COAL: Rhine River Levels at Kaub Drop Further

• FRANCE MAY FINAL MANUFACTURING PMI 49.8 (49.5 FLASH, 48.7 APRIL)

The Italian May manufacturing PMI was a little weaker-than-expected at 49.2 (vs 49.6 cons, 49.3 prior). The PMI nonetheless consolidates the 5.8 rise seen in April. The index has still been in contractionary territory in each month since March 2024 though. Despite ongoing tariff uncertainty, Eurozone demand helped export sales rise in May. 

Key notes from the release:

• "There was a fractional decrease in factory orders in May, contrasting favourably with the sharp declines seen at the start of the year. Where a drop was reported, panellists noted weakness across the autos and electronic industries, in particular".
• "Despite the backdrop of tariff uncertainty, export sales increased in the latest survey period. Although the uptick was only marginal, it was the first recorded in over two years. Panellists linked the rebound to a rise in orders from European customers".
• "The sustained trend of weak demand for inputs saw expenses fall for the first time in six months"..."Reduced raw materials prices were frequently mentioned in panel member reports. Meanwhile, further hikes to charges were put on pause in May and there was no change in average output prices set for Italian goods"
• "On top of cutbacks to inventories and purchasing, manufacturing employment also decreased further in May".

Markets seem to be pricing in risks of structurally higher inflation this morning.

• Headline drivers on this front are centred on:
• Trump’s latest tariff threats (a doubling of aluminium tariffs).
• Higher oil prices after the OPEC+ decision disappointed some, following pre-decision speculation for larger-than-delivered output hikes from the group.
• More intense Ukrainian attacks on Russia are also noted, but probably aren’t a major factor in today’s moves.
• Bonds have bear steepened as a result, as opposed to the bear flattening that would be more associated with shorter term inflationary worry.
• Firmer-than-expected Spanish manufacturing PMI data also weighs on EGBs.
• EUR 5y5y up ~2bp after failing to close below 2.05% last week.
• Equities are weaker against this backdrop, which is understandable.
• Meanwhile, spot gold adds 2%.
• The USD is lower vs. all G10 FX peers, with participants seemingly keen to resume the familiar greenback selling pattern when tariff risks increase.