The manufacturing sector in the Eurozone is showing signs of recovery, with production increasing since March. In May, the final manufacturing PMI was 49.4, matching the preliminary figure. Key economies like Germany, France, Italy, and Spain are seeing growth, indicating a broad-based recovery. Historical data suggests there is a 72% chance of continued growth next month, although potential US tariff hikes on EU imports could pose a risk. In May, industrial production rose across major Eurozone economies, partly driven by expected US tariffs. This led US buyers to place early orders. France did not benefit as much from these trends. Lower interest rates and decreasing oil and gas prices have eased pressure on the sector. German companies are expected to do better than their European peers thanks to new government expansion policies.

Potential Changes to Interest Rates

The European Central Bank may gain support for expected interest rate cuts as the industrial sector lowers sales prices after two months of increases. With lower energy prices reducing input costs, there is room for the ECB to adjust its monetary policy. The manufacturing PMI being just below 50 indicates a contraction, though only slightly. This suggests the sector is cautiously stabilizing. The production increases in Germany, France, Spain, and Italy carry significant implications. Growth based on output rather than temporary inventory changes indicates stability and suggests firms are fulfilling orders based on actual demand. We should also think about how production surged due to tariff concerns from the US. US buyers rushing to place orders in anticipation of tighter trade conditions has impacted the data. This can create temporary boosts in orders but may lead to a decline if buyers have overstocked. Those relying on flow-through data rather than isolated snapshots should brace for unexpected volatility. Lower input costs, primarily due to easing energy prices, have given manufacturers more flexibility. It’s not simply about cheaper energy; it affects overall costs and eventually product pricing. Early signs show a shift in pricing trends, with producers reducing sales prices in the past two months. This development could prompt the ECB to consider further interest rate cuts. Markets are already factoring in these adjustments, and policymakers now have additional support from the real economy.

Impact of Fiscal Policies and Market Dynamics

Scholz’s government has increased fiscal spending in important manufacturing areas, supporting the performance of Germany’s larger production firms. Traders must consider differing national policy responses when estimating firm-level earnings. Ignoring fiscal changes could lead to mispricing performance. Early adjustments may be rewarded in the market. This scenario means some producers, despite reporting increased production, could still have slim margins due to weak demand. So, while the PMI shows slight improvement, it doesn’t guarantee broader earnings growth—especially if inventory increases from export surges start to decline. Those monitoring profit guidance must check if input price reductions translate into operating profits or are absorbed by price cuts to maintain market share. A key effect of decreasing producer prices is the impact on policy expectations. We are seeing reduced cost increases being passed on, helping to support lower inflation projections. As pricing pressure decreases, the ECB may find it easier to lower rates. While this may already be somewhat anticipated, confirmation from industrial indicators adds credibility to this outlook. Misinterpreting these signals could pose risks for duration-heavy investments in the near future. It’s also important to note that early mover advantages could emerge in areas linked to Germany’s expansionary stance. Changes in Bund yields may indicate broader macroeconomic shifts. If investors reposition towards countries with stronger industrial recoveries than the EU average, this could subtly affect intra-EU spreads. Traders using forward curves or swaps with cross-border exposure need to assess this risk carefully. We expect that flow-based indicators, like export volumes, input cost trends, and rate expectations, will be increasingly important in June and July. These will now be viewed through the lens of fiscal movements and trade benefits. Long positions that benefitted from short-term order surges should be evaluated against retail and export orders for Q3. The outlook for Eurozone lagging investments appears more fragile than it did two quarters ago. Create your live VT Markets account and start trading now.

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