The S&P Global Manufacturing PMI for July stood at 49.8, indicating a slight contraction in the U.S. manufacturing sector, the first of 2025. This follows a decline from June’s 52.9, ending a period of consistent growth.
Employment Decrease
Market demand stagnated in July, with new orders rising only marginally, while new export orders decreased, especially in sales to China, the EU, and Japan. Trade policy concerns affected business sentiment, impacting decision-making.
Employment levels decreased for the first time since April as firms were reluctant to hire due to weak demand and cost pressures. Companies reduced inventory reliance, and tariff-related stockpiles diminished.
Input costs remained elevated due to tariffs, but inflationary pressures decreased from June’s high. Selling prices continued to rise, marking the second-largest increase since November 2022. Output growth also slowed, remaining marginal.
Business confidence declined to a three-month low, though firms anticipate rising output in the next year. Supply chain conditions improved slightly, with shorter input delivery times, attributed to better stock availability and reduced vendor backlogs.
Overall, July’s data suggest the manufacturing sector is undergoing challenges like demand stagnation and policy uncertainty, with hope for stabilisation due to easing inflation and better supply chain conditions.
Market Strategies
With the manufacturing PMI dipping to 49.8, we are seeing the first contraction of 2025, signaling a notable slowdown. This move below the key 50.0 threshold is reminiscent of what we saw in August 2019, when the ISM index fell to 49.1 amid similar tariff concerns, leading to a period of market weakness. In response, we should consider initiating bearish positions on sectors most exposed to manufacturing cycles, such as industrials (XLI) and materials (XLB).
The stagnation in new orders and the reduction of inventories are significant headwinds for third-quarter economic growth. This inventory destocking is a classic drag on GDP; US business inventories-to-sales ratios rose to over 1.40 in late 2022, and the subsequent work-down period cooled the economy. We should anticipate that this trend will weigh on the broader market, making put options on the Russell 2000 (RUT), which is sensitive to the domestic economy, an attractive hedge.
While input cost pressures are easing, the fact that selling prices are still rising steeply points to sticky inflation. This scenario of slowing growth alongside persistent price hikes complicates the Federal Reserve’s policy path and could delay any anticipated rate cuts. This policy uncertainty often leads to higher market volatility, suggesting it may be wise to purchase VIX call options for the coming weeks as a portfolio shield.
The report’s mention of declining export orders to China and the EU signals a weakening global demand environment. Historically, during periods of global economic stress, the US Dollar acts as a safe-haven asset, as seen by the Dollar Index (DXY) rally of over 15% through mid-2022. We should watch for a strengthening dollar, which would further pressure earnings for US multinational corporations.
Given the conflicting data of a slight contraction but improving supply chains, an outright aggressive short position is risky. A more calibrated strategy would be to use bearish debit spreads on the S&P 500 (SPX) with expirations in late August or September. This approach allows us to capitalize on a potential modest decline while clearly defining our maximum risk if the market remains resilient.
