Year: 2025

US manufacturing PMI picks up in May – Tariffs related

The headline index from the report, the seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI^®), posted 52.0 in May. That was up from readings of 50.2 in the preceding two months and represented solid overall growth which was the best since February’s recent high.

May’s improvement in the PMI was driven by an uplift in new orders and an outsized contribution from input inventories which, in 18 years of data collection, rose at an unprecedented pace. Similar factors drove growth in both instances – efforts by manufacturers and their clients to front-run tariff related increases in prices and supply-side disruption.

For new orders, which rose to the strongest degree in three months, demand from within the United States was noted as the primary driver of growth as international sales remained relatively subdued, rising only slightly following April’s steep fall. Trade policies and tariffs continued to weigh on foreign demand, according to panelists.

Despite the uplift in order books, production volumes were trimmed marginally for a third month in a row. Capacity was also broadly sufficient to deal with the dual requirements of both incoming and existing orders as backlogs of work fell again, albeit modestly. Firms also added to their finished goods inventory, which rose for the first time since last November.

An increase in labor capacity was registered in May, with a net increase in employment signaled for the first time in three months. However, growth was only marginal, with some firms noting difficulties in finding suitable workers to fill vacancies.

Tariffs helped explain another steep increase in manufacturing input prices during May. Latest data showed that raw material price inflation remained high, despite dropping to a three-month low, amid reports that suppliers were passing on tariff related cost increases. Supplier delivery delays were also noted, linked to growing stock shortages at vendors. The degree to which supplier performance worsened was the steepest for over two-and-a-­half years.

In response to higher input costs, factory gate prices were also raised in May, and to the greatest degree since November 2022.

Finally, manufacturers are hopeful of a more stable trading environment in a year’s time, with growing expectations among the panel that disruption to markets caused by tariffs will dissipate in the months ahead. This helped to explain why confidence in the outlook improved in May to a three-month high – and to a level fractionally above the survey average

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence

“The rise in the PMI during May masks worrying developments under the hood of the US manufacturing economy. While growth of new orders picked up and suppliers were reportedly busier as companies built up their inventory levels at an unprecedented rate, the common theme was a temporary surge in demand as manufacturers and their customers worry about supply issues and rising prices.

“These concerns were not without basis: supplier delays have risen to the highest since October 2022, and incidences of price hikes are at their highest since November 2022, blamed in most cases on tariffs. Smaller firms, and those in consumer facing markets, appear worst hit so far by the impact of tariffs on supply and prices.

“Encouragingly, manufacturers regained some optimism in May after sentiment had been hit hard by tariff announcements in April, partly reflecting the pauses on new levies. However, uncertainty clearly remains elevated amid the fluid tariff environment, and factories have so far shown a reluctance to expand headcounts in the face of such volatility.”

The ISM survey outlines the “worrying developments”:

• ISM Manufacturing Index Signals Waning Activity in May

Manufacturing activity retreated again in May, notching the fourth-straight monthly decline for the ISM manufacturing index amid a measurable deterioration in trade-related activity. That is not to suggest that things were going swimmingly before the recent escalation in trade tensions. To be sure, the headline index failed to register even a single month on the good side of 50 in all of 2023 and 2024.

But in the wake of the election, the factory sector had regained a little lost swagger. After sinking to its lowest level of 2024 in October, the ISM rose for three-straight months amid hopes for less regulation and lower taxes. January marked the not-quite nose-bleed-inducing summit of just 50.9. The ensuing descent for the manufacturing sector has occurred against a backdrop of an ever-changing and increasingly Byzantine list of tariffs that is sowing confusion for American industry and is impacting U.S. firms’ orders from abroad.

In the fabricated metals space, one respondent illustrated this concept with the very direct observation that “tariff uncertainty is impacting new international orders. Tariffs are also the main reason our Asia customers are requesting delayed shipments.”

While the indexes for import and export orders do not feed directly into the headline measure, they do offer an empirical way to measure how broadly these trade issues are impacting businesses. The export orders measure dropped to 5-year low of 40.1 and the imports measure fell to 39.9, a level not seen since 2009 when the global financial crisis slowed global trade to a crawl.

Source: Institute for Supply Management and Wells Fargo Economics

Four of the five indexes (production, new orders, supplier deliveries, inventories, employment) that feed into the headline ISM index rose last month, though all but one remain consistent with contraction. Inventories was the only component to slip and supplier deliveries is the only that remains in contraction, both of which reflect tariff pressure.

The measure of current activity—production—rose in May after hitting a historically-low level in April, but at 45.4, it’s still consistent with some of the lowest-levels of activity outside the pandemic in the last couple of decades. It’s little surprise that new demand remained constrained with the new orders index barely budging and registering contraction for the fourth straight month. In the context of on-again, off-again tariff policy, most businesses are left sitting on their hands as they await any sign of more-persistent clarity.

The prices paid index came down slightly, but continues to run at a level consistent with higher cost pressure in the manufacturing sector. “We have entered the waiting portion of the wait and see, it seems. Business activity is slower and smaller this month. Chaos does not bode well for anyone, especially when it impacts pricing.” The employment metric also continues to be consistent with layoffs in the sector.

Source: Institute of Supply Management and Wells Fargo Economics

It also looks to be getting a bit more challenging to get inputs as well. The supplier deliveries index rose to 56.1, given this is an inverse metric this is consistent with some of the longest wait times for needed inputs in nearly three years. This measure is something to pay attention to. Not only will longer delivery times signal trade-related supply chain disruptions, but as we detailed in a note last week, it could boost the headline ISM in coming months and overstate the health of the manufacturing sector.

Current supply challenges are already reminiscent of the pandemic for some—a respondent from the Electrical Equipment, Appliances & Components industry said, “The administration’s tariffs alone have created supply chain disruptions rivaling that of COVID-19.” Another from the Computer & Electronic Products industry said, “…No one is willing to take on inventory risk.” The drop in the inventories index comes as the pull-forward in demand looks to have run its course, leading inventories back into contraction.

There is ultimately no industry untouched by tariffs and the selected respondent comments summarize an uncertain and chaotic environment. Purchasing managers are reporting softening demand conditions, increased cost pressure and declining profitability.

From NBC:

After U.S. businesses massively front-loaded international orders in the first quarter to avoid tariffs imposed by the Trump administration, a swing back was to be expected in the second quarter. However, the reversal appears to be much more dramatic than anticipated.

Trade balance data published last Friday showed a 19.8% decline in goods imports in April—the largest monthly drop since records began in 1989. Goods exchanges do not appear to have rebounded in May, judging from the ISM Manufacturing Report published this morning.

As today’s Hot Chart shows, the sub-index tracking new export orders came in at just 40.1—a level never seen outside of recessionary periods. Meanwhile, the import index saw its third-largest monthly decline in history (-7.2 index points) and stood at its lowest level since the Great Recession (39.9).

The collapse of trade in the second quarter will affect economic data in different ways depending on the country. In the United States, it should result in higher-than-expected GDP growth, with sinking imports acting as a major boost. Elsewhere, however, the impact will be the opposite. A decline in exports will indeed act as a drag on growth among the United States’ trading partners, notably Canada. The impact could be significant for the manufacturing sector, which has already been experiencing a decline in production and jobs for several months.

China: PMI signals first deterioration in operating conditions in eight months The headline seasonally adjusted Purchasing Managers’ Index™ (PMI) posted 48.3 in May, down from 50.4 in April. Registering below the neutral 50.0 mark for the first time in eight months, the latest data signalled that manufacturing sector conditions deteriorated midway through the second quarter. Moreover, the reading was the lowest recorded since September 2022. Central to the easing of manufacturing business conditions was the reduction in new orders. Incoming new work contracted at the quickest pace in over two-and-a-half years. This was attributed by surveyed businesses to deteriorating demand conditions and was partly driven by a second successive monthly decline in export orders. In line with the reduction in new work, manufacturing output fell for the first time in 19 months. Slower inflows of new work meanwhile contributed to a further depletion of backlogged orders in May. The reduction in capacity requirements further led Chinese manufacturers to scale back headcounts in May, either through redundancies or the non-replacement of job leavers. Additionally, a marginal reduction in purchasing activity was observed in May, though a renewed – albeit fractional – rise in stocks of purchases suggested that there was an adequate level of pre-production inventory holdings among Chinese goods producers. Stocks of finished goods accumulated for the first time in four months, albeit only slightly. Survey respondents indicated that this was due to both falling sales and delays in outbound shipments of products. Supplier lead times meanwhile lengthened marginally for the third month in a row in May. Turning to prices, average input costs and output charges continued to decline midway through the second quarter of 2025. Moreover, the rates of reduction accelerated since April. While lower raw material and energy costs underpinned the fall in input prices, which firms passed on to clients, charges were also suppressed by heightened competition. On the other hand, there was a renewed increase in export charges, the first in nine months. Finally, sentiment in the Chinese manufacturing sector improved in May. Optimism picked up since April as firms grew more hopeful that trade conditions can improve and the widening of export markets will help to drive sales in the year ahead. Commenting on the China General Manufacturing PMI® data, Dr. Wang Zhe, Senior Economist at Caixin Insight Group said: (…) “The contraction in supply and demand was attributed to sluggish external demand, which fell for a second straight month. The gauge for new export orders dropped to the lowest level since July 2023. Notably, the decline in supply and demand was particularly pronounced for investment products. “Employment continued to decline. The job market shrank at a faster pace than in April, marking the eighth instance of a decline in employment in the past nine months. “In light of downward market pressure, manufacturers remained cautious when it came to hiring. Investment product manufacturers laid off a significant number of workers. Amid tepid demand, businesses continued to clear backlogs of work, keeping the corresponding indicator in contraction and sending it to its lowest since January 2022. “Prices remained at a low level as supply and demand weakened. Input costs declined for the third straight month on falling prices of energy and chemical raw materials. Sales prices were also subdued as businesses sought to lower prices to remain competitive, resulting in the corresponding gauge contracting in May for the sixth straight month. (…) “Major macroeconomic indicators showed a marked weakening at the start of the second quarter. The downward pressure on the economy has significantly intensified compared to preceding periods. “In terms of policy, the lasting impact of earlier measures that aimed to stimulate consumption needs further evaluation, and follow-up actions should be introduced based on actual conditions. “More importantly, boosting domestic demand should be grounded in improving household incomes. As such, feasible and effective measures must be taken to improve the employment environment, strengthen social security, raise household disposable income, improve market expectations, and ultimately drive a continued economic recovery.”

Canada: Output and new orders fall sharply

The S&P Global Canada Manufacturing Purchasing Managers’ Index™ (PMI®) posted 46.1 in May. That was slightly up on April’s 45.3 but nonetheless below the critical 50.0 no-change mark for a fourth month in a row. (…)

International demand remained especially hard hit, with new export business again declining to a steeper degree than overall sales. Trade with the neighbouring United States was again reported to be weak. (…)

Price data meanwhile showed an acceleration of input cost inflation. There was again evidence that tariffs had led to a general uplift in input costs, with vendors reportedly raising their charges.  Latest data showed a marked overall increase in output charges,
despite the rate of inflation dropping to a three-month low.

Mexican manufacturing sector contracts further in May

Despite rising from April’s 50-month low of 44.8, the headline index posted 46.7, pointing to a solid decline in business conditions.

New orders shrank markedly and for an eleventh month running during May. A substantial drag on sales volumes came from abroad, with new export business decreasing at the second-fastest rate since February 2021. US tariffs were once again widely cited as a drag on demand for Mexican goods (…).

May survey data signalled steep cost pressures for Mexican manufacturers. Although the rate of increase in input prices eased, it remained elevated. Unfavourable exchange rate movements were cited by panellists, as were price hikes from vendors and US tariffs.
Prices charged rose, albeit only marginally and at a softer pace.

Other Asian PMIs released yesterday paint a broadly similar picture:

• Japan: Total new business fell modestly, with lower sales generally linked to subdued demand conditions amid US tariffs and increased client hesitancy. The decline in new export orders also moderated since April, but remained solid overall.
• Vietnam: New business from abroad declining at a much faster pace than total new orders.
• Indonesia: Manufacturers signalled particular falls in exports to the US.
• Taiwan: New export orders declined at the steepest pace in nearly a year-and-a-half.
• South Korea: New orders fell at the fastest pace since June 2020, and the strongest rate in almost a decade if the COVID-19 pandemic period is excluded. Respondents particularly mentioned the US as a source of falling new export orders.

New orders are manufacturers’ lifeblood. Trade is about to slow meaningfully.

(Bloomberg)

Revenues from Tariffs Spiked to $23 Billion in May, up by 168% in 3 Months

Collections from customs and certain excise taxes spiked by $6.5 billion, or by 37.5%, in May from April, to $24.0 billion, nearly triple the average monthly collections in 2024 ($8.2 billion), according to the Treasury Department’s daily data today.

Over the past three months, they spiked by $15 billion, or by 168%.

This $24.0 billion is the amount in customs and excise taxes that the Department of Homeland Security – which includes Customs and Border Protection – transferred in May into Treasury Department’s checking account at the Fed, the Treasury General Account. This total of $24 billion includes a small amount in “certain excise taxes” (in April, $1.1 billion). The rest is from tariffs – so, roughly $23 billion in receipts from tariffs.

At May’s pace, these customs and excise taxes would amount to $288 billion per year, up by $190 billion from 2024. (…)

OECD Warns That World Growth to Slow Amid Trade Turmoil The global economy is now set to grow by 2.9% this year and next, a downgrade from previous forecasts

Collectively, the global economy is now set to grow by 2.9% this year and next, the OECD said in its quarterly report released Tuesday. That marks a downgrade to the group’s previous forecasts, which saw growth at 3.1% in 2025 and 3% in 2026, and suggests the world economy is set to slow from the 3.3% expansion it booked last year. (…)

The U.S. itself will be among the economies worst hit, the group said. The world’s largest economy is set to grow just 1.6% this year, a sharp deceleration from 2024’s 2.8% and lower than OECD’s previous forecast of 2.2% for the year, as a result of Trump’s tariffs, wider policy uncertainty, lower net immigration and cuts to federal workforces, the group said. (…)

Mexico and Canada, which are particularly vulnerable to a hit to their trade with their common neighbor, will also see sharp slowdowns in growth this year, according to the forecasts. The Mexican economy will grow just 0.4%, while Canada’s economy will expand by 1.0%, the OECD expects. (…)

In the average wealthy economy, investment is set to take a sustained hit in the current environment, similar to the damage dealt by previous global shocks such as the global financial crisis and the Covid-19 pandemic, Pereira said.

“We would not be surprised to see investment come down again,” he said. “That’s why substantial policy support for housing investment, business investment, and public investment is key so that we can bring more investment to the table and more growth to the economy.” (…)

“With the recent spike in effective tariffs and the inflationary pressures associated with that, we expect [US] inflation to reach around 4% by the end of this year,” he said. So we’re not expecting policy-rate changes this year.”

Eurozone Inflation Falls Below Target Investors expect the European Central Bank to cut borrowing costs by a quarter point on Thursday to 2%

(…) May’s decline was driven by a drop in services inflation to 3.2% from 4.0% in April, its lowest level since March 2022. That was in part due to the later timing of Easter, but also wages that declined sharply, easing pressure on businesses in the labor-intensive sector. Unemployment, however, equaled a record low of 6.2% in April, data also published Tuesday said. (…)

• Highly Unusual Divergence in US-EU Inflation Outlook

The consensus expects inflation to rise in the US and fall in the eurozone. Combined with the worsening US fiscal situation, this highly unusual divergence will continue to put upward pressure on US rates across the curve and downward pressure on rates in Europe.

It’s a homebuyer’s market — if you can afford one

There are nearly 500,000 more home sellers than buyers in the U.S. housing market, Redfin estimates.

That’s the widest gap on record — and a big reversal from just a few years ago, when home buyers were desperate to find a place to live, sending prices into the stratosphere.

There are 33.7% more sellers than buyers now. At no other point since Redfin began tracking in 2013 have sellers outnumbered buyers by this large a percentage.

• A year ago, sellers outnumbered buyers by just 6.5%, and two years ago, buyers outnumbered sellers.
• Redfin counted sellers as the number of active listings in a given area and created a model to estimate the number of buyers.

For home sellers “the mortgage rate lock-in effect is easing,” per Redfin. “For most people, it’s not realistic to stay put forever; job changes, return to office mandates and divorce force people to move.” Higher mortgage rates are also becoming normalized. “The idea of taking on a higher mortgage rate also isn’t as shocking as it was when rates first skyrocketed in 2022.”

Historically, when sellers outnumber buyers, prices drop. And in some markets, prices have already started falling.

• Home prices fell in 11 of the top 50 most populous U.S. metro areas in the four weeks ended April 20, per Redfin. That includes Austin; Oakland, California; and Tampa, Fla.
• Redfin believes prices will dip 1% by the end of the year (not exactly a huge sale, to be sure).

Data: Redfin. Chart: Axios Visuals

House prices jumped 54% since the pandemic, double rentflation. It is still much cheaper to rent, even more so with mortgage rates near 7%:

FYI:

“Yesterday, as everybody knows, [was the] first day of hurricane season,” [FEMA leader] Richardson said. “I didn’t realize it was a season.”

Mr. Richardson does not seem seasoned enough for this job, does he?

Slower Spending Amid a Pullback in Goods Outlays in April

Personal income shot higher in April rising 0.8%, well north of the 0.3% that had been expected. The fact that it comes on the heels of an upwardly revised increase the prior month makes the gain all the more impressive. Looking at the underlying details, a standout was a surge in transfer payments from the U.S. government.

The increase in government social benefits was driven mostly by Social Security payments, reflecting payments associated with the Social Security Fairness Act. This act, passed in December, granted benefits to more than three million retirees from a variety of sectors including teachers, law-enforcement officers and other workers receiving public pensions who had not previously been receiving full benefits for a variety of reasons.

Note that the saving rate jumped to 4.9%, the highest in nearly a year. Take that with a grain of salt as it is driven partly by this one-off jump in income.

Consumer spending rose 0.2% in April, but for the most part, the gains were in services categories, the largest of which were non-discretionary categories such as housing and utilities as well as health care.

Consumers cut back on spending in most goods categories in April after having pulled forward demand to get ahead of tariffs earlier in the year. The retreat was led by non-durable goods and motor vehicles as well as clothing and recreational goods. The only two goods categories that were meaningfully positive in April were household furnishings which notched a $1.1 billion gain and gasoline where the gain was mostly attributable to rising prices at the pump.

We got a glimpse of downward revisions in yesterday’s second-estimate of first-quarter GDP growth. While overall GDP was revised up, consumer spending was revised down; real personal consumption expenditures advanced at just a 1.2% annualized pace in Q1, or the slowest in a year and a half.

 

Source: U.S. Department of Commerce and Wells Fargo Economics

At this early stage, there is not any particularly compelling evidence tariffs have had a material impact on inflation…yet. Headline PCE rose just 0.1% in April, coming on the heels of last month’s goose-egg, the year-over-year measure slipped to just 2.1% from 2.3% in March.

Core PCE similarly rose just 0.1% in April putting the annual rate of core PCE inflation at 2.5%. As we think about the rest of the year, we suspect inflation will be characterized by a continued slight cooling in services inflation and a boost from the goods side that will largely be a function of how things play out in the ever-changing world of tariffs.

The big question is whether tariff-induced uncertainty will cause households to stop spending. One way to gauge consumer concern is through the personal saving rate, which measures how much income households have left after spending on traditional goods and services and other outlays, like interest, each month. However the jump this month as we mentioned is a little suspect due to the jump in social security payments.

In the absence of that income jolt, the saving rate would remain near the lower-end of its recent range and well below pre-pandemic averages. Overall the household sector remains in a sturdy financial position helping mitigate recent uncertainty, but we suspect household will remain very price sensitive in coming months.

It’s true that discretionary spending was soft in April (and BofA card data suggest a soft May) but real expenditures on durables was only off 0.8% MoM after a 3.8% surge in March. Not much of a payback.

That said, real durables have declined in 3 of the first 4 months this year, –4.0% annualized YtD.

That said, though volatile, Americans are keeping their consumption of durable goods in stride with their labor income:

It’s also true that there is no evidence that tariffs are causing higher inflation, overall, but durable goods price rose 0.5% MoM in April and are up 3.3% annualized YtD, sharply above last year’s –2.1%.

Recall that

• core goods PPI rose 0.4% in April after +0.3% in each of February and March. Last 3 months annualized: +4.1% following +2.0% in the previous 8 months when monthly gains were limited to 0.1-0.2%.
• import prices for consumer goods increased 0.3% in April, the first monthly advance since October 2024 (import prices exclude tariffs).

There is clearly price pressures in the goods pipelines.

But YoY, durables inflation is still negative while services inflation is slowing thanks to slowing wages and lower oil prices.

• “This chart looks at what’s driving the continued overshoot of core inflation from the Fed’s target versus the 2011-19 level. Right now, the overshoot is being driven mostly by core nonhousing services, but the gap continues to narrow.” (Nick Timiraos)

American Consumers Are Still Gloomy on the Economy Changing tariff policies have made it difficult to forecast prices

The final May reading for the University of Michigan’s closely watched index of consumer sentiment was 52.2, unchanged from the previous month.

It was slightly higher than a preliminary reading of 50.8 that was released two weeks ago. It was still one of the lowest ever recorded, in data going back to 1952. (…)

People expect prices to surge 6.6% over the next year. That was up from April’s reading of 6.5% and the highest since 1981. Still, the previous four months saw much larger increases in people’s inflation expectations. Inflation expectations for the next five years fell slightly, to 4.2% in May from 4.4% in April.

Still helping:

Saudi Arabia Tightens Grip on OPEC+ by Pushing Through Oil Surge

(…) The kingdom steered the group to agree the third super-sized monthly output hike in a row, despite dissent from a faction led by Russia. The Saudis are doubling down on a historic shift, driving oil prices lower as they seek to punish the alliance’s quota cheats and reclaim their share of global markets.

The policy change dragged crude futures to a four-year low below $60 a barrel in April, affecting everyone from American drivers to petrochemical users in Asia. (…)

The meeting’s outcome marks a new peak in the Saudis’ long-running dominance of OPEC+. It raises questions over the future of the alliance and the complex web of relations between Crown Prince Mohammed bin Salman and Russia’s Vladimir Putin — as well as President Donald Trump. (…)

Russia — the only member with comparable oil production and geopolitical clout to Saudi Arabia — was supported by Oman and Algeria as it argued for OPEC+ to hold output steady in July and wait to assess the impact of earlier increases.

But with no other opposition, the Saudi proposal for another 411,000 barrels a day was approved. While Russia and its allies acquiesced, and delegates denied there was any real split, there was no doubt who carried the day.

The agreement means OPEC+ is just over halfway through its accelerated revival of 2.2 million barrels-a-day of halted production. The coalition will meet again on July 6 to discuss its supply increase for August, when the differences between Moscow and Riyadh will come back into play.

“Saudi Arabia is really in the driving seat,” said Jorge Leon, an analyst at Rystad Energy A/S, who previously worked at the OPEC secretariat. “This isn’t just supply management — it’s strategic calibration with geopolitical intent.”

Goldman: “We are maintaining our cautious Brent/WTI oil price forecast averaging $60/56 in the remainder of 2025 and $56/52 in 2026. This reflects our forecast that strong supply growth outside of US shale will drive surpluses of 1.0mb/d in 2025 and 1.5mb/d in 2026.”

US goods imports tumble 20% in April as Donald Trump’s tariffs disrupt trade President’s sweeping levies have increased cost of foreign goods

(…) Imports of goods for April totalled $276.1bn, down 19.8 per cent from March, according to the Census Bureau’s advance economic indicators report, released on Friday. The drop is the largest in the bureau’s data dating back to 1992 and marks a stark turnaround from March, when companies rushed to buy foreign goods before Trump’s April 2 “liberation day” tariffs announcement. (…)

A worldwide manufacturing slump underway?

MANUFACTURING PMIs

China Manufacturing Activity Improves in May

The official manufacturing purchasing managers index for May came in at 49.5, sharply [?] up from April’s 49.0 and narrowly missing the 49.6 tipped by a Wall Street Journal poll of economists, according to data released by the National Bureau of Statistics on Saturday. (…)

The production subindex increased to 50.7 in May from 49.8 in April. The subindex for total new orders rose to 49.8 in May, compared with 49.2 in April, while that for new export orders jumped to 47.5 from 44.7.

Meanwhile, China’s nonmanufacturing PMI, which covers both service and construction activity, edged down to 50.3 in May from 50.4 in April, said the statistics bureau.

The subindex tracking service activity rose to 50.2 in May from 50.1 in April, while the construction subindex declined to 51.0 from April’s 51.9.

S&P Global’s China manufacturing PMI is out tomorrow. The US later this morning.

• Japan Manufacturing PMI improved a little from 48.7 to 49.4. “Total new business fell modestly, with lower sales generally linked to subdued demand conditions amid US tariffs and increased client hesitancy. The decline in new export orders also moderated since April, but remained solid overall. The health of the consumer goods sector meanwhile weakened after an improvement in April. Average input costs faced by Japanese goods producers increased at a softer pace in May, with the rate of inflation the weakest in 14 months. At the same time, selling price inflation also eased in May, with charges rising at the softest rate in nearly four years.”
• The HCOB Eurozone Manufacturing PMI rose to 49.4 in May, from 49.0 in April. “Demand conditions were broadly stable midway through the second quarter. Relative to the trend over the past three years, this marked an improvement, as new orders had previously fallen sharply on average since May 2022. Sales made to customers in export markets likewise came close to stabilising, with the respective HCOB index posting a 38-month high that was only just below the neutral 50.0 level. Input costs decreased for a second month in a row in May. The rate of decrease was the quickest in 14 months. There was evidence of companies passing on cost savings to their clients as output charges were discounted for the first time  since February.”
• In Vietnam, “ as was the case in April, new orders decreased during May, with survey respondents linking the latest fall to tariffs and subdued market demand. The impact on demand was most keenly felt in export markets, with new business from abroad
  declining at a much faster pace than total new orders. The fall in new export orders was broadly similar to that seen in April. With input costs down, manufacturers continued to lower their own selling prices midway through the second quarter. Charges have now decreased in each of the past five months, with output prices down modestly again in May.”
• In Indonesia, “International demand also reduced further, albeit at a softer pace, as manufacturers signalled particular falls in exports to the US. Firms looked to increasingly absorb higher input costs and even offer discounts as part of efforts to stimulate demand. As a result, output prices rose at a fractional rate that was the softest in the current eight-month sequence of charge inflation.”
• In Taiwan, “Total new business fell solidly in May, despite the rate of contraction easing slightly from April, while new export orders declined at the steepest pace in nearly a year-and-a-half. Companies often looked to pass on any cost savings to customers as part of efforts to attract new orders, cutting their selling prices for the third month in a row. The rate of discounting was the quickest seen in nearly two years and solid.”
• In South Korea, “New orders fell at the fastest pace since June 2020, and the strongest rate in almost a decade if the COVID-19 pandemic period is excluded. Respondents particularly mentioned the US as a source of falling new export orders. Goods
  producers raised charges at the slowest rate in the current six-month sequence of inflation.”

Trump Says Steel and Aluminum Tariffs Will Double to 50%

President Trump said he would double tariffs on imported steel, a move he said would bolster the domestic industry and protect U.S. jobs.

Trump announced the higher duties at a rally near Pittsburgh promoting a $14 billion deal between Tokyo-based Nippon Steel and U.S. Steel, which the president said would ensure U.S. control over the storied steelmaker. (…)

Trump said tariffs on imported steel, as well as aluminum, would increase to 50% from the current 25%, effective June 4. Global prices for steel have been falling in recent months, making it easier for steel buyers to pay the existing duty on imports and still acquire steel at a discount to domestic prices.

The higher tariff also will give domestic steelmakers more power to raise prices. Steel demand and prices have been cooling since April. (…)

• America’s New Steel Curtain Trump’s 50% tariff will punish U.S. steel users, including American car makers.

The WSJ Editorial Board:

(…) Higher tariff walls may help Cleveland-Cliffs stanch its red ink, but they are unlikely to save or create jobs. They will raise costs for steel consumers including auto-makers and machinery manufacturers and could boomerang.

His first-term steel and aluminum tariffs caused prices to rise for a period, but higher prices hurt customers and caused demand to fall. A Federal Reserve Board of Governors study estimated the tariffs cost 75,000 manufacturing jobs. Employment in fabricated metals manufacturing is still some 33,000 lower than when the tariffs took effect.

[Cleveland-Cliffs CEO] Mr. Goncalves noted in a recent quarterly earnings call that Mr. Trump’s auto and steel tariffs on Canada “impacted our clients” who sell products in the U.S. “That was not part of our plan. Absolutely not. Nobody saw that coming,” he said, adding he wouldn’t have bought Canadian steelmaker Stelco “if I knew that Canada would not be treated like a friend.”

That’s what happens when your main business model is political mediation. The politicians can’t be trusted. The new 50% tariff wall will hurt Mr. Goncalves’ “clients” doubly hard.

Charts from Goldman Sachs. Spot US HRC prices are 31% higher than EU and Brazil, 50% higher than Japan and 107% higher than China. On rebar: +21-36%, +44% and +93% respectively. Yet, we import less of the lower cost stuff. What cost MAGA?

 

Bruce Mehlman

China Hits Back Against Trump Claims That It Broke Trade Truce Recent developments have damped optimism that the two superpowers will reach a lasting deal

China’s global favorability rising, views of the U.S. turn negative

U.S. trade policy is making China great again — at the United States’ expense, per an analysis from Morning Consult that looks at global favorability ratings, and finds China’s rising while America’s falls.

The drop in America’s reputation is already costing the country economically — through a fall in foreign visitors turned off by White House policies, and even the decline of the dollar. (…)

As of the end of May, China had an 8.8 net favorability rating, compared to -1.5 for the U.S., according to favorability data for last month provided exclusively to Axios by Morning Consult.

In January 2024, the U.S. rating was above 20 and China was in negative territory.

The data tracks net favorability ratings, or the share of respondents with a positive view of a country minus those with a negative view.

Morning Consult surveyed adults in 41 countries including Canada, France, Japan, Russia and the U.K.

The U.S. had a largely positive reputation last year — but it dropped sharply after President Trump took office.

• “Since January 2025, the overwhelming majority of countries simultaneously exhibit worsening views of the United States and improving views of China,” McMann writes.
• “Only in Russia have views of America meaningfully improved.”

Meanwhile, China’s rating has been negative going back to October 2020, when Morning Consult first began tracking; it started trending into positive terrain after election day last year.

• But most of the country’s improvements have come since March — including a sharp tick up after Trump’s “Liberation Day” tariff announcements.
• “The reputational damage done by the “Liberation Day” tariff announcements has now sealed the deal,” per the report.

Morgan Stanley Team Sees Dollar Falling 9% on Slowing US Bets

The US Dollar Index will fall about 9% to hit 91 by around this time next year, strategists including Matthew Hornbach predicted in a May 31 note. (…)

“We think rates and currency markets have embarked on sizeable trends that will be sustained — taking the US dollar much lower and yield curves much steeper — after two years of swing trading within wide ranges,” the strategists wrote.

The Morgan Stanley report adds to a chorus of voices questioning the outlook for the dollar, as traders and analysts weigh up US President Donald Trump’s disruptive approach to trade. JPMorgan Chase & Co. strategists led by Meera Chandan told investors last week they remain bearish on the US currency, instead recommending bets on the yen, euro and Australian dollar.

The US Dollar Index has dropped nearly 10% since a February peak as Trump’s trade policies dent sentiment on US assets and trigger a re-think on the world’s reliance on the greenback. Still, the bearishness is far from historical extremes, underscoring the potential for more dollar weakness ahead, Commodity Futures Trading Commission data showed. (…)

The bank said that 10-year Treasury yields will reach 4% by the end of this year, and stage a much larger decline next year as the Federal Reserve delivers 175 basis points of rate cuts.

Obituary of the US Dollar as the Sole Lifeblood of the World Economy

By: Hubert Marleau

A few days ago, Donald Trump told the Americans that “if we lost the dollar as the world currency…that would be the equivalent of losing a war”. Indeed, the U.S.’s reserve currency status does bring exorbitant privilege:

• First, it creates demand for dollars, thereby tending to reduce borrowing rates and keep them lower than they would otherwise be.
• Second, such reserves become important and very handy in fighting financial crises.
• Third, there is a big national security element, because a huge percentage of the global financial network essentially goes through U.S. regulators, gaining all kinds of information to ward off terrorist threats, alert intelligence services, and implement sanctions in place of military interventions.
• Fourth, net trade patterns are caused by financial flows, not the other way around, allowing consumers to spend more, and businesses to invest more, than they would be able to otherwise.

On this last point, the US has a structural trade deficit, while the EU has a structural trade surplus, yet the US invests a lot more, as a percentage of GDP, than the EU. In fact, a big amount of the US’s structural net inflow of capital is spent on R&D and data centers to train AI, which is what affords the U.S. to take big investment risk and keep its current innovative edge without reducing household consumption.

America should be grateful that it can suck in the savings of others to fund what they envy so much. For example, Canada holds $2.6 trillion of US securities, contributing capital to American firms, holding down borrowing costs, and boosting the net worth of US households. According to Bloomberg, Canadian holdings are equivalent to more than 40 times the 2024 US goods trade deficit with its northern neighbour. It’s one of the many illustrations of how what may appear to some as a waste of money actually accrues to American interest.

Is the US Dollar Still Dominant? Yes

As it stands today, the dollar is the world’s leading currency because the U.S accounts for 26% of the global economy; remains about the same size as it was in the 1980s; is still the foremost military power; remains at the frontier of technological development, has the deepest, most diversified and liquid market financial market in the world; holds independent institutions that regulate its domestic markets; plus a central bank that acts as a lender of last resort in times of crisis for the rest of the world as a whole.

These are the reasons why 58% of global reserves are in dollars, 81% of world trade is conducted in dollars, 48% of international bonds are denominated in dollars, and 47% of cross-border claims are set in dollars.

There is another area where the dollar leads the world as a currency. The US economy has been able to attract extraordinary amounts of foreign capital for decades, sucking the world dry of capital. The inflow of funds to the U.S. has been driven from destructive investment policies of the European Union, China’s closed economic model, and the uniquely attractive returns of the US as the global innovator. The sheer appetite for claims on the US has reshaped its external balance sheet.

As a result, the U.S. net international investment position – the difference between US residents’ foreign financial assets ($35.89trn) and liabilities ($62.12trn) – was -$26.23 trillion at the end of 2014, representing about 85% of the N-GDP.

Based on the Federal Reserve trade-weighted index, which measures the dollar against the currencies of countries with which the U.S. trades most, the almighty dollar is 5 times more expensive today than it was in 1973, when the Middle-East oil producers hit the world with an oil shock.

Could Something Go Wrong? Yes

In 1971, President Nixon stopped the convertibility of dollars into gold, which led to a floating exchange rate system that was based on a theory that currency reserves would cease to be necessary because the free market price mechanism would make the necessary adjustments to keep the international balance of payments in an acceptance equilibrium. Nonetheless, the system has been subject to a plethora of crises since, notably the Asian crisis of the late 1990s, and the great financial crisis of 2008-09.

As US exceptionalism erodes gradually, and the damaging effects of Trump’s economic nationalism and protectionism grow, the dominant role of the US dollar in the world monetary order is being challenged by three candidates: the EU (euro), the BRICS (yuan), and the Underground Economy (cryptocurrencies). The bottom line here is that the dollar is fraying at the edges. The euro is growing its footprint, the renminbi is breaking free of the dollar, and crypto is ousting the dollar in the world’s underground economy, where governments do not control things, or not much.

Progress has been limited. Nonetheless, a shift away from the dollar is ongoing. But this process could speed-up somewhat, because the Trump administration offers mixed signals. It wants the dollar to weaken against other major currencies, while retaining its status as the anchor of global finance. Scott Bessent, US Treasury Secretary, says the US wants a strong dollar policy, while Horward Lutnick, the Commerce Secretary, promotes the benefits of a weak dollar. Meanwhile, Stephen Miran, chair of the White House’s Council of Economic Advisers, talks about the burden of owning the reserve currency.

Trump’s erratic policies are giving the European Central Bank a prime opportunity to take steps to strengthen the euro’s international role. Its president, Christine Lagarde, is pushing this idea, as a global euro moment, because it would allow the EU currency bloc to enjoy the privileges so far reserved for the US.

In this connection, she has urged the members of the European Monetary Union to maintain a steadfast commitment to open trade, underpinned with security capabilities; to complete a single market by trimming regulations; to build a savings and investment union; and to foster financings at the European level to fund large projects, including defence, thereby creating a deeper pool of securities and a larger bond market – prerequisites for a greater international role for the euro.

This year’s BRICS summit will focus on the creation of a multi-jurisdictional gold custody network, whose vaults are already under construction as the backbone of a new settlement system, where gold is the primary collateral asset, replacing the U.S. Treasury as the standard bearer of trust. Under the plan, gold would serve as the store of value, replacing US Treasuries, and the yuan as the medium of exchange, replacing the US dollar.

According to Kenneth Rogoff, from the IMF and Federal Reserve, who help shape the dollar-led global economic and monetary order, the growing influence of cryptocurrencies is chipping away at the greenback’s global standing. The underground economy already accounts for about 20% of the global GDP, according to World Bank literature. This is about people who pay in cash for amiable services like tips and home services, and for harmful ones like arms dealing, human trafficking, and drugs, plus tax evasion, which is quantitatively larger.

I’ve concluded that the world will slowly move toward a multi-currency power, with the dollar being less dominant than today, but still deeply entrenched. Keep in mind that it reigns in part because the US economy is huge- as big as China, Germany and Japan combined. Remember, too, that talk of the dollar’s demise in the 1990s at the hands of the Japanese yen, and in the 2000s by the euro, did not amount to much.

Ray Dalio has this chart showing how and why empires peak and eventually decline. Education always peaks first, followed by innovation and competitiveness, eventually leading to a fall in the currency reserve status.

BTW:

Source:  Apollo via Mike Taylor

JPMorgan’s Jamie Dimon Predicts ‘Crack in the Bond Market,’ Citing U.S. Fiscal Mess While China is a potential adversary, the bank executive said, America must ‘get our own act together’

(…) “You are going to see a crack in the bond market, OK?” Dimon said during an interview at the Reagan National Economic Forum in California. “It is going to happen.” (…)

Dimon noted that Covid had left the debt markets in disarray in early 2020, until the government responded with several actions that normalized trading and stimulated the economy. But “they massively overdid” it in the years that followed, he said.

Regulations imposed on banks after the 2008-09 financial crisis have left them with less flexibility to hold bonds and other securities on their balance sheets. That makes it difficult for financial firms to step in between sellers and buyers when credit markets freeze up, Dimon said.

Treasury Secretary Scott Bessent and other banking regulators have pledged to loosen capital requirements to let banks hold more Treasurys.

Without substantial changes, the U.S. is headed for a reckoning, Dimon said. “And I tell this to my regulators…it’s going to happen, and you’re going to panic,” he said. “I just don’t know if it’s going to be a crisis in six months or six years.” (…)

A potential debt-market crisis isn’t the only scenario that has Dimon worried. He also believes that if America’s economic and military might erodes, the dollar’s pre-eminent status is at risk.

“If we are not the pre-eminent military and the pre-eminent economy in 40 years, we will not be the reserve currency,” he said. “People tell me we are enormously resilient. I agree with that. I think this time is different. This time we have to get our act together and do it very quickly.”

Dimon acknowledged that China, the primary target of Trump’s trade war, is a “potential adversary.”

“What I really worry about is us,” he said. “Can we get our own act together—our own values, our own capabilities, our own management?”

The U.S. Plan to Hobble China Tech Isn’t Working Chinese solar panels, electric vehicles and drones are better than those made in the U.S. Is AI next?

China’s EVs are cheaper and by many measures better than America’s. The country dominates in consumer drones. Autonomous vehicles have rolled out on the streets of Wuhan and Beijing at a pace that Waymo and Tesla have yet to match. China produces the lion’s share of the world’s solar panels and batteries. And while the U.S. and its allies maintain a narrow lead in advanced microchips and AI, the gap appears to be closing faster than ever.

The result is a fierce debate between senior leaders in the current administration, and critics outside it. White House officials and their proxies are almost uniformly in favor of choking off China’s tech advance by banning the export of AI microchips and the tools to make them. Some outside the administration, including the head of Nvidia, say such policies are backfiring by accelerating China’s development of its own tech ecosystem. (…)

On Wednesday, during an earnings call, Huang doubled down on his criticism, saying “Shielding Chinese chip makers from U.S. competition only strengthens them abroad and weakens America’s position. Export restrictions have spurred China’s innovation and scale.” (…)

Each of Huawei’s latest Ascend 910C AI chips are only one-third as powerful as Nvidia’s, but five times as many are crammed into each of the company’s CloudMatrix 384 AI supercomputers. In terms of raw power, and in the all-important metric of how much memory is crammed into each CloudMatrix computer, Huawei is already beating Nvidia.

And though Huawei’s CloudMatrix 384 requires four times as much electricity, China has a huge advantage in terms of energy production, says Doug O’Laughlin, an analyst at SemiAnalysis who has studied Huawei’s new AI supercomputers. “China has been adding energy production for the past 10 years, and has the entire supply chain on lock to continue to do that,” he adds.

SMIC, which makes Huawei’s processors, is now the third-biggest chip maker in the world, and has managed to innovate in the manufacture of high-quality chips despite having older-generation, pre-export-ban tech.

Bryan Burack, a China analyst at the Heritage Foundation, the conservative DC think tank with significant influence in the current administration, says export controls on tech like AI are more important than ever because the U.S. is in a new Cold War. Burack was a member of the National Security Council until last week, when 100 staffers were cut, and says his time on the council strengthened his convictions on the matter.

“Are we comfortable helping China create dual-use AI that can be used to acquire targets for guided weapons,” Burack says, “even if it’s a sound business?”

Over and over again, China has purchased advanced tech from the U.S. and copied it, then scaled it into huge businesses, a process O’Laughlin likens to a student copying another’s homework. “I sound almost antibusiness saying this, but I really can’t express enough that we shouldn’t make their jobs easier,” he adds. (…)

The better China’s chips got, the more the U.S. attempted to slow down China’s advance, including by banning the export of chipmaking machinery and materials to China.

This doesn’t mean China’s domestic chipmaking ecosystem is equal to what can be marshaled by the U.S. and its allies. But the idea that it is far behind—or will remain so forever—flies in the face of history, says Patrick Moorhead, a semiconductor-industry analyst who was an executive at AMD for 11 years.

“I’ve been in tech for 30 years, and I’ve heard a lot of, ‘Oh, China won’t figure this out,’” he adds. “Now I think the only question is when they will figure it out.” In the long run, China could be in a position to locally source everything it needs to match or even exceed the capabilities of companies like Taiwan’s TSMC and U.S.-based Intel, he says. (…)

In the best of all worlds, the U.S. would have allowed its chip and software champions to continue dominating the domestic Chinese market, says Wang. But since export controls initiated years ago have made that impossible, the only logical way forward may be to keep up the controls—and probably even tighten them.

“What we have now is not the second-best solution, but a seventh-best solution,” says Wang. “There’s certainly no way to restore trust with Chinese companies.”

EARNINGS WATCH

From LSEG IBES:

488 companies in the S&P 500 Index have reported earnings for Q1 2025. Of these companies, 76.0% reported earnings above analyst expectations and 19.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 77% of companies beat the estimates and 17% missed estimates.

In aggregate, companies are reporting earnings that are 6.3% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.3% and the average surprise factor over the prior four quarters of 6.8%.

Of these companies, 63.2% reported revenue above analyst expectations and 36.8% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.

In aggregate, companies are reporting revenues that are 0.9% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.

The estimated earnings growth rate for the S&P 500 for 25Q1 is 13.6%. If the energy sector is excluded, the growth rate improves to 15.6%.

The estimated revenue growth rate for the S&P 500 for 25Q1 is 5%. If the energy sector is excluded, the growth rate improves to 5.4%.

The estimated earnings growth rate for the S&P 500 for 25Q2 is 5.5%. If the energy sector is excluded, the growth rate improves to 7.4%.

• Deere’s Plans for Offsetting $500 Million in Tariff Costs The farm equipment maker looks into tweaking its supply chain and raising prices as it navigates new levies

The Moline, Ill.-based farm equipment manufacturer on May 15 said it incurred about $100 million in tariff expenses in the latest quarter and expects more than $400 million in additional expenses through the end of its fiscal year in October. The company booked $7.1 billion in net income for the year ended last October, down 30% from a year earlier, and roughly $45 billion in net sales, down 19%.

At the same time as new tariff costs, Deere and other manufacturers continue to face weak demand for farm equipment from farmers grappling with lower crop prices and higher production costs. (…)

Deere said soft demand for equipment and significant past price increases due to inflation have tempered the company’s desire to raise prices. The company expects to raise prices in some cases, not necessarily due to tariffs, but also as a result of general inflation, Jepsen said.

Deere has already begun rolling out price increases of 2% to 4% for its early order program for sprayers and planters for the 2026 model year in response to inflation. The company hasn’t added tariff surcharges to prices during the year ending in October, Jepsen said. (…)

Deere has said that about 80% of the equipment it sells in the U.S. is manufactured there, and roughly three-fourths of its suppliers are based in the country. Nevertheless, its international operations play a critical role in its supply chain. The company attributes 60% of its estimated $500 million tariff cost to levies on goods from the European Union, Mexico and China.

Deere’s calculation also factors in potential retaliatory tariffs on the U.S., which would affect its exports around the world, according to Jepsen. “We have a lot of focus on how we ensure that we stay competitive on those export markets because it is an important part of the volume that we produce in our U.S. factories,” he said. (…)

Meanwhile, “M&A activity has reached a 20-year low; with the more recent drop linked to multiple sources of uncertainty driving decision paralysis and wait-and-see mode for many corporate teams.” (Callum Thomas)

Source:  Reuters via @MichaelAArouet