03.06.25 - Leading indicators - no rosy outlook
The latest global manufacturing PMI (Purchase Manager Index) data for May 2025 paints a cautious picture, with signs of stabilization in parts of Europe but notable weakness in Switzerland, the US, and China, largely due to escalating trade tensions and tariff impacts.
Purchasing Manager Index: based on a monthly survey of supply chain managers across multiple industries, covering upstream and downstream activity. The Purchasing Managers' Index can range between 0 and 100, with a number over 50 citing expansion and under 50 noting contraction.
In the Eurozone the Manufacturing PMI edged up to 49.4 in May from 49.0 in April, marking the slowest pace of contraction in nearly three years. This improved number was mainly driven by Spain's manufacturing sector returning to growth in May, with the Manufacturing PMI rising to 50.5 from 48.1 in April. However, Germany's manufacturing sector continued to contract, with the PMI slightly decreasing to 48.3 in May from 48.4 in April, marking the 35th consecutive month below 50.
Fort the export focused country Switzerland, the manufacturing PMI plummeted to 42.1 in May from 45.8 in April, the lowest reading since late 2023. The decline reflects collapsing production, dwindling orders, and escalating trade barriers. Over half of surveyed firms cited trade barriers as a core constraint, signaling significant challenges for the sector.
China's manufacturing sector contracted in May, with the Caixin/S&P Global Manufacturing PMI falling sharply to 48.3 from April's 50.4, the lowest in 32 months.
The United States manufacturing sector showed mixed signals in May. The S&P Global Manufacturing PMI rose to 52.3, indicating expansion, while the ISM Manufacturing PMI registered at 48.5, suggesting contraction. The divergence reflects varying assessments of the sector's health amid ongoing trade tensions and tariff impacts.
Markets: Global equities do not show big reaction on these numbers: China up this morning, US indices closed higher yesterday, Europe trading almost unchanged; long-term interest rates, after latest rally in May on the way to decline further with the 10-year US Treasury moving towards 4.4%, gold in consolidation after yesterday’s strong move.
My view: This could just be the beginning that the effects of trade tensions and tariffs are about to manifest in the manufacturing data. The strong figures previously observed were likely influenced by front-loading activities, such as Switzerland's Q1 GDP boost from increased pharmaceutical exports to the US, growing 2% year-on-year basis. However, with investments being put on hold and deliveries now missing in this second quarter, the underlying economic challenges are becoming more apparent.
For such a scenario, equity indices ran too far up, even with potential interest rate cuts. Investors are increasingly hopeful that the Federal Reserve (Fed) might initiate interest rate cuts sooner than the anticipated September timeline. However, some analysts caution that the Fed's commitment to its 2% inflation target may lead to a more measured approach, especially given the potential inflationary impact of recent tariff policies.
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