The Australian S&P Global Services PMI Final for May 2025 registered at 50.6, slightly above the preliminary figure of 50.5 but lower than the prior rate of 51.0. The Composite PMI stood at 50.5, down from the previous month’s 51.0 and marginally below the preliminary estimate of 50.6.

The data indicated a slowdown in growth within Australia’s service sector, linked to a smaller increase in new business amid deteriorating external conditions. Confidence levels among service firms dropped to a six-month low, contrasting with manufacturers who reported rising optimism.

Labour Market and Inflation

While the labour market remained tight with sustained hiring activity, a reduction in inflationary pressures suggests potential for lowering interest rates to foster growth. Output price inflation decreased to its lowest since late 2020, alongside reduced charge inflation in the goods sector, indicating a potential easing of Australia’s CPI outlook.

Earlier this week, the Australian S&P Global Manufacturing PMI Final for May 2025 recorded a figure of 51.0, down from the previous 51.7.

That said, the broader message from May’s combined PMI readings is one of moderation, particularly as the services side turns sluggish. The marginal lift in the final Services PMI compared to its flash estimate does little to mask the underlying softness emerging in key pockets. Businesses in the sector are seemingly grappling with dwindling momentum – something particularly tied to weaker external demand, which may not rebound swiftly.

Jackson’s assessment that confidence among service providers fell to a six-month trough points to a marked divergence from manufacturing sentiment, where there still appears to be room for cautious optimism. This imbalance between sectors could begin to sway short-term expectations for broader activity, particularly when forward-looking indicators fail to show uniform resilience.

Economic Shifts and Market Reactions

We’re also seeing tangible shifts below the surface. The continued glide in output price inflation – now sitting at its lowest point since the latter part of 2020 – is particularly noteworthy. It suggests demand-pull pressure has waned for now, at least in services, and that corporate pricing power may be thinning. For us, this quietly improves the probability that monetary authorities will adopt a more growth-oriented stance in the second half of the year, especially if trimmed CPI readings persist across back-to-back quarters.

Although jobs growth remains intact, the overall moderation in top-line figures paired with cooling price data gives us a tool to gauge risk premiums over coming sessions. Traders might begin reviewing exposure that assumes more aggressive tightening, and instead weigh the probability of a more dovish pivot – not immediately, but increasingly priced into late-year positions. Looking at how the latest signals intersect with our near-term forecasts, there’s merit in adjusting leanings off the back of new business and confidence gauges, particularly on the services side.

Meanwhile, we took note of Patel’s earlier comments suggesting that the downward revision in the manufacturing PMI, while modest, adds weight to the notion that domestic engines are not fully compensating for weaker foreign orders. Line-item trends don’t yet scream contraction, but the flattening of momentum should act as a nudge to keep positioning flexible, particularly when playing the carry equation via local currency pairs.

With that in mind, it’s less a time for conviction trades, and more a case for rotational shifts that reflect narrowing spreads – and possibly a fresh look at where passive strategies might underperform. The slippage in the composite figure ties neatly with the signal we’re receiving from PMI internals: a gentle warning that multiple cylinders aren’t firing in sync.

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