EM ASIA CREDIT: MNI EM Credit Market Update - Asia

Spanish headline IP fell 0.5% in July, below the five-analyst strong consensus of -0.2% and June's 0.8% (revised from 1.0%). Energy (-2.7% M/M) and capital goods (-3.6% M/M) production dragged heavily on the print, both can be volatile and often reverse, meaning that underlying trends might be not as poor as the relatively weak sequential headline reading suggests.

• 3m/3m IP growth was 0.7%, as in June (revised from 0.8%), the joint highest reading since December 2024. On a Y/Y comparison, IP read 2.5%, the strongest since October 2024.
• Recall Spanish manufacturing PMI gives a firm outlook for August as it strongly outperformed on that month, quoting "fastest growth of the manufacturing sector since last October [...] output, new orders and employment all rose to stronger degrees compared to July. Expectations were positive that growth will be sustained, although buying activity increased only slightly amid ongoing supply-side challenges".
• Today's Spanish data comes after German July IP was marginally stronger than consensus (at 1.3% M/M) but France saw a setback as some one-off factors reversed (-1.1% M/M). Italy is scheduled for release at 0900BST/1000CEST today, with consensus standing at 0.1% M/M (after +0.2% in June).

A NATO spokesperson confirmed that up to 10 Russian drones violated Polish airspace overnight. A number of the drones were shot down by a multinational NATO air operation, including Italian and Dutch assets, in what appears to be the first direct military confrontation with Russia on NATO territory.  

• Polish PM Donald Tusk confirmed on X that Poland shot down drones that “posed a direct threat”, adding in later comments that the “violation of Poland's airspace was likely large-scale provocation."
• The EU's top diplomat, Kaja Kallas, said that the incident was “the most serious European airspace violation by Russia since the war began, and indications suggest it was intentional, not accidental.”
• A NATO spokesperson said, per Reuters, that the alliance is not treating the incursion “as an attack” but confirmed that NATO believes the Poland incident “was an intentional incursion by Russian drones”. NATO members will discuss their response at a regular council meeting this morning.
• While the NATO statement suggests the alliance is managing expectations about a collective response, the incursion is a major challenge to NATO’s ‘Article 5’ principle, with the alliance struggling to define the parameters of an attack that would warrant a collective response, leaving a large grey area for Moscow to conduct hybrid and low-level kinetic operations in NATO member states.
• European Commission President Ursula von der Leyen signalled that the incursion necessitates additional sanctions on Russia, including financing Kyiv with frozen Russian sovereign assets but it is unclear how quickly the EU can pass new sanctions, with Hungary and Slovakia likely to oppose any new measures.    
• Notably, the incursion comes ahead of the five-day ‘Zapad’ joint Russian/Belarusian military exercises near the Polish border, starting September 12. The exercises are officially expected to involve around 13,000 troops, but analysts caution the real number is likely to be far higher, per CEPA. Military experts warn that the exercises could provide cover for expanded Russian operations in Ukraine or mask a build-up of Russian military assets on NATO’s eastern flank. 

This morning’s stronger-than-expected Norwegian August inflation reading has pushed front FRA rates up 4-7.5bps, and the 2-year NOK swap rate up 6bps. 

• Although we don’t think the inflation print in isolation is enough to stand in the way of a September rate cut (particularly with the Q3 Regional Network Survey set to be released tomorrow), it warrants a repricing of the risk rates are held at 4.25% next week.
• We have noted several times over the past week that markets may be underappreciating such a risk. Governor Wolden Bache has been careful in stressing that the June MPR rate path was consistent with “one or two” more 25bp cuts this year.
• The tightening of EUR-NOK 2-year swap rate differentials (also in part related to this morning’s EUR rate price action, see above) has pulled EURNOK down 0.43% on the session.
• The cross is testing clustered support around 11.6273 (61.8% retracement of the June 17 – August 11 rally) and 11.6351 (Sep 2 low). Clearance of this level would expose the 11.6000 handle, which was an important pivot support between H2 2024 and Q1 2025.