The latest July data released by HCOB shows Italy’s manufacturing PMI at 49.8, slightly above the expected 49.0 and an increase from June’s 48.4. The index remains below the 50.0 threshold, suggesting continued contraction, though with softer declines in output and new orders.
Italy’s Manufacturing Outlook
Italy saw input stocks rise for the first time in nearly three years, alongside inflationary pressures re-entering the market. Italian manufacturers are rebuilding inventories, potentially due to supply chain concerns, reduced orders, and improved business confidence. Optimism is rising above the long-run average, signalling some firms anticipate a recovery in demand.
The EU–US trade agreement provides planning certainty for Italian exporters by replacing a threatened 30 percent tariff with a 15 percent duty on specific goods. This rate is still a hefty burden, impacting Italian competitiveness in the US. There is uncertainty on the longevity of this deal, given the unpredictable nature of recent US trade policies, which could alter terms in the future.
We are seeing tentative signs of stabilisation in Italy’s manufacturing sector, with the PMI nearing the 50.0 growth threshold. This suggests a move to reduce bearish positions on Italian assets, such as covering shorts on FTSE MIB index futures. This improvement is particularly noteworthy when compared to last week’s PMI data from Germany, which showed its manufacturing sector falling deeper into contraction at 47.5.
We should pay close attention to the rise in input stocks, a development not seen in nearly three years. Historically, such inventory rebuilding, similar to what we observed in late 2013, often precedes a broader economic recovery and a sustained rally in equities. This growing confidence could justify cautiously bullish strategies, like selling out-of-the-money puts on the FTSE MIB to collect premium.
European Economic Strategies
The return of price pressures aligns with the European Central Bank’s decision last week to hold interest rates steady, citing persistent core inflation. This backdrop may limit the upside for the broader market but could strengthen the Euro. Therefore, traders might consider long positions in the Euro, perhaps through EUR/USD call options, as a complementary trade.
While the recent EU-US trade agreement provides some clarity, the remaining 15% tariff continues to challenge Italian exporters. Recalling the sharp market swings during the 2024 trade policy disputes, it is wise to maintain some downside protection. Holding some long-dated, inexpensive put options on key industrial names could serve as a valuable hedge against any renewed trade volatility.
