Insights 
VT 
The eurozone’s May services PMI stood at 49.7, a slight rise from the preliminary 48.9. This indicates marginal growth in business activity, though the overall outlook shows an economy nearing stagnation.
The composite PMI increased from the preliminary 49.5 to 50.2, just above the expansion threshold, but with slowed growth in May. Weaker demand, particularly in Germany, and subdued business confidence due to uncertainty, contributed to this deceleration.
Eurozone Economy Growth
The eurozone economy marked its fifth consecutive month of growth. Manufacturing output maintained moderate growth, whereas the services sector saw a decline in activity. Economic measures, such as potential ECB interest rate cuts and fiscal stimuli, particularly from Germany, aim to counter rising tariffs and uncertainty.
ECB may lower interest rates on June 5, despite rising costs in the services sector, due to falling goods prices. Southern Europe, with solid sector growth in Italy and moderate growth in Spain, compensated for declines in France and Germany. Maintaining southern Europe’s momentum and Germany’s fiscal policy support might bolster the services sector this year. Confidence in recovery has slightly risen, yet remains weak when viewed historically.
Despite a modest lift in May’s final PMI readings, the trajectory remains underwhelming. The figure creeping just over the neutral 50 level gives the impression of expansion, but only narrowly. Much of the higher reading stemmed from services. Still, the figures reflect a lack of clear upward momentum in core economies. Germany has dragged once again, facing fragile domestic demand and fading business sentiment—both weighing on output.
France failed to offer any counterbalance. Instead, it posted further weakness in private sector activity. From Italy and Spain, however, there was at least some positive contribution. These countries continued to show more resilient services demand, possibly owing to relative strength in internal consumption and stable employment. Yet this performance might lack the scale needed to offset broader euro area softness, particularly as one-time boosts in Southern Europe, such as tourism-related demand early in the season, could start to fade.
Inflation And Rate Cut Considerations
We noticed that goods inflation has moderated significantly, which might provide the ECB with enough justification to proceed with a rate cut—even as service input prices remain elevated. Wage growth could still cause friction in efforts to manage inflation expectations, but the direction of travel continues to support a slightly looser stance.
Traders with exposure to short-term rates have readjusted positioning. With price pressures appearing more two-speed across the region, sensitivity to regional data has increased. The forward curve has slightly steepened in anticipation of a June cut, pushing yields lower on the short end while retaining broader caution across longer-dated contracts.
The divergence between input costs and output charges across manufacturing and services implies margin compression in some areas, which could narrow the window for any sustained profitability in certain sectors. From a strategic point of view, spreading exposures across geographies looks more favourable, particularly tilting towards Southern markets where demand is comparatively firm.
What stands out is the differential in confidence levels. While returning to positive territory in some parts, the historical context matters: sentiment remains relatively low. That limitation may continue to restrict hiring intentions and capital expenditure, especially in the contracting segments of the services sector.
Expect month-on-month volatility ahead, as headline PMIs hover around equilibrium levels. Any upside surprises in German orders or French consumer spending might reprice the outlook for Q3 growth, particularly if paired with clarity on fiscal direction. On the other hand, disappointments could swiftly unwind recent rate expectations.
What matters now is granular attention to regional data and a sharper focus on second-tier indicators. There’s been a tendency to lean too heavily on headline inflation and PMI prints alone. But in this environment, broadening the lens to include wage settlements, industrial order backlogs, and corporate lending volumes could better inform positioning. What mattered in the last cycle—front-loading, guidance dependencies, heavily weighted policy signals—has started to lose influence.
The risk-reward balance remains asymmetrical. Positive revisions can prompt sharp rallies in rate-sensitive products, but downside data often feeds into the persistent narrative of underperformance, particularly in Western Europe. No need now for overextended conviction in either direction—liquidity remains patchy, and even small shifts in forward-looking indicators are presently moving the needle.
As flows continue to build around summer expectations, tactical strategies may benefit from reassessing exposure to consumer-led sectors. The sharp divide between retail activity in North and South presents opportunities, especially if wage-driven inflation shifts act unevenly across the bloc. A pronounced focus on upcoming ECB and national communications will remain warranted, but equally, quieter data releases may carry unusual weight in shaping short-term sentiment.
