are deducted in the calculation of GDP, net exports became a significant drag on overall growth. Consumption, private investment, and exports themselves nevertheless continued to make positive contributions to GDP, meaning that the slowdown in headline growth should not be interpreted directly as a rapid deterioration in domestic demand. After excluding more volatile components such as government spending, inventories, and net exports, real final sales to private domestic purchasers, which consist of personal consumption and private fixed investment, increased at an annualized quarterly rate of 3.9% in the second quarter, up from 1.7% in the first quarter. Business investment was supported primarily by industrial equipment, transportation equipment, information-processing equipment, software, and research and development. Growth in information technology and intellectual property products was consistent with continued expansion in AI infrastructure and corporate digitalization investment, suggesting that the U.S. economy is currently experiencing a reconcentration of its sources of growth. Household consumption remains resilient, but financial buffers are shrinking. Nominal personal consumption expenditures increased by 0.3% month on month in June, while real consumption rose by 0.4%. Personal income and disposable personal income both increased by only 0.2%, pushing the personal saving rate down to 2.7%. Households are still maintaining spending, but continued consumption growth above income growth means that spending momentum could become more vulnerable if employment conditions weaken or energy prices rise again. The Euro Area Recovers from Stagnation, with Manufacturing Emerging as a Sign of Improvement Euro area GDP increased by 0.4% in the second quarter, improving from zero growth in the first quarter. The European Union as a whole expanded by 0.5%. Ireland and several smaller and medium-sized economies recorded faster growth, Spain maintained relatively strong momentum, and Germany, France, and Italy also avoided quarterly contractions. Although the initial estimates may still be revised, the second-quarter results suggest that the European economy displayed greater short-term resilience than initially expected despite elevated energy prices and continued uncertainty surrounding the situation in the Middle East. Manufacturing also showed clearer signs of stabilization. The euro area manufacturing PMI rose from 51.4 in June to 51.9 in July, while the manufacturing output index increased from 51.7 to 52.9, its highest level since March 2022. Germany improved and Italy remained in expansion, while France and Spain were broadly stagnant, showing that substantial differences remained within the region. The recovery in production still carries risks. New orders increased only slightly in July, and companies raised output mainly by working through previously accumulated backlogs. Employment and purchases of raw materials continued to decline. If new orders fail to take over as a source of growth, manufacturing momentum could weaken again once outstanding work has been completed. The euro area has therefore shown signs of stabilization, but has not yet achieved a full recovery supported by broadly expanding demand. The final U.S. Markit manufacturing PMI reading for July was 53.9, still above the euro area’s final July Markit manufacturing PMI reading of 51.9. However, U.S. manufacturing output growth slowed to a four-month low, new-order growth decelerated for a third consecutive month, and business confidence fell to a nine-month low. This indicates that the narrowing gap between the two manufacturing sectors reflects both improvement in Europe and weakening marginal momentum in the United States. Latest Inflation Trends Diverge as U.S. Inflation Eases in June and Euro Area Inflation Edges Higher in July Because the latest available data refer to different months, the following discussion examines U.S. inflation in June and euro area inflation in July separately. The overall U.S. PCE price index declined by 0.1% month on month in June, while the core PCE index increased by 0.1%. Their year-on-year growth rates slowed from 4.1% and 3.4% in the previous month to 3.7% and 3.3%, respectively. The easing in inflation was driven mainly by lower energy prices, while underlying price pressures remained above the Federal Reserve’s 2% target. The improvement in a single month is therefore insufficient to confirm that inflation has returned sustainably to target. The euro area’s latest figures are the preliminary estimates for July. Headline HICP inflation increased from 2.8% in June to 2.9%, while core inflation rose from 2.4% to 2.5%. Energy-price inflation accelerated from 8.5% to 10.0%, and services inflation also increased to 3.3%. The European Central Bank therefore needs to continue monitoring whether the energy shock spreads further to wages, services, and other goods prices. Growth Rates Are Converging, but the Fed and ECB Still Face Different Policy Considerations At its July meeting, the Federal Reserve maintained the federal funds rate target range at 3.50%–3.75%. The decision passed by a vote of nine to three, with three members favoring a 25-basis-point increase. This shows that even as GDP growth and monthly inflation eased, Federal Reserve officials remained divided over whether the current interest-rate level was sufficient to contain inflation. The European Central Bank also left interest rates unchanged, keeping its deposit facility rate at 2.25%. However, it did not pre-commit to its next policy move and maintained a meeting-by-meeting, data-dependent approach. Compared with the still-resilient private demand in the United States, the euro area has a weaker recovery base but is more exposed to imported energy prices. The ECB must therefore assess both the economic recovery and the risk of second-round inflation effects. U.S. Consumption and European New Orders Will Be Critical in the Second Half of the Year Looking ahead to the second half of the year, U.S. GDP growth may struggle to return rapidly to its previous highs if lower government spending, the drag from net exports, and slower income growth persist. Consumption and investment in equipment, software, and research and development can nevertheless continue to provide support. The main risk is that the saving rate is already low, meaning that a further deterioration in the labor market could lead household consumption to slow. The euro area, meanwhile, needs to transform the current rebound, which has been driven by improving confidence, the completion of backlogged orders, and domestic demand in several countries, into more sustained growth in new orders, business investment, and household consumption. If energy prices remain elevated, they will simultaneously squeeze real household income, corporate profits, and the room available for monetary policy. The convergence in U.S. and euro area momentum therefore more closely resembles the intersection of two different economic trajectories. The United States still has support from private demand, but its growth rate has slowed from a high level. The euro area has moved out of stagnation, but must still demonstrate that its recovery can spread from production to new orders and domestic demand. Whether these two conditions are met will determine whether the narrowing growth gap across the Atlantic proves temporary or develops into a more durable economic rebalancing.

By DataTrack

2026-08-04

Attacks on Refining Facilities Force Russia to Extend Fuel Export Restrictions, Leaving the Crude Oil Giant with a Refined Product Shortage

Russia possesses abundant crude oil supplies, yet it experienced gasoline and diesel shortages in the summer of 2026. Data from the U.S. Energy Information Administration (EIA) show that Russia produced approximately 9.9 million barrels per day of crude oil and lease condensate in 2025, ranking second globally behind the United States. However, continued Ukrainian attacks on Russian refineries, oil depots, and transportation facilities have disrupted part of the country’s crude oil processing capacity, making it difficult to convert crude oil into the gasoline, diesel, and jet fuel needed by the domestic market. The Russian government therefore announced on July 30 that exports of gasoline, diesel, marine fuel, and diesel-related products would be suspended from August 1 through January 31, 2027. However, beginning September 1, diesel, marine fuel, and diesel-related products exported by direct producers will no longer be subject to the restrictions, while intergovernmental agreements and humanitarian aid will also be exempted. This means that August will be the strictest phase of the export controls, while subsequent diesel supply will continue to be adjusted according to domestic market conditions and the pace of refinery restarts. Damage to Refining Capacity Prevents Crude Oil Supply from Being Converted into End-Use Fuels Crude oil must undergo distillation, cracking, desulfurization, and blending before it can be turned into gasoline and diesel. Once critical refinery equipment is damaged, the domestic market may still lack directly usable fuel even if oil fields continue producing. Ukraine expanded its drone attacks from the spring onward, forcing several large Russian refineries to shut down. In early July, gasoline production at one point was sufficient to cover only approximately 65% of normal summer demand, prompting some regions to impose purchase limits and resulting in queues at gas stations. Diesel exports also contracted rapidly. Russia’s exports of diesel and diesel-related products averaged approximately 817,000 barrels per day in 2025, but fell to around 234,000 barrels per day in early July 2026. At the same time, crude oil that could not be processed domestically was redirected to overseas markets. The latest market estimates indicate that Russia’s crude oil exports from western ports may rise by 4% in August from July to approximately 2.7 million barrels per day, reflecting how lower refinery throughput is changing the country’s export structure. Export Restrictions and Fuel Imports Proceed in Parallel, Showing That Supply Has Not Fully Recovered To increase domestic supply, Russia has not only restricted exports but has also unusually begun importing gasoline. Russia has imported fuel by sea from India and Morocco, while also increasing gasoline shipments by rail from Belarus and Kazakhstan. Approximately 30,000 metric tons of Moroccan gasoline arrived in Murmansk at the end of July, mainly to fill short-term shortages in specific regions and fuel categories. These imports remain insufficient to replace Russia’s large domestic refining capacity. Shipping distance, port transshipment, fuel specifications, and the limited surplus supply of neighboring countries all constrain import volumes. The Russian government has also established temporary fuel supply arrangements for the agricultural sector to ensure fuel availability for farm machinery and transportation during the autumn harvest season, indicating that the authorities remain concerned about regional shortages and price volatility. Declining Russian Exports Intensify Competition for Global Refined Product Supplies As Russia reduces refined product exports, some refineries in the Middle East have yet to fully recover, while refinery runs in Asia also remain low. The IEA’s July report showed that although global refinery throughput increased by 1.5 million barrels per day in June from the previous month, it was still 6 million barrels per day lower than a year earlier. Crude oil supply has recovered faster than refining activity and refined product supply, causing supply-demand conditions and price trends for crude oil to diverge from those of refined products such as gasoline and diesel. Changes in the international crude oil market can be referenced through “New York Mercantile Exchange: Energy Futures - Brent Crude Oil,” but crude oil futures prices do not fully reflect supply pressure in refined product markets. Read More at Datatrack As of July 30, the European diesel crack spread had at one point risen to a record high of USD 74.66 per barrel, while jet fuel refining margins also exceeded USD 80 per barrel. Russia’s traditional buyers, including Turkey and Brazil, therefore needed to turn to the United States, India, and other refining centers for supplies, further intensifying competition for cargoes across different regions. Although the United States has become an important alternative supplier, its additional supply capacity is also approaching its limit. “New York Mercantile Exchange: Energy Futures - West Texas Intermediate Crude Oil” reflects price changes in the U.S. crude oil market, but whether the United States can increase gasoline and diesel supply still depends on refining capacity and refined product inventories. EIA data show that U.S. crude oil and petroleum product exports reached a record high of 13.6 million barrels per day in April. During the week ending July 24, U.S. crude oil inputs to refineries averaged 17.336 million barrels per day, with the utilization rate reaching 97.2%. Distillate fuel oil inventories increased by 1.1 million barrels from the previous week to 110.6 million barrels, but remained approximately 10% below the five-year average for the same period. With facilities operating close to full capacity, the room for a substantial short-term increase in refined product output is relatively limited. Shortages May Ease Partially, but Refined Product Price Risks Remain Elevated As some refineries resume production, pressure on domestic supply in Russia is expected to ease gradually. Allowing direct producers to resume some diesel exports from September will also help prevent refiners from cutting throughput because of inventory accumulation once supply conditions improve. However, if major refineries, pipelines, or export terminals are attacked again, Russia may once more tighten restrictions. The Russian case highlights the gap between crude oil supply and refined product availability. Increasing crude oil exports cannot immediately fill shortages of diesel and gasoline because other markets are also constrained by refining capacity, fuel specifications, and logistical conditions. The Northern Hemisphere is about to enter the agricultural harvest and freight peak season. If diesel prices remain elevated, costs will gradually be transmitted to agriculture, road transportation, industrial production, and merchandise distribution. The key factors over the coming months will be the pace of Russian refinery restarts, the actual scale of export exemptions from September, and whether refining centers in the United States, India, and the Middle East can provide more alternative supply.

By DataTrack

2026-07-30

Philippine Central Bank Keeps a 50-Basis-Point Rate Hike on the Table as Oil Prices, Wages, Tariffs, and the Peso Create Fourfold Inflation Risks

Although Philippine inflation has retreated from its April peak, monetary policy is still far from shifting toward easing. Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. said that the Monetary Board could still raise interest rates by 50 basis points at its August 27 meeting, equivalent to a two-notch rate hike, although the probability of such a move remains low. His remarks indicate that the central bank is assessing whether oil prices, minimum-wage increases, U.S. tariffs, and peso depreciation could jointly raise business costs and import prices, causing inflation to spread further into core goods and services. The BSP faces the challenge of inflation remaining significantly above target while economic growth has slowed rapidly. Should all four pressures worsen simultaneously, the central bank may need to accelerate its rate hikes to stabilize the exchange rate and inflation expectations. However, should energy prices and the peso gradually stabilize, current policy signals and market reactions suggest that the BSP would be more likely to raise rates by 25 basis points or pause for further observation. The Philippines’ Tightening Cycle Is Not Over After Two Consecutive Rate Hikes After conflict in the Middle East drove global energy prices higher, Philippine inflation increased from 2.4% in February to 4.1% in March before surging to 7.2% in April. The BSP therefore raised its policy rate by 25 basis points to 4.5% on April 23, marking its first rate hike since October 2023. It delivered another 25-basis-point increase in June, bringing the policy rate to 4.75%. The BSP also raised its average inflation forecast for 2026 from 6.3% to 6.4% and its 2027 forecast from 4.3% to 4.5%. Inflation is not expected to fall to 3.1% until 2028. This indicates that the central bank does not expect the current inflationary episode to disappear immediately with short-term fluctuations in oil prices and still needs to prevent rising costs from spreading into corporate pricing, wages, and household inflation expectations. Headline inflation declined to 6.8% in May and then to 6.4% in June, but it remained above the BSP’s 3% inflation target and the upper bound of its 2%–4% tolerance range. More importantly, core inflation, which excludes volatile food and energy prices, increased from 4.1% in May to 4.4% in June. This indicates that price pressures are spreading from fuel and food into other goods and services. Oil Prices and the Peso Reinforce Each Other’s Impact on Imported Inflation The Philippines is highly dependent on imported oil. Rising international oil prices therefore directly increase fuel, transportation, and power-generation costs, while also feeding into food prices through logistics, fertilizer, fishing, and agricultural production. Transportation inflation surged from 9.9% in March to 21.4% in April, while the cost of housing, water, electricity, gas, and other fuels also rose significantly, showing that the energy shock has already entered household living costs. Higher oil prices also increase Philippine demand for U.S. dollars, placing pressure on the external balance and weighing on the peso. The peso closed at 61.847 per U.S. dollar on July 24, setting a record low. As of 11:30 a.m. on July 30, the peso had recovered to around 61.360 per U.S. dollar in intraday trading. Although it had strengthened from its record low, it remained near historically weak levels. Peso depreciation raises the local-currency cost of dollar-denominated oil, fertilizer, animal feed, and machinery. Oil prices and exchange rates are therefore not independent risks. Higher oil prices increase import spending, while a weaker peso further magnifies the local-currency cost of the same imported products, creating a reinforcing cycle of imported inflation. Although raising interest rates cannot increase the supply of oil, it can enhance the attractiveness of peso-denominated assets and reduce the risks of disorderly currency depreciation and rising inflation expectations. Read More at Datatrack Wage Adjustments Increase the Possibility of Cost Pressures Spreading into Service Prices The National Capital Region raised its minimum wage beginning on July 25. The daily minimum wage for non-agricultural workers initially increased from 695 pesos to 755 pesos and will rise again to 780 pesos in January 2027. The full adjustment amounts to 85 pesos per day, or approximately 12.2%, and affects more than 1.1 million workers. Higher wages help compensate households for rising living costs, but they also increase operating expenses for labor-intensive sectors such as retail, food services, transportation, and personal services. Companies that cannot absorb these costs through productivity improvements or narrower profit margins may raise their prices. An increase in the minimum wage could also lead to adjustments in other salary brackets, extending the impact beyond workers who are directly paid the minimum wage. The BSP is reassessing the inflationary impact of the wage adjustment. Should other regions subsequently follow with similar increases, the supply-driven inflation initially caused by energy costs could evolve into second-round effects in which wages and service prices reinforce each other. U.S. Tariffs Indirectly Affect Domestic Prices Through Exports and the Peso Beginning on July 24, the United States imposed an additional 12.5% tariff under Section 301 of the Trade Act of 1974 on Philippine goods that were not included on the exemption list. The Philippine Department of Trade and Industry initially estimated that approximately 34.28% of the country’s exports to the United States, worth about US$6.25 billion, could be affected. More than 60% of Philippine exports to the United States may qualify for exemptions, including semiconductors, certain electronic products, automotive and aerospace components, and selected agricultural and mineral products. The tariff’s primary impact comes indirectly through export revenue, business investment, and foreign-exchange supply. Should exporters be required to lower prices to absorb the tariffs, or should U.S. orders shift to other manufacturing locations, the Philippines’ dollar earnings could decline. This could increase depreciation pressure on the peso and raise the cost of imported goods. First-Quarter GDP Growth Slows to 2.8%, Limiting the Central Bank’s Scope for Aggressive Rate Hikes The Philippine economy grew by only 2.8% year on year in the first quarter of 2026. Household consumption increased by 3%, while capital formation contracted by 3.3%. The services sector expanded by 4.5%, whereas industrial output declined by 0.1%. These figures indicate that current inflationary pressures are primarily driven by energy, exchange-rate, and broader cost factors. A substantial rate hike could help stabilize the peso and inflation expectations, but it would also increase the cost of corporate financing, mortgages, and consumer credit, further weakening investment and consumption. A single 50-basis-point rate hike therefore remains a low-probability scenario. The BSP may accelerate monetary tightening if oil prices surge again, the peso experiences disorderly depreciation, core inflation continues to rise, or wage costs are passed through more broadly into selling prices. Should energy prices and the exchange rate gradually stabilize, the central bank would be more likely to raise rates by 25 basis points or pause for further observation, balancing the need to curb inflation against the risk of causing a further economic slowdown. Philippine Policy Is Shifting Toward Preventing Inflation from Becoming Entrenched Philippine headline inflation has declined from 7.2% in April to 6.4% in June, but core inflation has risen to 4.4%. This indicates that although the initial energy-price shock has eased, price pressures continue to spread into other parts of the economy. Oil prices and the peso are contributing to imported inflation, higher wages are increasing the risk of second-round effects, and U.S. tariffs are creating indirect pressure through export earnings and the exchange rate. By keeping a 50-basis-point rate hike on the table, the BSP is seeking not only to reduce current inflation but also to prevent widespread corporate price increases, higher wage demands, and inflation expectations from moving away from the target. The future direction of monetary policy will depend on whether the four pressures worsen simultaneously, while weak economic growth means that the threshold for more aggressive central bank action remains relatively high.

By DataTrack

2026-07-30

U.S. Refined Copper Tariff Expectations Draw Inventories Away from Non-U.S. Markets, While Regional Price Spreads Reshape the Copper Supply Chain

Although the United States has yet to finalize its policy on tariffs on refined copper, the global copper supply chain has already begun to adjust. Attracted by tariff expectations and the copper price premium in New York, refined copper has continued to flow into the United States, pushing up inventories at the Commodity Exchange, or COMEX. Inventories at the London Metal Exchange, or LME, and the Shanghai Futures Exchange, or SHFE, have declined simultaneously. After weak imports in the first quarter, China’s restocking demand recovered in the second quarter and in June, further tightening the availability of freely tradable physical copper in Asia and Europe. The principal imbalance in the global copper market now lies in the geographic distribution of inventories. When U.S. prices exceed international prices, traders have an incentive to ship copper from Asia and Europe to the United States. This has gradually created a regional divergence characterized by rising inventories in the United States and tighter physical supply in non-U.S. markets. Refined Copper Is Already Flowing into the United States Before Tariff Policy Is Finalized The United States previously invoked Section 232 of the Trade Expansion Act of 1962 to impose tariffs on semi-finished copper products and certain copper-intensive derivative products, with rates varying by product category. Refined copper cathodes, copper ores, concentrates, and copper scrap were not included. The U.S. Department of Commerce previously recommended imposing a 15% tariff on refined copper beginning in 2027 and raising the rate to 30% in 2028. However, the president must still decide whether to adopt the recommendation based on an updated market assessment submitted by the department. As of July 30, 2026, publicly available information did not indicate that the United States had announced a final tariff plan for refined copper. Policy uncertainty has created opportunities to redirect physical copper across markets. When COMEX copper futures settlement prices exceed the closing price of LME three-month copper futures by enough to cover freight, insurance, financing, storage, and delivery costs, traders can purchase copper in Europe or Asia and ship it to the United States for sale or storage in COMEX warehouses. Read More at Datatrack In a report published on July 24, Morgan Stanley estimated that the United States had imported approximately 335,000 metric tons of copper ahead of potential tariffs since the beginning of 2026. Annualized at the pace prevailing at the time, this volume was equivalent to approximately 2.3% of global copper demand. An earlier estimate cited in a public report on June 8 placed the volume at 260,000 metric tons. The two figures reflect different measurement dates and indicate that copper inventories continued to move toward the United States under the influence of tariff expectations. These figures represent Morgan Stanley’s estimate of accelerated imports and inventory transfers. They are not equivalent to official U.S. customs data on total refined copper imports. Based on the July 22 figures from “COMEX Copper Futures Settlement Price” and “LME Three-Month Copper Futures Closing Price,” the converted New York–London price spread was approximately USD 507.70 per metric ton, equivalent to about 3.7% of the LME price. Because the two markets differ in contract maturity, quotation time, and delivery location, the spread should primarily be used to gauge the incentive for cross-market physical shipments. It should not be treated as a risk-free arbitrage return. Indicator Latest Market Signal Market Implication Morgan Stanley's July 24 estimate of accelerated U.S. imports since the beginning of the year Approximately 335,000 metric tons Tariff expectations continue to attract copper into the United States Converted spread between nearby COMEX copper and LME three-month copper on July 22 Approximately USD 507.70 per metric ton Cross-market shipping incentives remain in place COMEX inventories in mid-July Approximately 625,000 metric tons Global visible inventories are becoming increasingly concentrated in the United States Total LME inventories on July 20 Approximately 295,300 metric tons Down about 24% from the end of May Share of cancelled LME warrants on July 20 Approximately 56% A large portion of inventories has been designated for withdrawal SHFE inventories on July 29 Approximately 69,600 metric tons Inventories fell to a two-and-a-half-year low, reflecting continued depletion of available inventories in China Yangshan copper import premium on July 17 USD 100 per metric ton The premium rose to a 14-month high, indicating a recovery in import demand Note: Publication dates and inventory methodologies vary across exchanges. The table uses the latest available figure for each indicator, with the applicable date shown separately. Aggregate Inventories Remain High, but Tradable Physical Supply Outside the United States Is Tightening As of the end of June 2026, combined copper inventories at the LME, COMEX, and SHFE totaled approximately 1.066 million metric tons, up 43% from the end of 2025 and the highest level since 2003. Based solely on the aggregate figure, the copper market might appear to retain an ample supply buffer. However, most of the increase has been concentrated in the United States, while European and Chinese markets have continued to draw down inventories. The amount of copper actually available at the LME is also lower than the headline inventory figure suggests. On July 20, approximately 56% of LME copper inventories had been converted into cancelled warrants, indicating that holders had instructed warehouses to prepare the metal for withdrawal. Cancelled warrants do not mean that the metal has already left the warehouse, nor do they necessarily indicate an increase in end-user consumption. However, this inventory can no longer be regarded as freely available metal that is immediately accessible for delivery. Tightening supply for nearby delivery also pushed LME spot copper above the three-month futures price for the first time since January 2026, creating backwardation. This indicates that buyers are willing to pay more to secure immediate supply. The location of inventories and the status of warehouse warrants have therefore become more informative indicators of short-term market conditions than the aggregate level of global inventories. Accelerated U.S. Imports and Chinese Restocking Are Competing for Physical Copper A distinctive feature of the copper market in 2026 is that the United States has been accumulating inventories in anticipation of potential tariffs, while China resumed purchases in the second quarter following weak imports in the first quarter. The two markets have therefore begun competing simultaneously for limited physical supply. China imported approximately 1.41 million metric tons of refined copper in the first half of the year, down 14.3% from the same period a year earlier, indicating that cumulative imports remained below the previous year’s level. However, second-quarter imports increased 42% from the first quarter and were 3% higher than a year earlier. Imports reached 281,307 metric tons in June, up 0.5% from the previous month and the highest level since September 2025, indicating that Chinese import demand had recovered from its first-quarter low. Available inventories in China continued to decline during the same period. SHFE copper inventories fell to approximately 69,600 metric tons by July 29, their lowest level in two and a half years. The Yangshan copper import premium also rose to USD 100 per metric ton on July 17, reaching a 14-month high. Declining inventories, rising imports, and a higher import premium collectively indicate that China continued to require imported physical copper despite elevated prices. In the near term, Chinese import demand has been supported by maintenance at domestic smelters, limited substitution from copper scrap, and restocking requirements. Over the medium and long term, investment in power grids, renewable energy, electric vehicles, and AI data centers continues to support end-user demand. As U.S. importers accelerate purchases ahead of a possible tariff and China increases procurement, less refined copper is available to buyers elsewhere in Europe and Asia, further widening regional supply disparities across the global copper market. Mine Supply Contraction and an Apparent Refined Copper Surplus Are Occurring Simultaneously Data from the International Copper Study Group, or ICSG, show that global copper mine production declined 1.9% year over year to 9.38 million metric tons during the first five months of 2026, while copper concentrate production fell 3.4%. Production declined significantly in Chile and Indonesia, while accidents and operational problems affected several large mines. These disruptions pushed global copper concentrate treatment charges to low levels, reflecting greater difficulty among smelters in securing feedstock. During the same period, global refined copper production still increased by approximately 3% to 12.05 million metric tons, exceeding apparent consumption of 11.83 million metric tons and producing an apparent surplus of approximately 220,000 metric tons. The main drivers were higher refined copper production in China and the Democratic Republic of the Congo, together with growth in secondary refined output from copper scrap. However, an apparent statistical surplus does not mean that every region has access to sufficient physical supply. Some of the additional metal has already been shipped into U.S. warehouses, while other inventories are constrained by location, warrant status, deliverable specifications, and logistics. As a result, a modest global statistical surplus in refined copper can coexist with tight physical conditions in Europe and Asia. Regional Price Spreads Are Changing Trade Flows and Industrial Costs Regional price spreads are first changing the direction of copper trade. As long as the U.S. premium is sufficient to cover transportation and financing costs, refined copper produced in Chile, Peru, Canada, and other locations is more likely to be shipped preferentially to the United States. Buyers in Europe and Asia seeking to retain supply may therefore need to pay higher physical premiums, sign longer-term procurement contracts, or maintain larger safety inventories. Rising U.S. inventories also do not mean that domestic supply capacity has materially improved. Imported copper can provide a short-term buffer, but it cannot rapidly expand mining and smelting capacity. Should a tariff on refined copper take effect, downstream industries—including wires and cables, power-grid equipment, automobiles, construction, electronics, and data centers—could face higher raw-material costs before additional domestic supply becomes available. Inventory movements driven by policy expectations also carry the risk of reversal. In July 2025, the market widely anticipated that the United States would impose a 50% tariff on refined copper. However, the final measures covered only semi-finished copper products and certain copper-intensive derivative products, leaving refined copper outside the tariff scope. COMEX copper prices and the New York–London price spread subsequently fell sharply. When inventory flows are driven primarily by policy expectations and cross-market price spreads, a policy outcome that falls short of market expectations can cause both trading positions and physical shipments to reverse rapidly. The Tariff Decision Will Determine Whether Regional Divergence Persists If the United States adopts the Commerce Department’s earlier recommendation to impose a 15% tariff on refined copper beginning in 2027, the COMEX premium over the LME could widen again, and traders may continue shipping copper into the United States before the tariff takes effect. Once the policy is implemented, inventories accumulated in advance could provide a temporary buffer, but higher import costs would still gradually be transmitted to downstream manufacturers. If the United States abandons the refined copper tariff, the COMEX premium could narrow. Some inventories might be re-exported or remain in U.S. warehouses for an extended period, while physical supply pressure in Asia and Europe could ease. If the decision continues to be delayed, traders will still have an incentive to retain inventories in the United States, and the global market will continue to incur additional storage, financing, and logistics costs. Key indicators to monitor include the final U.S. tariff decision and implementation schedule, the COMEX–LME price spread, the share of cancelled LME warrants, SHFE inventories, the Yangshan copper premium, and copper concentrate treatment charges. Together, these indicators will determine whether tight physical conditions persist outside the United States and whether U.S. inventory accumulation can continue. The central risk in the copper market now stems from a geographic mismatch between physical supply and end-user demand. Once regional price spreads begin determining where copper is shipped, tariffs affect not only prices but also the logistics, storage, pricing mechanisms, and supply security of the global metals market.

By DataTrack