For files that have a merge conflict, the 'baseline', 'original', and 'merge' files get created on my local file system. All other files that would get updated do not get updated (the expected result with the -n option).

Either those files shouldn't be created for -n, or, if they are a necessity, be deleted afterwards. I agree with Marty that the state of the checkout should be the same before and after fossil update -n.