Italy’s manufacturing PMI for May was 49.2, slightly below the expected 49.6. According to HCOB, output saw a small increase, ending a 13-month drop. Order books are getting closer to stability, helped by slight growth in exports. Input costs have fallen, and delivery times have improved. Italy’s manufacturing is almost stable, with the PMI just under the neutral point of 50. Although there was a slight decline from April, the signs indicate a cautious recovery after a long downturn. Output rose for the first time in over a year, driven by new clients and recovery in demand, particularly in European markets.

Turning Point In New Orders

New orders, however, continued to drop for the 14th month, but at a slower pace, hinting at a possible turning point. Export orders increased for the first time in over two years, boosted by stronger European demand. Domestic demand remains weak, especially in key sectors like auto and electronics. Employment declined slightly, due to voluntary departures and cautious hiring amid uncertainty. Reduced input costs, resulting from lower material and freight prices, suggest easing inflation pressures. Alongside stable output prices, this provides some relief to manufacturers, aligning with the eurozone’s disinflation trend. The outlook is cautiously positive, supported by a stronger euro, declining energy prices, and potential easing from the ECB. However, trade tensions pose risks, especially after the Prime Minister’s recent visit to the U.S. While the sector shows signs of stabilizing, the recovery remains uneven. The PMI reading of 49.2, just below neutral, indicates that the industrial sector is not shrinking as quickly as before, but it’s not expanding either. Although there’s a minor decline from last month, manufacturers are slowly emerging from a prolonged slump. Factory activity is tentatively rebounding, partly due to renewed demand from Europe, suggesting the worst of the contraction may be over. The most notable change is in output: production has increased after more than a year of decline. This rise seems to be driven by a few new orders from clients in nearby eurozone economies. However, domestic activity is still uneven. Key sectors like machinery and consumer electronics remain under pressure, suggesting that household spending and business investment in Italy are not strong. On the pricing front, firms have experienced some relief. Reduced transport and material costs have led to leaner inputs, and delivery delays have shrunk, easing supply chain pressures. These changes point to better cost control and reduced inflationary pressures within manufacturing inputs, even though final demand remains too weak to fully benefit.

Inflationary And Employment Trends

The rise in new export orders, the first increase in over two years, is an encouraging sign. Even though overall new orders are still declining, this growth hints that some foreign markets may be improving. If external demand remains strong and exchange rates are favorable, it could support further gains. Job figures require attention. Despite a softer decline, jobs are still being lost mainly through attrition and cautious hiring. This reflects firms’ hesitation to commit, likely due to uncertain demand in the latter half of the year. While this doesn’t suggest immediate risk, it indicates a defensive industrial sentiment. We view the slight increases in activity, along with falling input costs and controlled output prices, as signs of a sector nearing bottom. While there isn’t a significant surge, stabilisation appears to be occurring, aided by a weaker euro and declining energy prices positively affecting profits. The potential for looser monetary policy over the summer—especially given the ECB’s softer rhetoric—could lower borrowing costs and narrow credit spreads. This may provide medium-sized manufacturers with more flexibility. However, geopolitical instability, particularly regarding transatlantic trade, continues to dampen confidence for firms that rely heavily on North American partners. In terms of derivatives, macroeconomic hedging should reflect a slowdown in inflation, and selective exposure to European industrial demand might regain value. Short-term volatility in commodity-linked contracts may decrease as material and freight prices stabilize. Nonetheless, positioning should remain cautious while risks—especially related to policy shifts and external trade actions—are still highly unpredictable. It’s essential to monitor the differences between domestic and international demand metrics. If foreign demand continues to grow while domestic demand remains weak, it may widen the gaps across regional sub-industries. This could suggest the need for more precise allocation rather than broad-based trading strategies. Create your live VT Markets account and start trading now.

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