The final Australian S&P Global Manufacturing PMI for May 2025 was reported at 51.0, a decrease from the preliminary reading of 51.7. This marks a decline from April’s 51.7, although the sector remained in expansion territory.

Production And New Orders

In May, production experienced its first decrease in three months, and new orders grew at a slower rate. There was also a reduction in stocks of purchases as buying activity diminished. Despite these developments, some forward-looking indicators suggest potential output growth in the coming months with increased export orders and improved business confidence.

Employment gains continued, and firms were actively hiring to fill vacant positions. Inflationary pressures eased, marking the lowest cost pressures seen in over a year, which may positively influence demand growth soon. The report indicated that any reduction in growth may have been affected by the election, suggesting this could be temporary.

The reported reading of 51.0 for May places the manufacturing sector just above the threshold that separates expansion from contraction. The figure being lower than both the preliminary estimate and the previous month’s data signals a mild but clear softening in activity. However, the index remains above 50, which implies there is still underlying resilience in the sector, albeit less so than before.

The drop in output, the first since February, reflects waning momentum in production lines. While not dramatic, this reversal following a string of gains points to a broader hesitation among manufacturers, possibly due to order backlogs easing or clients holding off on commitments. Purchasing managers also cut back on input buying, causing stocks of purchases to decline for the first time in months. Demand appears less urgent, even as firms show optimism for upcoming periods.

Export Orders And Business Confidence

The uptick in export orders is encouraging. Focusing on foreign demand might provide an additional avenue for sustaining activity levels if domestic conditions remain subdued for a while. Business confidence rose, according to survey responses, though history tells us this doesn’t always turn into immediate volume gains—it often takes time to translate into physical output.

Labour conditions still show a tightening trend. The continued hiring spree suggests firms expect demand to hold firm enough to justify maintaining or expanding capacity. These hiring movements, paired with easing cost inflation—the lowest in over a year—create an environment where margins might start to stabilise or even improve. From an operating cost perspective, lower input pressure tends to provide space for inventory rebuilding or price competition later, without hurting profits straight away.

There’s a political undertone to the data as well. The timing of national elections often brings about shifts in activity, partly due to uncertainty and partly because of policy anticipation. It’s plausible that some clients, especially in investment-heavy sectors, delayed orders temporarily. Once policy clarity returns, we typically see deferred decisions come back through the pipeline.

In light of these developments, we should prepare for patchy data in the near term. In our trading models, previous instances of stalled output growth without broader contraction have led to tighter implied volatility around manufacturing-driven instruments. That suggests a potential opportunity for deploying strategies more geared toward range-bound conditions or lower-delta derivatives. Moreover, employment data combined with easing input costs may imply a support floor under forward price expectations for industrial production-linked assets.

Export strength should not be ignored. It might not yet move the broader economic measures, but for instruments tied to producer sentiment or shipping volumes, tailwinds are forming. The shift in purchasing activity and stock drawdown may give forward indicators a slightly later uptick, meaning that medium-term derivative structures might benefit from deferred entry points.

Finally, flattening inflation pressures, especially ones sustained over several readings, could adjust yield curve assumptions. If we continue to see these in conjunction with stable hiring, product-linked fixed income derivatives may need recalibration. Scenarios should be updated to give heavier weight to growth persistence in a disinflationary environment.

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