The manufacturing sector in the Eurozone shows signs of recovery, backed by production increases since March. May’s final manufacturing PMI stands at 49.4, the same as the preliminary figure. Production has risen in the major economies of Germany, France, Italy, and Spain, indicating a broad-based recovery. Historical patterns suggest a 72% chance of continued growth next month, though potential US tariff hikes on EU imports remain a potential threat.

May saw an upswing in industrial production across major Eurozone economies, driven in part by anticipated US tariffs, prompting early orders from US buyers. France, however, did not experience the same level of benefit from these trends. Lower interest rates and decreased oil and gas prices have provided relief to the sector. German firms are expected to outperform their European counterparts due to new government expansionary policies.

Potential for Eeb Interest Rates Adjustments

The European Central Bank may gain support for anticipated interest rate cuts as the industrial sector decreases sales prices after two months of increases. Lower energy prices have reduced input costs, allowing room for potential monetary policy adjustment by the ECB.

That the manufacturing PMI has edged just below the 50-mark—signalling contraction but only narrowly—suggests a sector tentatively finding its feet. Production increases across Germany, France, Spain, and Italy carry meaning far beyond the uptick on a month-by-month basis. Growth rooted in output rather than in temporary inventory shifts lends weight to its stability. It tells us that firms are filling orders based on demand perceptions, not in response to transient restocking.

We should also consider how production lifted more sharply in response to tariff concerns from across the Atlantic. US buyers speeding up shipments out of anticipation for tightened trade conditions has certainly shown up in the ordering data; this creates temporary boosts in one direction but can later suppress momentum in the opposite. What follows may be just as steep a dip in order flow if buyers have overstocked during this phase. Those making decisions based on flow-through data rather than isolated snapshots should be prepared for such volatility to express itself with less warning than ideal.

Lower input prices, led by easing energy markets, have given manufacturers welcome flexibility. It’s not merely about energy being cheaper; it feeds directly into cost structures and, in time, output pricing. Evidence already points to a reversal in the pricing trend, with producers scaling back sales prices over the past two months. We view this as a trigger the ECB might use to support further reductions on interest rates. Market pricing on rates will already reflect anticipation of such adjustments, but policymakers now also have the added backing from the real economy pointing in a supportive direction.

Impact of Fiscal Policies and Market Dynamics

Scholz’s government has opened fiscal taps in key manufacturing regions, underpinning the performance of Germany’s large cap production firms. For traders, divergence in national policy response must be factored into assumptions about firm-level earnings. Pricing assumptions that ignore fiscal shifts will likely misprice performance scope. Markets may reward those who adjust early.

This environment creates a context where some producers, despite reported production expansion, may still have lean margins due to weak final demand. So while the PMI shows modest upward drift, that alone does not guarantee broader earnings expansion—especially if inventory builds fed by export-surge patterns begin to reverse. Those of us watching profit guidance will need to verify whether input declines make it all the way through to operating profits or are absorbed in price cuts to defend market share.

A key side-effect of softening producer prices is its impact on expectations for policy next steps. We’re seeing reduced cost pass-throughs downstream, which helps to justify receding inflation trajectories. When pricing pressure fades, the ECB has fewer obstacles to trimming rates. That’s perhaps already priced in to an extent, yet the confirmation in industrial indicators adds weight to it. Misreading that calibration creates risk on duration-heavy exposures in the coming sessions.

It’s also worth flagging that early mover advantage could play out in segments tied to Germany’s expansionary posture. Bund yields’ reaction here may reflect a broader macro rebalancing. If we see investor positioning adjusting toward nations with above-EU-average industrial rebound, that could push intra-EU spreads in subtle but directional ways. Traders using forward curves or swaps with cross-border exposure need to gauge this risk properly.

We expect that flow-based indicators will matter more across June and July—export volumes, input cost trajectories, rate expectations—all of which are now being viewed through a filter of fiscal manoeuvring and trade tailwinds. Long positions that benefitted from short-term order surges must now be checked against retail and export orders for Q3. The early year bets on Eurozone lagging are more fragile than they looked two quarters ago.

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