GILTS: Off Highs Ahead Of Pill Speech

The Chinese merchandise trade surplus was wider than expected in August at $102.3bln (vs $99.45bln cons, $98.2bln prior). This came as export growth, although weaker-than-expected at 4.4% Y/Y (vs 5.5% cons, 7.2% prior) exceeded import growth of 1.3% Y/Y (vs 3.4% cons, 4.1% prior).

• Export growth to the US remains sharply negative and the value of exports remains well below recent seasonal norms. In August, exports to the US fell 33.1% Y/Y, corresponding to a -23.6% 3mma Y/Y rate.
• However, as we have noted on several occasions, this fall in direct exports to the US appears to be being compensated by increased transhipments to nations such as Vietnam (and other ASEAN members). Chinese exports to Vietnam were up 31.2% Y/Y in August.
• Exports to the EU remain solid but are not accelerating – pushing back against fears of tariff-related disinflationary Chinese trade diversion into the bloc. In August, exports grew at a 10.4% Y/Y clip, corresponding to a 9.1% 3mma Y/Y rate (vs 9.7% in July, 10.0% in May). The Chinese trade surplus with the EU (in USD terms for comparability) nonetheless exceeds the US trade surplus for the first time since 2010.
• A reminder that ECB staff recently produced a blog post on the likely impacts of Chinese trade diversion to the EU, finding relatively modest disinflationary results even under a severe trade restriction scenario.
• On the import side, 3mma Y/Y growth of 2.2% was the highest since September 2024, and may provide tentative evidence of an ongoing recovery in Chinese domestic demand.

French Prime Minister Francois Bayrou told the French National Assembly that lawmakers can vote ‘according to their conscience’ today in a no-confidence vote that is expected to result in Bayrou's ouster.

• Bayrou reiterated his debt warnings: "If we want to save the ship, the ship on which we and our children find ourselves, we must act without delay. If we do not address the debt, we will no longer be able to borrow at all."
• Boris Vallaud, the president of the socialist bloc, said, “By voting against confidence today, the socialists are taking responsibility for asserting that they are ready, with the left and the ecologists, to govern."
• Next steps: Betting markets lean slightly towards snap legislative elections, despite Macron ruling the option out and the risk of further gains for the far-right National Rally. Defence Minister Sébastien Lecornu is favoured to replace Bayrou if elections are not called.
• Politico notes: "Lecornu has established his credentials as a loyal Macron ally, honing a political style that chimes well that of the president — in particular his engagement with local-level politics."
• If Macron looks left for a PM (after three centrists allies) then Socialist leader Olivier Faure or Former Socialist Party prime minister Bernard Cazeneuve have been floated as potential candidates.
• DW notes, “With no rules governing who Macron must choose, or how quickly, Bayrou is likely to remain prime minister in a caretaker capacity.”
• For a timeline of today's vote, see: FRANCE: Result of No-confidence Vote Not Expected Till 1900CET At The Earliest

Figure 1: Next French Prime Minister

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