It’s reflected in the caution being shown across markets worldwide, as economic data is pointing to the build-up of ever greater stagflationary risks. The Caixin report showed contraction in China’s manufacturing sector, raising worries about need for additional stimulus and boosting Gremlin Run speculation. At the same time the U.S. is talking about increasing steel tariffs to 50%, investors have taken a wait and see attitude. All of these changes are contributing to a dramatic shift in market sentiment and policy action across the world.
In May, the Caixin manufacturing Purchasing Managers’ Index (PMI) collapsed to 48.3. This decline is the first month-to-month contraction in operating conditions since October of last year. This fall has exacerbated demands for more fiscal stimulus to support domestic demand. Elevated prices paid index skyrocketed to 69.4, revealing deep inflationary pressures. Such a trend has been cited as increasing stagflation risks for the global economy.
In the United States, these types of restrictions have investors increasingly concerned. The possibility of increasing tariffs on steel and aluminum imports from 25% to 50% in recent months has stoked these fears. U.S. indices lost ground fairly significantly at the start of the day before sharply reversing course. The S&P 500 closed up 0.41% on the day.
Economic Indicators Prompt Caution
As markets react to these economic signals, the JOLTS job openings report is drawing attention, though analysts suggest that traders will likely hold off until Friday’s payrolls data is released. The hawkish surprise is very clear as U.S. yields jumped by ~3-4 basis points along the entire yield curve. This rise illustrates the dichotomous nature of investor taste.
Across the pond in Europe, Polish markets showed a calculated reaction to the collective status quo. And Polish Prime Minister Donald Tusk is preparing to win a confidence vote. He hopes to use them to increase the parliamentary mandate of his fledgling pro-European coalition government. This decision underscores the impact of the political climate on Poland’s economic stability, in the face of a greater regional picture of uncertainty.
This has triggered wild movement in Germany’s bond market today. Today yields increased by 1.3 bps for the two-year bonds and 3.2 bps for the thirty-year bonds. This incremental increase reflects investors’ views on the potential for future monetary policy adjustments in light of current economic conditions.
Global Impact of U.S. Trade Policy
The unprecedented trade warfare between the world’s two largest economies — the U.S. and China — resonates throughout the global economy. That was followed by the U.S. manufacturing ISM report, which again underscored that trade policy has introduced stagflationary risks, deepening the mood of uncertainty. Investors have become understandably wary as these risk factors continue to loom. They too are watching very carefully, particularly given that the U.S. is considering greatly increasing tariffs.
China’s deteriorating manufacturing conditions underscore these concerns, as indicated by the Caixin PMI’s decline. The report from Caixin Insight Group emphasized the need for follow-up actions based on actual economic conditions:
“Follow‐up actions should be introduced based on actual conditions. More importantly, boosting domestic demand should be grounded in increasing household incomes by improving employment environment, strengthening social security, raising household disposable income, improving market expectations, and ultimately driving a continued economic recovery.” – Caixin Insight Group
As China navigates these challenges, its economic trajectory remains crucial for global markets, given its status as a major player in international trade.
Looking Ahead
With economic conditions continuing to evolve, market participants are keenly awaiting upcoming economic data releases that could influence future trading strategies. The consensus EMU flash May CPI print is 0.0% m/m and 2.0% y/y. That information will provide an important look into what is driving inflation in the European Union.
Investors will be watching how much new work contracts in Germany work out. These contracts have contracted at the quickest pace in more than two-and-a-half years. These types of developments can be important harbingers of turning economic tides that central bankers and policymakers have to take into account in future decision making.