Global factory activity exhibited signs of recovery last month, with contractions slowing in the eurozone and manufacturing activity gaining momentum in several of Asia’s largest economies. However, the U.S. stood apart with its output weakening for a second consecutive month, according to private business surveys released on Monday.
Despite the softness in U.S. manufacturing, improved business sentiment globally suggests a more robust momentum in the economy than expected earlier this year. This trend offers central banks a reason to hold off on cutting interest rates or to proceed cautiously when they do. Asia’s manufacturing expansion is particularly notable, with surveys indicating that the eurozone’s manufacturing sector might have turned a corner after a prolonged downturn. Activity in Germany and France, the bloc’s two largest economies, showed signs of bottoming out.
The final eurozone manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global and released by HCOB, rose to 47.3 in May from 45.7. Although it remained below the 50-point mark separating expansion from contraction for the 23rd consecutive month, it was close to the preliminary estimate of 47.4. Carsten Brzeski, global head of macroeconomics at ING, commented, “It’s positive confirmation we’ve seen the bottoming out of the cycle … it points to probably a slight acceleration of growth.”
Global PMIs have also been encouraging, reflecting better-than-expected performance in China and some resilience in the U.S. Falling production costs in the eurozone suggested easing price pressures, giving the European Central Bank room to potentially deliver a 25-basis-point interest rate cut on Thursday. British manufacturers also reported a return to growth last month after a prolonged slowdown.
In the U.S., the Institute for Supply Management (ISM) reported that manufacturing activity slowed for the second consecutive month in May, with new goods orders dropping by the most in nearly two years. However, a measure of input inflation eased from its highest level since mid-2022. The U.S. factory sector has faced significant pressure for over a year, with ISM’s measure of output in contraction for 18 of the past 19 months due to high interest rates curbing demand for goods.
Asia’s Manufacturing Powers Ahead
In Asia, manufacturing activity expanded in Japan for the first time in a year, and South Korea’s manufacturing grew at the fastest pace in two years, driven by recoveries in the automobile and semiconductor sectors. This manufacturing recovery is expected to underpin economic growth in Asia and mitigate the impact of any market volatility caused by uncertainty over U.S. monetary policy.
“South Korea’s manufacturing sector appears to have caught a second wind,” said Joe Hayes, principal economist at S&P Global Market Intelligence. “Qualitative evidence from the survey also paints a promising forward-looking picture, with panelists commenting on imminent new product launches providing them with a platform for sustainable production expansion.”
Manufacturing activity also expanded in Taiwan, Indonesia, Vietnam, and the Philippines. In China, the private Caixin survey indicated factory activity rising at the fastest pace in nearly two years, driven by strong production and new orders. However, this contrasts with an official survey released on Friday that showed a decline in manufacturing activity, leaving some cautious about the outlook.
Toru Nishihama, chief emerging market economist at Japan’s Dai-ichi Life Research Institute, remarked, “The improvement in factory activity may be driven by hopes that China’s production will increase ahead. But the problem is that demand in the country isn’t improving much. It’s too early to judge whether the improvement will be sustained, given uncertainty over the strength of big markets like China and the United States.”
Market Implications and Investment Opportunities
Short-Term Market Reactions: The signs of recovery in global manufacturing could boost investor confidence in the industrial sector. Investors might find opportunities in stocks of manufacturing companies, particularly those with strong performance in Asia and Europe. However, caution is advised given the mixed signals from the U.S. market.
Long-Term Market Impact: The gradual recovery in global manufacturing suggests a more resilient economic environment than previously anticipated. This resilience could support sustained investment in manufacturing and related sectors. Additionally, central banks may adopt a more cautious approach to monetary policy changes, which could stabilize interest rates and support market growth.
Strategic Diversification: Investors should consider diversifying their portfolios to include exposure to manufacturing sectors in Asia and Europe. This diversification can help mitigate risks associated with economic uncertainty in the U.S. Furthermore, keeping an eye on central bank policies and economic data releases will be crucial for making informed investment decisions.
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