Insights 
VT 
Italy’s manufacturing PMI for May was recorded at 49.2, just under the anticipated 49.6. Data from HCOB shows a modest increase in output, ending a 13-month decline. Order books are nearing stabilisation with minor export growth aiding this trend. Input costs have reduced, and delivery times are shorter.
Italy’s manufacturing is close to stabilisation with the PMI slightly below the neutral 50. While there was a minor dip from April, the dynamics indicate cautious recovery from a long downturn. Output increased for the first time in over a year, driven by new clients and tentative demand recovery, especially in European markets.
Turning Point In New Orders
Despite this, new orders continued to decrease, marking the 14th month of decline, though at a slower rate, suggesting a possible turning point. Export orders rose for the first time in over two years, buoyed by stronger European demand. Domestic demand remains weak in key sectors like autos and electronics.
Employment declined modestly, impacted by voluntary turnover and cautious hiring amid uncertainty. Decreased input costs, due to lower raw material and freight prices, suggest easing inflation pressures. This, alongside stable output prices, offers manufacturers some relief, aligning with the eurozone’s disinflation trend. The outlook is cautiously optimistic, with potential support from a stronger euro, falling energy prices, and possible ECB monetary easing. Risks include trade tensions, with Italian exporters facing uncertainties following the Prime Minister’s recent visit to the U.S. The sector shows signs of stabilising, but recovery remains uneven.
That reading of 49.2, coming in just beneath the neutral threshold, effectively points to an industrial sector that is not shrinking as quickly as before but also not yet entering into clear expansion. While the decline from last month’s reading is marginal, the broader context shows that manufacturers are gradually emerging from an extended slump. A tentative rebound in factory activity, driven in part by a return of some European demand, suggests that the worst phase of the contraction may be passing.
The most telling shift lies in output: after more than a year of persistent decline, production has edged higher. This was apparently supported by a few new orders trickling in, particularly from clients based in nearby euro area economies. Domestic activity, however, remains patchier. Key sectors such as machinery and consumer electronics are still under pressure, indicating that household spending and business investment inside Italy are far from robust.
On the pricing side, firms have seen some relief. Lower transport and material costs allowed for leaner inputs, while delivery delays have shortened—a welcomed change that helps reduce buffer stock requirements and smoothen supply chains. These factors suggest that cost control is improving and that inflationary pressures are becoming less intense at least within manufacturing inputs, even if the final demand remains too soft to fully capitalise.
Inflationary And Employment Trends
New export orders growing, the first such uptick in over two years, offers an important clue. Even though the broader tally for new orders is still in negative territory, this small external bump hints that some foreign markets may be on firmer footing. The assumption, then, is that external demand could again form a foundation for further gains—provided exchange rates hold favourably and geopolitical issues don’t interfere unexpectedly.
The workforce figures warrant attention. Despite a softer decline, jobs are being lost, mostly through attrition and cautious rehiring policies. It’s a sign that firms remain reticent to commit, likely due to unclear demand prospects in the second half of the year. This doesn’t yell risk, but it waves a flag—labour mobility paired with slow hiring points to an industrial sentiment that’s still defensive.
We interpret the creeping increases in activity, alongside declining input costs and restrained output prices, as classic hallmarks of a sector that is bottoming out. There isn’t a surge underway, but stabilisation appears to be taking shape, helped along by a softer euro recently and signs of energy price declines feeding into bottom lines.
The possibility of looser monetary policy over the summer—especially with ECB rhetoric already softening—may help to reduce borrowing costs and narrow credit spreads. That in turn could offer medium-sized manufacturers more breathing room. But geopolitical instability—particularly around transatlantic trade arrangements—continues to act as a drag on confidence, particularly for firms with heavy dependence on North American partners.
From a derivatives standpoint, macroeconomic hedging should increasingly reflect a deceleration in inflation, and selective exposure to European industrial demand might begin to show value again. Short-term volatility across commodity-linked contract curves may ease as freight and materials prices become less erratic. However, positioning should remain constrained while clustered risks—especially policy shifts and external trade actions—remain highly event-driven.
The idea is to watch the divergence between domestic and overseas demand metrics. If the external bump is sustained while home demand remains weak, there’s a chance spreads widen across regional sub-industries. That suggests potential for more exacting allocation, rather than broad-based directional trades.
