Euro zone factory downturn eased in May, PMI shows

The Eurozone Manufacturing Purchasing Managers' Index rose to a 33-month high of 49.4 in May, signaling a further easing of the downturn and approaching stabilization, with output increasing for the third consecutive month. New orders neared stabilization and export orders hit a 38-month high, while input costs declined, leading factories to cut selling prices for the first time since February, potentially giving the ECB room for further interest rate cuts after an expected cut in June.

Analysis

The Eurozone manufacturing sector showed significant signs of recovery in May, with the HCOB Purchasing Managers’ Index (PMI) climbing to 49.4 from April's 49.0, marking a 33-month high. Although still below the 50.0 threshold indicating expansion, this upward trend points towards a progressing stabilisation. Manufacturing output increased for the third consecutive month, holding steady at an index level of 51.5, its joint-highest since March 2022. This improvement was supported by new orders approaching stabilisation after nearly two years of contraction and export orders reaching a 38-month high. The recovery appears broad-based across major economies: Greece maintained a PMI of 53.2, Spain returned to expansion at 50.5, France approached stabilisation at 49.8 (a 28-month high), and while Germany remained the weakest at 48.3, it experienced one of its softest deteriorations in three years. Job cuts were scaled back, with employment declining at the shallowest rate since September 2023, and purchasing activity shrank at its slowest pace in almost three years. Manufacturer confidence regarding the year ahead rebounded strongly, with the future output index jumping to 61.6 from 58.0, its highest since February 2022, despite concerns over potential U.S. tariffs. Critically, input costs declined for the second consecutive month, accelerating to the fastest pace in 14 months, leading factories to reduce selling prices for the first time since February. This development is seen as providing the European Central Bank (ECB) with increased scope for anticipated interest rate cuts, with a cut widely expected in June and potentially more to follow.

Key Decisions for Investors

• Investors should consider the improving Eurozone manufacturing data, particularly the rise in output and new orders, as a positive signal for equities in the region, though the sub-50 PMI still warrants caution.
• The decline in input costs and subsequent factory gate price reductions may reinforce the ECB's path towards monetary easing, potentially benefiting rate-sensitive assets and supporting broader market sentiment.
• While optimism is growing, as reflected in the future output index, investors should remain vigilant regarding external risks, such as potential U.S. tariffs, which could impact export-driven components of the recovery.