BOE: Pill says monpol should be focused on price stability; not much new

The policy process for fiscal measures and structural reforms in Germany appears to be starting to take shape according to reports filtering through over the weekend. This comes amid the government's "autumn of reforms" being set to start this week, and means a) income tax changes, b) social security net cuts and c) pension system reform are all being discussed if not in the pipeline. The backdrop remains weak growth, a E30bln+ gap in the 2027 budget as well as right-wing AfD polling close to the largest party nationally. Meaningful progress on the widely heralded "bureaucracy reforms" remains to be observed, and the coalition takes split views on how to proceed.

Details below:

• On pensions, ideas being floated include the abandonment of retirement with 63 years (which is in place for some age groups) but other representatives proposed raising the retirement age to 70 years more altogether.
• On income taxes, finance minister Klingbeil as well as a single CDU budget policy spokesman have both previously floated increases for high earners but this was met with wide criticism by other CDU representatives, referring to the coalition agreement, which makes no mention of this.
• A commission for deeper welfare state reform ("modernization" and "bureaucracy reduction") is set in place and targets publishing proposals by the end of year. Chancellor Merz plans E5bln of savings in unemployment benefits (around 10% of respective expenditure) through such a system reform. Labour minister Bas (SPD) has strongly argued against the proclaimed magnitude of savings but terms between her and Merz eased afterwards again.

• EUR/USD: $1.1530-50(E1.2bln), $1.1600(E519mln), $1.1650-70(E1.0bln), $1.1685-05(E2.3bln), $1.1750(E835mln), $1.1790-00(E1.2bln), $1.1885-90(E994mln)
• USD/JPY: Y145.85-00($1.4bln), Y150.00($1.1bln)
• GBP/USD: $1.3595-20(Gbp1.0bln)

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.