China’s Private Manufacturing PMI Hits 32-Month Low Amid Tariff Fallout

Economic

Summary:

The Caixin manufacturing PMI plunged to 48.3 in May, its lowest since September 2022, signaling a sharp contraction in China's private industrial activity...

Private Sector Pain: Small Firms Bear the Brunt of Tariff Tensions

China's manufacturing sector stumbled in May, with the Caixin/S&P Global PMI tumbling from 50.4 to 48.3—the weakest reading in over two and a half years. The decline is not just statistically significant but economically revealing: it reflects the growing vulnerability of small- and medium-sized enterprises (SMEs) to geopolitical headwinds, particularly the escalating tariff regime revived by the Trump administration. Unlike the official PMI, which showed milder contraction, the Caixin index—focused on smaller, export-reliant firms—illustrates deeper fractures beneath the surface of China's recovery narrative.

According to Caixin Insight’s Wang Zhe, the contraction was driven by a simultaneous decline in supply and demand, with export orders falling steeply. This dynamic can be directly attributed to recent hikes in U.S. tariffs, especially on intermediate and finished goods from SMEs. The data suggest that the 90-day truce on tariffs agreed in mid-May may have come too late to arrest the sentiment-driven deterioration in factory activity. Smaller firms, less able to diversify their customer base and absorb shipping costs, are experiencing acute operational distress—evident in both reduced purchasing activity and employment cutbacks.

Policy Uncertainty and External Demand Weakness

Standard Chartered’s Becky Liu highlighted that while large corporations have diversified exposure and resilient export channels, SMEs are exposed directly to policy shocks. The latest downturn in external demand is compounded by broader global uncertainties, including U.S. fiscal policy debates and monetary tightening, which are likely to drag on consumer sentiment and business investment globally. If these trends persist, further weakness in Chinese exports—especially from SME clusters—should be expected.

Methodological Caveats and Divergence in PMI Signals

Interestingly, Bloomberg Economics notes the magnitude of the drop may partially reflect methodological quirks. The Caixin survey is smaller in sample size and applies different seasonal adjustments compared to the government’s PMI, which surveys more state-owned and large enterprises. Historically, Caixin readings have outpaced the official index due to export strength, making this reversal even more concerning. The May divergence points to a growing duality in China’s manufacturing recovery—one that benefits large firms while SMEs falter.

Looking ahead, sentiment on future output remains mildly optimistic, likely reflecting hope in policy support or easing trade tensions. However, analysts like Raymond Yeung from ANZ warn that without a turnaround in the domestic property sector, the broader industrial base may remain sluggish. Property, a key driver of steel, cement, and machinery demand, continues to show no signs of recovery, which could undermine any gains from improved trade dialogue.

While headline growth figures and official PMI data may suggest stability, the sharp downturn in Caixin’s private-sector manufacturing gauge exposes mounting pressures on China’s industrial base. The outsized impact on SMEs hints at rising structural imbalances, worsened by geopolitics and domestic demand weakness. Until either tariffs ease or significant domestic stimulus materializes, the near-term outlook for China’s private industrial sector remains fragile and skewed to the downside.

Source: Bloomberg

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Economic

Rising Debt Loads Put G7 Economies Under Investor Microscope

After years of tolerating heavy sovereign debt, global bond markets are increasingly reacting to what they see as fiscal overreach among G7 nations. From the U.S.'s downgraded credit rating to Japan’s faltering bond auctions, signals are emerging that investors are beginning to demand accountability and restraint—or higher yields. While a full-blown debt crisis remains unlikely, the trend marks a shift in how markets are pricing sovereign risk across major economies.

The U.S. is at the epicenter of these concerns, following Moody’s decision to strip the country of its last AAA credit rating. Market reaction has been swift, with a sharp selloff in April pushing 10-year Treasury yields beyond 4.5%. Investor skepticism has grown around President Trump’s new tax and spending bill, which is projected to inflate the national debt by $3.3 trillion by 2034.

Despite reassurances from Treasury Secretary Scott Bessent that the U.S. will never default, the sheer scale of deficit expansion has prompted warnings from industry leaders like JPMorgan’s Jamie Dimon, who cited a “crack in the bond market.” A potential regulatory adjustment to the supplementary leverage ratio (SLR) may restore some intermediation capacity among banks, but the underlying debt trajectory remains a structural concern for both foreign and domestic investors.

Japan: Cracks Emerge in Longstanding Debt Tolerance

Long insulated by strong domestic demand and central bank dominance, Japan is now experiencing cracks in its debt resilience. The country’s debt-to-GDP ratio—more than 200%—remains the highest among developed nations. But what’s changed is market behavior. A recent 20-year bond auction flopped, pushing 30-year yields up by 60 basis points in just three months.

The Bank of Japan’s reduced balance sheet exposure has played a critical role, as traditional buyers like life insurers and pension funds scale back amid low return prospects. With Prime Minister Shigeru Ishiba facing calls for stimulus via spending and tax cuts, concerns have intensified about the government's ability to maintain market confidence. While policymakers are weighing trimming super-long bond issuance, weak auction demand suggests that the risk may already be embedded.

United Kingdom: Policy Crosswinds Raise Fiscal Visibility

The UK is also vulnerable, with debt levels nearing 100% of GDP and 30-year gilt yields hovering above 5%. Upcoming announcements from Finance Minister Rachel Reeves on defense and healthcare spending, despite pledges of fiscal discipline, may raise further questions about debt sustainability. The IMF has urged the government to hold firm on borrowing reductions.

Analysts suggest that a premature end to Bank of England bond sales could offer near-term support to gilts. But with no major tax increases planned and public spending pressure rising, the UK faces a delicate balancing act between credibility and public expectations.

France: Political Stability Buys Time, But Fundamentals Lag

France has seen its risk premium over German bunds ease to 66 basis points, down from last year’s peak of 90. This moderation has been helped by more constructive EU-wide defense and fiscal cooperation narratives. Yet France’s fiscal position remains structurally weak. A July announcement of a four-year deficit reduction plan by Prime Minister Francois Bayrou could provoke internal political tension.

Notably, France has shown little improvement in debt metrics since the COVID-19 pandemic, as pointed out by Carmignac’s Eliezer Ben Zimra. Markets may react negatively if the proposed reforms are diluted or delayed.

Italy: From Laggard to Relative Outperformer

Italy has improved its position, thanks to enhanced creditworthiness and a surprisingly strong fiscal performance. The budget deficit fell to 3.4% in 2024, with projections of 2.9% by 2026—matching Germany. The spread between Italian and German 10-year bonds has narrowed to under 100 basis points, its tightest since 2021, indicating improved investor confidence.

While long-term debt challenges remain, Italy is benefiting from EU fiscal integration and better comparative metrics, especially versus France. This shift in perception has led to renewed investor flows into Italian debt.

Across the G7, fiscal issues are no longer background noise—they’re central to market behavior. With global bond markets less tolerant of unanchored spending, nations that fail to present credible consolidation plans risk facing higher borrowing costs and eroding investor confidence. While central banks and reserve currency status still provide buffers, market dynamics are clearly shifting. The coming quarters may see a divergence in sovereign bond performance based not just on macroeconomic strength, but also on credibility and coherence in fiscal policymaking.

Source: Reuters

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Commodity

Economic

Multiple Supply Threats Drive Price Rebound

Crude oil markets extended gains on Tuesday, supported by escalating supply concerns tied to geopolitical developments and natural disruptions. Brent crude futures rose by 55 cents (0.85%) to $65.18 per barrel, while US West Texas Intermediate (WTI) climbed 59 cents (0.94%) to $63.11. These increases follow a nearly 3% surge in both benchmarks the day prior, marking one of the strongest two-day rallies in recent weeks.

The primary catalyst was Iran’s expected rejection of a proposed US nuclear deal, a development that threatens to prolong sanctions on Tehran and keep its oil exports constrained. An Iranian diplomat confirmed on Monday that the proposal failed to meet Iran’s core demands, particularly around uranium enrichment rights and sanction relief. Without a breakthrough, Iranian supply is unlikely to return to global markets in the near term.

Canada’s Wildfires Add Physical Disruption to the Mix

Beyond geopolitics, physical supply disruptions are also intensifying. Wildfires in Alberta, a key oil-producing region of Canada, have forced the temporary closure of operations impacting an estimated 344,000 barrels per day—roughly 7% of the nation’s output. The sudden production halt adds to existing global supply tightness, particularly given the limited spare capacity among non-OPEC producers.

While such events are often localized, the scale of disruption in a high-capacity oil sands zone heightens market sensitivity, especially in a context where any incremental loss has outsized effects on sentiment.

OPEC+ Offers Stability by Holding Production Steady

Adding further support to prices was the outcome of the recent OPEC+ meeting, where members agreed to maintain the planned increase of 411,000 barrels per day in July. This was notably less aggressive than some market participants had feared. By avoiding a steeper hike, the cartel signaled its caution about oversupplying a fragile market already facing weakened demand growth and heightened volatility.

Daniel Hynes, senior commodity strategist at ANZ, noted that the restrained move helped unwind speculative bearish positions built ahead of the meeting. Markets had been bracing for the possibility of a surprise production surge, which failed to materialize.

Fragile Balance Keeps Risk Premium Elevated

Geopolitical uncertainty in the Middle East and Europe continues to layer a risk premium onto crude prices. The unresolved conflict between Russia and Ukraine remains a persistent source of global tension, further discouraging supply chain normalization. At the same time, the prospect of stalled nuclear diplomacy between Washington and Tehran raises the possibility that Iran’s significant reserves will remain sidelined longer than previously anticipated.

With Canadian wildfires offering a direct shock to physical supply and OPEC+ signaling production restraint, the near-term outlook for oil is increasingly tied to risk-sensitive flows. While demand-side indicators remain soft in parts of Asia and Europe, supply constraints appear dominant in pricing models this week.

The convergence of geopolitical tension, supply interruptions, and measured cartel policy has revived oil market momentum. However, the sustainability of this price rebound remains fragile, subject to the outcomes of US-Iran diplomacy, fire containment efforts in Canada, and evolving global demand signals. For now, the combination of immediate disruptions and cautious production policy is reinforcing a bullish bias—but with heightened volatility as the defining feature of the current energy market landscape.

Source: Reuters

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Economic

Real Wage Growth Returns as Inflation Stabilizes

Australia’s national minimum wage will rise by 3.5% from July 1, marking a significant real income boost for low-paid workers as inflation retreats to manageable levels. The Fair Work Commission (FWC) raised the minimum hourly rate to A$24.94 (US$16.19), translating to an annual increase of approximately A$1,670 for full-time workers. This adjustment, impacting around 2.6 million employees, reflects a decisive move to restore purchasing power lost during years of elevated inflation.

This is the second consecutive annual increase in line with improving macroeconomic conditions. Last year’s 3.75% hike barely matched inflation, offering no real wage gain. By contrast, this year’s increase comes as headline CPI has cooled to 2.4% in the first quarter—well within the Reserve Bank of Australia’s (RBA) 2–3% target range and far below the 7.8% peak recorded in late 2022.

Policy Context: Wage Growth Without Inflation Risks

FWC President Adam Hatcher framed the increase as a necessary step to reverse the erosion of real income caused by past inflation shocks. He emphasized that failure to act now would lock in a lower standard of living for Australia’s lowest-paid workers. His remarks underline the Commission’s dual objectives: protecting living standards without undermining macroeconomic stability.

The RBA, which cut rates to a two-year low in May amid slowing inflation and global trade turbulence, is unlikely to view the wage hike as inflationary. Wage growth remains tepid overall, and the job market remains solid but not overheated. The unemployment rate has held steady at 4.1%, with public sector hiring driving recent employment gains. These indicators suggest that wage inflation risks remain contained.

Broader Economic and Social Implications

The wage increase is also politically and socially significant. The Australian Council of Trade Unions (ACTU) praised the decision, calling it a long-overdue reprieve for workers most affected by the post-COVID inflation surge. ACTU Secretary Sally McManus stressed that minimum-wage earners—disproportionately employed in retail, hospitality, and care sectors—are finally seeing their earnings catch up with living costs.

The broader effect on wage-setting across the economy is expected to be modest, as enterprise agreements and higher-tier wage negotiations often exceed the minimum standard. However, the decision may exert mild upward pressure on lower-tier wages, particularly in labor-intensive sectors reliant on award-based pay.

The Fair Work Commission’s 3.5% minimum wage increase marks a deliberate effort to restore real income without stoking inflation. Supported by a more stable price environment and a healthy labor market, the move enhances income equity and reinforces purchasing power at the lower end of the wage distribution. With the RBA maintaining a cautious easing bias and fiscal conditions broadly stable, Australia appears to be navigating a rare moment of wage growth with minimal inflationary downside.

Source: Reuters

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Forex

Economic

Trade War Fallout Weakens Dollar Despite Global Equity Rebound

While global stock markets have regained some footing after weeks of volatility driven by trade headlines, the US dollar has remained notably weak. On Tuesday, the dollar index touched 98.58, its lowest level since late April, reflecting investor unease over the deepening economic toll of the Trump administration’s tariff policies. The index’s recent trajectory suggests that foreign exchange markets are increasingly discounting US assets in response to persistent uncertainty.

The dollar’s decline follows Monday’s weak US manufacturing report, which showed a third consecutive month of contraction in May, coupled with worsening supply chain delays—further evidence that tariff disruptions are dragging on production. This erosion of manufacturing momentum reinforces concerns that trade friction is now having a measurable impact on the broader economy.

Currency Markets Reflect Broader Risk Repricing

Against the yen, the dollar traded near a one-week low at 142.71, while the euro held steady at $1.1446, just below a six-week high. Anticipation is building around the European Central Bank’s upcoming rate decision, but for now, the euro has benefited from the relative weakness in the greenback. Commodity-linked currencies like the Australian and New Zealand dollars outperformed, with the kiwi hitting a new year-to-date high at $0.6045—an unusual divergence from typical risk-off behavior that highlights shifting capital flows away from US-denominated assets.

According to Rodrigo Catril, senior FX strategist at National Australia Bank, the dollar is being “hammered widely” due to mounting doubts about trade resolution. The perception that tariff dynamics are worsening, not improving, is reversing any safe-haven appeal the dollar might have once had in times of global friction.

Macroeconomic Indicators Under Scrutiny

This week’s upcoming US data—particularly factory orders and nonfarm payrolls—will be critical for assessing whether the recent dollar weakness is transitory or the start of a more sustained realignment. Manufacturing softness has already pressured the greenback, and any signs of weakening in employment growth could trigger additional losses and spark fresh speculation around Federal Reserve easing, even if not imminent.

Meanwhile, last week’s brief legal victory for US tariff opponents—when a trade court blocked the majority of Trump’s tariffs—was quickly reversed by an appeals court. The administration also stated that alternative legal avenues exist to enforce the tariffs, adding another layer of unpredictability to an already opaque trade policy environment.

Fiscal Overhang Adds to Dollar Depreciation

The dollar’s weakness is not solely trade-related. Broader fiscal concerns are now compounding investor skepticism. The Senate is set to begin deliberations on a sweeping tax and spending bill estimated to add $3.8 trillion to the federal debt over the next decade, further swelling the already record-high $36.2 trillion national debt.

This growing deficit burden has fueled what market participants describe as a “sell America” sentiment—an environment where both equities and Treasurys face outflows, eroding the dollar’s comparative advantage in global portfolios. The re-pricing of US risk across asset classes suggests that the dollar is losing ground as both a growth proxy and a safe-haven asset.

The dollar’s retreat to multi-week lows underscores how deeply entrenched concerns about trade and fiscal policy have become. With manufacturing data flashing recessionary signals and legal uncertainty over tariffs resurfacing, investor confidence in the US macro outlook is fading. Unless upcoming economic indicators provide a positive surprise, the dollar may continue to face downward pressure as global capital repositions in search of stability and yield outside the US.

Source: Reuters

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Economic

RBA Weighs Risk Management Against Policy Predictability

The Reserve Bank of Australia (RBA) revealed in its May 20 meeting minutes that it seriously considered cutting interest rates by 50 basis points as a form of “insurance” against global economic uncertainty stemming from rising US tariffs. However, board members ultimately chose a more moderate 25bps cut to 3.85%, citing a preference for caution and a desire to maintain predictability in monetary policy.

The internal debate was shaped by escalating global risks, especially the Trump administration’s more aggressive-than-expected tariff strategy, which the board recognized as a significant threat to global confidence and Australian economic momentum. Nonetheless, members agreed that the domestic economy remained relatively resilient, with tight labor market conditions and inflation returning within the target range, thus not yet warranting an aggressively expansionary stance.

Domestic Resilience Counters Global Fragility

Despite subdued household consumption and external uncertainty, the RBA judged Australia’s domestic economy to be holding up, supported by robust employment and inflation data. Core inflation slowed to 2.9% in the first quarter—comfortably within the RBA’s 2-3% target band—and is forecasted to decline further to 2.6% by year-end.

These figures indicated that inflation no longer posed an immediate threat, opening the door for policy easing. However, concerns lingered over the potential need to reverse any abrupt cuts should global conditions unexpectedly improve. As such, the board preferred to maintain flexibility and avoid introducing new volatility into financial markets or consumer sentiment through an overly aggressive move.

Global Policy Uncertainty Anchors Caution

The board’s deliberation reflects a broader strategic balancing act: addressing downside global risks without undermining domestic stability. Trump’s tariff actions were identified as a central source of external risk, with implications for global growth, commodity demand, and trade flows. The RBA acknowledged that if worst-case scenarios emerged, policy rates might need to fall below the neutral threshold (estimated between 2.85% and 3.10%) to stimulate the economy.

Yet given the unpredictability of international trade policy and its indirect transmission to Australia, members leaned toward a wait-and-see approach. They explicitly favored policy moves that were “cautious and predictable” to maintain market trust and avoid unnecessary disruptions to consumer or business planning.

Market Expectations and Policy Path Forward

Futures markets are currently pricing in a roughly 70% probability of another rate cut at the RBA’s July 8 meeting. However, many economists anticipate the central bank will delay further moves until second-quarter inflation data is released later that month. This data will be pivotal in determining whether the current disinflationary trend persists or if underlying pressures remain.

Should inflation continue to decline and global trade uncertainty remain elevated, a shift toward a more expansionary stance could materialize by August. Market expectations see rates bottoming around the neutral zone, suggesting that policymakers are not yet anticipating a prolonged easing cycle but are instead preparing to recalibrate policy toward a more supportive footing if necessary.

The RBA’s May minutes underscore a delicate policy balancing act between responding to escalating global trade risks and preserving domestic economic momentum. While the central bank signaled readiness to act more aggressively if needed, its preference for stability, gradualism, and evidence-based decision-making will likely define its short-term path. The trade fallout from US-China tensions may yet prompt stronger action, but for now, the RBA is choosing caution over urgency.

Source: Reuters

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China–U.S. Trade War

Tariff Impact Deepens as PMI Signals Contraction

China’s manufacturing momentum suffered a sharp reversal in May, with the Caixin/S&P Global Manufacturing Purchasing Managers’ Index (PMI) plunging to 48.3 from 50.4 in April. This marked not only the first contraction since September 2024 but also the weakest reading in 32 months. Falling below the 50-mark, the PMI signals a downturn in business conditions, confirming that the effects of reimposed US tariffs are beginning to ripple through the Chinese industrial base.

The private-sector data aligned closely with China’s official PMI released days earlier, which also showed contraction, reinforcing the assessment that the manufacturing slowdown is broad-based and not a temporary aberration. The latest numbers point to a clear weakening in both domestic production and foreign demand, tied in large part to geopolitical friction and policy uncertainty.

Export Orders and Output Falter Under Trade Strain

One of the most direct consequences of the tariff escalation is visible in the export component of the PMI. New export orders contracted for the second straight month and at the fastest pace since July 2023. According to the survey, producers cited rising US tariffs as a key factor restraining global demand, disrupting overseas orders and extending delivery timelines.

The deterioration in export demand pulled overall new orders to their lowest level since September 2022. Factory output also fell, marking the first monthly contraction in manufacturing output since October 2023. These patterns suggest that the latest round of tariffs is producing more immediate operational consequences compared to previous rounds, which were either anticipated or partially absorbed through supply chain adjustments.

Labor Market and Price Signals Reflect Deflationary Pressures

Alongside declining orders, employment in the manufacturing sector fell at the fastest pace since early 2025, indicating rising pessimism among producers. Cost control and weaker revenue expectations are driving headcount reductions, especially in sectors facing intense price wars, such as the automotive industry.

Prolonged pricing pressure is compounding the weakness. Output prices have now fallen for six consecutive months due to intense market competition and excess capacity. This downward pressure reinforces the deflationary dynamic already visible in China’s macroeconomic data. Morgan Stanley’s Chief China Economist, Robin Xing, highlighted that the persistence of a supply-driven growth model continues to stifle rebalancing efforts and makes inflation recovery elusive.

Interestingly, export charges rose for the first time in nine months, with producers attributing the increase to higher logistics and tariff costs. This divergence—rising export prices amid falling domestic output prices—indicates that firms are beginning to pass on some of the external costs, though only selectively.

Policy and Market Outlook: Unconventional Tools on Watch

In response to these mounting pressures, Premier Li Qiang hinted last week at deploying “unconventional measures” to stabilize the industrial economy. While no details have been disclosed, such language suggests that Beijing may consider targeted fiscal incentives, credit easing, or industry-specific subsidies to soften the blow of declining factory performance and rising trade friction.

Nevertheless, the broader outlook remains fragile. While business optimism ticked up slightly, with firms expressing hopes that the trade environment will improve and markets will expand, these expectations appear to rest more on anticipation of diplomatic progress than on any structural turnaround in global demand.

China’s May factory data confirm that renewed US tariffs are beginning to inflict tangible damage on its manufacturing sector. With export orders weakening, factory output contracting, and employment declining, the latest figures highlight both cyclical and structural vulnerabilities in China’s supply-led growth model. Unless global trade tensions ease or domestic policy provides stronger support, the pathway to industrial stabilization remains uncertain—especially as geopolitical risks continue to eclipse economic fundamentals.