UK Business Downturn Eases Despite Worsening Factory Woes, PMI Shows

Economic

Forex

Summary:

A downturn for British firms eased in May despite a darkening picture for manufacturers who cut jobs at one of the fastest rates since the global financial crisis almost 20 years ago, according to a survey published on Thursday.

The S&P Global UK Composite Purchasing Managers' Index (PMI), a gauge of the private sector economy, rose to 49.4 from 48.5 in April, roughly as expected by economists polled by Reuters and moving closer to the 50 threshold for growth.

The services sector which dominates Britain's economy edged back into growth territory, in contrast to factories where the biggest contraction in jobs since May 2020 dragged the manufacturing index down.

Official data published earlier this month showed Britain's economy expanded strongly in the first quarter of 2025.

However, the Bank of England believes the underlying pace of growth is far weaker and Wednesday's PMI chimed with that view, with survey compiler S&P Global warning of the possibility of an economic contraction in the second quarter.

Businesses grew a little cheerier about the outlook, with fewer worries about the impact of higher U.S. trade tariffs. Earlier this month Britain and the United States signed an accord to reduce tariffs and trade barriers in key areas.

U.S. President Donald Trump has also suspended the heaviest of his tariff increases for other countries, easing some of the concerns about their impact on the global economy.

"Although brighter news on tariffs and trade appears to have helped restore some confidence among businesses, sentiment about prospects in the year ahead is still subdued," said Chris Williamson, S&P Global Market Intelligence's chief business economist.

Thursday's survey showed business price pressures weakened noticeably in May which may reassure BoE officials after data on Wednesday showed consumer price inflation jumped last month by more than expected.

The PMI for the services sector rose in May to 50.2 from 49.0, although new orders contracted at the fastest rate since late 2022 - a bad omen for future months.

The manufacturing PMI fell to 45.1 from 45.4 and the jobs index for the sector sank to its lowest level since the onset of the COVID-19 pandemic. Outside of that, it was the lowest since the 2008-09 recession.

April's PMI showed British manufacturers suffered a greater fall in export orders than in any of the 28 countries measured by S&P Global. That index improved in May, but stayed deep in contraction territory.

Source: TradingView

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James Whitman

Economic

German businesses remain cautiously optimistic. After the back-and-forth on US tariffs, German businesses seem to be focusin on the bright side of what could happen under the new German government, rather than fearing the downsides from ongoing uncertainty and trade tensions. This is, at least, the message that the just-released Ifo index seems to convey. Germany's most prominent leading indicator improved again and came in at 87.3 in May, from 86.9 in April. While the current assessment component weakend to 86.1, from 86.4 in April, expecations improved significantly to 88.9, from 87.4, the highest in a year.

Between nearer term risks and longer term opportunities

Taking a step back from high frequency data (and noise), the German economy remains in the middle of two seismic activities: a new government, which seems to lack strong ambition for structural reforms but will have access to unprecedented fiscal space for infrastructure and defence investments, and fundamental shifts in trade and geopolitics, including US tariffs. We think that, at least in the shorter run, the negatives will outweigh the positives. Not that we enjoy negative news but we're currently witnessing several official forecasts for German growth this year converging with our long-held view of yet another year of stagnation. Yesterday’s forecasts from the Germany council of economic advisors was just another example.

Still, not everything is bad. The German economy acutally grew in the first quarter, probably as a result of export frontloading, and industrial data pointed to some cyclical rebound at least before 'Liberation Day'. The tariff extravaganza since the beginning of April, however, will leave clear marks on the German economy. There is the direct impact, as even with the current 90-days-pause, tariffs are still higher than at the start of the year, but also the indirect impact via confidence and still high uncertainty. In the longer term, the announced fiscal stimulus will boost growth in Germany. Implemented in the right way, investment in infrastructure should lead to a cyclical upswing, at least. The caveat, however, remains that the fiscal measures alone – impressive as they might be – will do very little to improve the economy’s competitiveness. Modern infrastructure is essential for one of the world's largest economies, but it doesn't inherently drive innovation, sector transformation, or new growth opportunities. In this regard, we still expect tensions within the government about potential expenditure cuts and some structural reforms as the intended additional spending plans, other than infrastructure and defence, are hard to reconcile with the European fiscal rules.

The frustrating observation, however, is that the analysis of a stagnating economy with the need for investment and structural change is not new. While the discussion has been going on for years now, actual action to change the situation has been limited. In fact, due to the tensions within the last government, the elections and the new government just off the starting blocks, another year of economic policy standstill has passed. Last week, Chancellor Friedrich Merz announced that Germans should feel some positive changes by this summer. We agree that a quick implementation of policy and quick results will be needed but remain sceptical that the summer will bring significant change given the long implementation lags of public investment. Rather than seeing tangible improvements, Germans may find themselves noticing little more than old fax machines still lingering on the streets of Berlin. Public investment and structural changes simply take time.

All in all, today’s Ifo index comes as a positive surprise. Still, we caution against overly hasty optimism. There are currently more unknowns than knowns for the German economy, and we continue to expect another year of stagnation – which would mark the first time ever for Germany to go through three consecutive years without growth.

Source: ING

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Michelle

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Euro zone business activity unexpectedly slipped back into contraction this month as the bloc's dominant services industry suffered a deeper downturn in demand, although manufacturing showed further signs of stabilisation, a survey showed.

HCOB's preliminary composite euro zone Purchasing Managers' Index, compiled by S&P Global and seen as a good guide to growth, dropped to 49.5 this month from April's 50.4.

May marks its first time below the 50 mark separating growth from contraction this year and confounded expectations in a Reuters poll for a rise to 50.7.

"The euro zone economy just cannot seem to find its footing. Since January, the overall PMI has shown only the slightest hint of growth and in May, the private sector actually slipped into contraction," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

The services PMI dropped to 48.9 from 50.1, its lowest reading since January 2024 and far short of the poll estimate for a rise to 50.3.

As demand fell again optimism among service firms about the year ahead waned further. The business expectations index sank to 54.0 from 55.1, its lowest reading in approaching three years.

But factories showed more signs of recovery with the manufacturing PMI rising to a near three-year high of 49.4 from 49.0, slightly ahead of the 49.3 poll forecast. An index measuring output, which feeds into the composite PMI held steady at April's 51.5.

Some of the improvement in the headline number may have come from factories cutting their prices to support demand. The output prices index fell to a five-month low of 49.0 from 51.3.

"The recovery in manufacturing is broad-based, with encouraging signs coming out of both Germany and France. Further interest rate cuts could provide a boost, and lower oil prices compared to last year are also helping," de la Rubia said.

The European Central Bank cut interest rates for the seventh time in a year last month and markets are currently pricing in another 25 basis point reduction to its deposit rate to 2.00% on June 5.

Source: Reuters

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Gerik

Economic

Forex

Cautious Patience Amid Uncertainty

Bank of Japan policymaker Asahi Noguchi signaled that Japan’s central bank should remain on hold with interest rate hikes amid growing uncertainty from U.S. tariff policies and the prospect of a global economic slowdown. While Japanese super-long bond yields have surged to record highs, Noguchi dismissed the need for emergency BOJ intervention, framing the moves as market-driven and not indicative of dysfunction.

Noguchi's remarks suggest a strong dovish tilt within the BOJ, especially as Tokyo faces intensified trade tensions with Washington. He emphasized that “there’s no point acting on interest rates” during a period of such geopolitical and economic ambiguity, especially when U.S. tariffs are likely to apply "quite strong downward pressure" on Japan’s economy.

No Action Despite Bond Yield Spike

The jump in yields on 20- and 30-year Japanese Government Bonds (JGBs) this week sparked speculation about a potential BOJ response, particularly through additional bond purchases or verbal intervention to cool volatility. However, Noguchi asserted that bond markets occasionally experience sharp movements and that current conditions do not yet warrant central bank interference.

"At times, central banks must take action to stabilize markets. I don't think we're seeing a situation where we need to do so," he said.

This hands-off approach reflects a shift from the BOJ’s prior ultra-loose monetary policy, where yield curve control (YCC) policies were used to cap long-term yields. Since exiting YCC in 2023 and raising rates modestly to 0.5% in January 2025, the BOJ has adopted a more market-driven stance toward bond price discovery.

Tapering and Balance Sheet Plans to Stay Steady

Looking ahead, Noguchi downplayed the possibility of major changes in the BOJ’s current bond tapering schedule, which runs through March 2026. Although he acknowledged the long-term necessity of reducing the central bank’s massive bond holdings, he cautioned that balance sheet normalization should proceed slowly and without destabilizing markets.

“It’s true the BOJ needs to reduce its huge bond holdings... But the priority should be to avoid disrupting markets,” he added.

Next month’s BOJ meeting will include an interim review of tapering progress, but any adjustments are expected to be marginal, keeping the emphasis on financial market continuity.

Tariff-Driven Downside Risks to Growth and Inflation

Noguchi’s cautious tone aligns with the BOJ’s recent downward revision of its economic forecasts, reflecting concern over U.S. tariffs and the global economic slowdown. The BOJ is becoming less confident that wage growth and consumption will be resilient enough to support a sustainable return to its 2% inflation target.

According to a recent Reuters poll, most economists now expect the BOJ to keep rates steady through at least September, with just over half predicting a small hike before the end of 2025. These expectations reflect increasing skepticism about the strength of Japan’s domestic recovery in the face of global headwinds.

Noguchi’s remarks underscore the BOJ’s commitment to patience and market stability. With Japanese yields rising, fiscal policy debates intensifying, and trade friction clouding the macroeconomic horizon, the central bank appears poised to let market forces guide bond prices while holding off on aggressive monetary tightening. The focus now shifts to the BOJ’s June meeting, where policymakers will walk a fine line between credibility and caution.

Source: Reuters

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Gerik

Economic

June Cut ‘Baked In’, But What Comes After?

After executing seven rate cuts in its last eight meetings, the European Central Bank is widely expected to deliver another cut in June, bringing the deposit rate closer to 1.75%. However, increasingly complex dynamics—ranging from a more resilient eurozone economy to emerging inflation risks—are prompting internal debate about the wisdom of extending the easing cycle into the summer.

While inflation appears poised to dip below the 2% target in the short term due to lower energy prices and slowing global demand, longer-term risks are beginning to overshadow the near-term softness.

Emerging Inflation Pressures: Trade Wars and Demographic Drag

The ECB now faces a structurally different landscape. Officials like Isabel Schnabel and Klaas Knot have voiced explicit concerns that global deglobalization, tariff proliferation, and labour market tightness due to demographic shrinkage could anchor medium-term inflation well above 2%.

Schnabel warned that while tariffs might depress demand in the short run—creating a temporary disinflationary pulse—they would ultimately elevate global production costs, especially through fragmented supply chains. This narrative aligns with Klaas Knot’s cautionary stance that initial disinflation may give way to a more stubborn supply-driven inflation, echoing dynamics last seen during the energy crisis.

Signals from Within: Calls for a July Pause

Although the ECB remains officially silent about forward guidance beyond June, dovish signals from figures like France’s François Villeroy de Galhau and Belgium’s Pierre Wunsch hint at internal openness to pausing in July. Off-the-record sources confirm that a distinct internal bloc is coalescing around the idea of a “strategic pause” to allow time to reassess.

The main concern is one of credibility and inflation anchoring. Societe Generale, in its latest note, argued that the ECB must resist overreacting to transient dips in inflation and instead maintain a medium-term policy horizon. A pause could signal the ECB’s resolve to avoid falling back into a deflationary trap, particularly if expectations about inflation volatility remain within control.

Market Pricing: One Cut, Then Wait

Markets have already adjusted. Futures pricing indicates a near-certain June cut, followed by a pause and possibly one final cut by year-end. This moderation reflects improved eurozone growth indicators and a stabilization of U.S.–China trade tensions, which had been dragging down global demand.

Still, the easing bias remains embedded. As TS Lombard notes, the ECB continues to lean dovish due to the drag of U.S. tariffs on euro area exports, a fragile job market under pressure from weak corporate profits, and political pressure to maintain accommodative policy amid fiscal uncertainty across member states.

A Strategic Crossroads for the ECB

The ECB finds itself in a delicate position. It must walk the tightrope between supporting growth in an uncertain trade environment and avoiding policy overreach that could reignite inflation in the medium term. With the June rate cut already priced in, attention will now turn to how ECB President Christine Lagarde communicates the Governing Council’s longer-term thinking.

The critical question for July: Is this the start of a pause—or merely a pause before further cuts? Either way, the summer of 2025 will test the ECB’s commitment to data-dependence and its ability to navigate a global economy reshaped by tariffs, fragmentation, and fiscal fragility.

Source: Reuters

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Gerik

Economic

China–U.S. Trade War

From Tail Risk to Strategic Threat

For decades, investors regarded a Chinese invasion of Taiwan as a low-probability, high-impact risk—an abstract geopolitical tail scenario. That view is rapidly evolving. Since Trump’s return to the White House, his rhetoric on reshaping the global order and downplaying traditional U.S. alliances has amplified uncertainty. The betting platform Polymarket has seen the odds of invasion rise to 12%, signaling a shift in sentiment.

Even absent an outright conflict, China's April military exercises around Taiwan and inflammatory rhetoric from Beijing have rattled markets. As one portfolio strategist noted, “the decision is becoming binary: stay exposed and risk extreme volatility, or exit now and preserve capital.”

The Exodus: Foreign Capital Pulls Back

Foreign investors have already yanked nearly $11 billion from Taiwan’s stock market this year. Although the benchmark TWII index attempted a partial recovery in May, it remains 6% down year-to-date, underperforming most global indices. While the outflow is partly attributed to U.S. tariffs, the underlying geopolitical unease is deepening.

Notably, Goldman Sachs’ Cross-Strait Risk Index—which tracks mentions of Taiwan-China tensions in global media—has surged since Trump’s electoral win, further validating investor fear.

The TSMC Factor: A Double-Edged Bet

At the heart of Taiwan’s financial resilience is Taiwan Semiconductor Manufacturing Co (TSMC), the world’s most critical chipmaker. TSMC is not just the crown jewel of Taiwan’s economy but also the global tech supply chain. Investors have long assumed that Taiwan’s economic indispensability—especially to Apple and Nvidia—would compel the U.S. to intervene militarily in any cross-strait conflict.

But that assumption now feels increasingly fragile. Trump’s administration has already shown a willingness to weaponize tariffs against allies and adversaries alike. Even TSMC has not been spared, with some of its U.S.-bound shipments recently caught in tariff negotiations. If Washington’s defense of Taiwan becomes less certain, investor bets tied to TSMC’s geopolitical importance could backfire.

No Real Hedge: The Structural Vulnerability

What’s more concerning is that there is effectively no financial hedge for a full-scale conflict. As Mukesh Dave of Aravali Asset Management pointed out, “You can’t settle trades. The currency might disappear altogether.” Hedging against a market downturn is possible—through options, futures, or sector rotation—but protecting against total systemic collapse is not.

Even local experts remain divided. Li Fang-kuo of Uni-President’s advisory arm in Taiwan argues that foreign investors are exaggerating the geopolitical risk, asserting that the real threat is economic—namely, Trump’s tariffs. However, global investors are less convinced, as evidenced by the sudden surge in Bitcoin and gold, traditional havens in times of geopolitical instability.

Strategic Implications for Global Portfolios

Major global pension advisers like Mercer are urging clients to conduct stress tests and pursue regional diversification. Rich Nuzum, Mercer’s global investment strategist, said bluntly, “There’s no perfect hedge for war—but diversification is still your best bet.”

The current environment is accelerating two parallel trends: de-risking from U.S. assets due to fiscal deterioration, and reducing exposure to East Asia due to military flashpoints. As Taiwan braces for a volatile summer, and Washington struggles to reconcile military commitments with Trump’s fiscal priorities, the investment world finds itself without a playbook for this kind of uncertainty.

While financial markets are often ruled by fundamentals and earnings multiples, Taiwan’s case now hinges on geopolitics. No amount of price-to-earnings compression can offset the risk of currency obsolescence or an untradable exchange. Whether investors choose to stand firm behind Taiwan’s strategic relevance or exit in anticipation of conflict, the overarching truth remains: in a China-Taiwan showdown, there may truly be no place to hide.

Source: Reuters

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Gerik

Economic

As the U.S. economy weathers inflationary pressures and international trade disruptions, President Trump’s proposed tax bill has emerged as a lightning rod in the nation’s fiscal debate. The bill seeks to extend the 2017 tax cuts, introduce sweeping deductions, curtail green energy credits, expand defense and immigration spending, and sharply alter Medicaid—all while adding nearly $4 trillion to the national debt over a decade.

Tactical Timing, Political Theater

The pre-dawn vote timing is strategic, if not symbolic. It serves two purposes: to compress the window for Democratic procedural interference and to allow Speaker Mike Johnson to preserve momentum following days of exhausting internal negotiation. The bill, passed out of committee after a grueling 22-hour session, now heads into floor debate under pressure—both from fiscal conservatives worried about the deficit and moderates concerned about voter backlash.

The GOP holds a razor-thin 220-212 majority, making defections a serious threat. Earlier tensions around Medicaid cuts and state-level tax deductions were defused only after Johnson brokered a set of last-minute amendments, including accelerated work requirements and punitive clauses for states expanding Medicaid. The patchwork compromise underscores how fragile the GOP coalition remains—even on cornerstone Trump-era policy.

Debt, Downgrades, and Denial

The bill’s projected $3.8 trillion addition to federal debt has triggered alarm bells, including a fresh downgrade from Moody’s, which cited deteriorating fiscal discipline. Trump allies in Congress have rejected the nonpartisan CBO’s estimates and accused rating agencies of political sabotage—reminiscent of 2017, when similar claims were made to justify the first wave of tax cuts.

Yet the economic math remains stubborn. Even under optimistic growth assumptions, the CBO’s projections from Trump’s first-term tax cuts showed a $1.9 trillion deficit increase. This latest package, dubbed by Trump as his “big, beautiful bill,” appears even more ambitious—and risky.

Markets are already reacting. Treasury yields have spiked to multi-year highs, reflecting investor unease about the U.S. government's debt trajectory. Equities have slumped, gold has risen, and capital flows are shifting into non-dollar assets like Bitcoin and emerging market equities—further evidence that confidence in U.S. fiscal sustainability is eroding.

Democratic Backlash and Senate Uncertainty

Democrats have mounted fierce resistance. Representative Jim McGovern called the bill a “scam,” accusing Republicans of enriching the wealthy at the expense of working families. The more than 500 amendments filed by Democrats in committee served as both a procedural stall tactic and a declaration of opposition, previewing a broader fight as the bill moves to the Senate.

There, despite Republican control, procedural hurdles and tighter vote margins mean any defectors could delay or sink the measure. Senate Republicans—particularly moderates from purple states—may balk at Medicaid cuts or the absence of new revenue offsets.

Debt Ceiling Dangers Loom

The timing of the bill is also politically loaded. Passage before the Memorial Day recess allows the GOP to claim momentum. But by raising the debt ceiling by $4 trillion, the bill entangles tax reform with the looming summer showdown over the federal borrowing limit. Should Congress fail to raise the cap, the U.S. risks a catastrophic default. With Moody’s already stripping the U.S. of its AAA rating, further delay or fiscal brinkmanship could trigger a market crisis.

If passed, Trump’s tax-and-spending package will define America’s fiscal path for the next decade. Republicans are betting on growth-fueled revenue gains to defy deficit warnings, but history—and nonpartisan projections—suggest otherwise. As the House prepares for pre-dawn votes and the Senate braces for impact, the question is no longer just about whether the bill passes—but what happens to U.S. financial credibility if it does.