Italy’s services sector growth slowed down in August. The HCOB Services PMI fell to 51.5 from 52.3 in July, marking the lowest level since January. Although the sector has been expanding for nine months, this growth is now at a slower pace. The slowdown happened even with an increase in new business due to better domestic demand and new clients. However, foreign sales decreased for the thirteenth month, though less sharply than before. Employment growth continued but at a slower rate because companies are being cautious with hiring. Job backlogs decreased for the sixth month, suggesting that current staffing levels are enough to meet demand. Companies faced rising costs, including higher expenses for fuel, energy, and rent. The rise in output prices was the slowest in nine months, which may indicate potential pressure on profit margins. Business confidence fell, with future expectations reaching their lowest point in four and a half years. While some companies remain hopeful about growth from new projects and clients, the overall outlook is tempered by tough economic conditions. On the upside, Italy’s private sector showed slight improvement, with the HCOB Composite PMI increasing to 51.7, supported by renewed growth in manufacturing output. New business growth at the composite level was the strongest in 16 months, highlighting strong demand in the private sector. The contrast between Italy’s slowing services sector and recovering manufacturing presents a complicated situation. This situation indicates that broad market investments may be risky. Instead, we should pay attention to the tension between these two sectors. The strength of new business orders is encouraging, but we can’t overlook the major decline in confidence within the services sector. Given the drop in business confidence and shrinking profit margins in services, it may be wise to seek downside protection. Similar margin compression was seen in 2023 when energy costs were high, and the European Central Bank was tightening its policies. Buying put options on the FTSE MIB in the coming weeks could serve as a smart hedge against a possible downturn driven by the struggling services sector. Rising input costs and slow growth also bring attention back to Italian government debt. We recall how the gap between Italian BTPs and German Bunds widened during past economic uncertainties, like the sovereign debt crisis in the early 2010s. Positioning for a similar, though smaller, widening of that spread could be a beneficial trade if these negative trends persist. On the flip side, strong growth in manufacturing and a surge in new composite orders highlight underlying resilience. A broad slowdown isn’t guaranteed, especially with steady domestic demand. Indeed, Italy’s industrial production showed surprising strength in the first half of 2025, surpassing consensus forecasts in three of the last five months. This mixed data suggests that a relative value or pairs trade strategy may be the best course. We could invest in Italian industrial and manufacturing stocks that are gaining from the rebound while simultaneously shorting consumer services or domestically-focused banking stocks. This strategy allows us to profit from the economic divergence while minimizing our risk concerning overall market trends.

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