MANUFACTURING PMIs

Eurozone: Inflationary pressures ease and factory production growth quickens in June

The S&P Global Eurozone Manufacturing PMI registered above the 50.0 mark and therefore in expansion territory for a fifth consecutive month in June. It did tick down, however, from 51.6 in May to 51.4.

Euro area goods producers closed out the first half of the year with a sixth successive month of rising output volumes. Furthermore, the pace of expansion accelerated from May’s four-month low. Of the constituent countries covered by the PMI survey, only Spain and France failed to register production growth in June.

After stagnating in May, the latest survey data signalled a rise in new orders received by eurozone manufacturers. The increase was only marginal, however. Export demand remained a drag, having decreased for a second month in succession.

The volume of raw materials and semi-finished goods purchased by eurozone manufacturing firms declined in June, ending a three-month spell of growth. Instead, inputs to production were taken directly from stock, as evidenced by a monthly contraction in pre-production inventories. The rate of depletion quickened and was the sharpest since January.

The use of pre-purchased materials allowed eurozone manufacturers to lessen the operational impact of supply-chain disruption. June signalled that vendor capacity remained stretched. That said, there were some signs of alleviating pressures as the respective sub-index rose to a three-month high. It did, however, remain well below the level seen prior to the outbreak of the Middle East war.

Nevertheless, eurozone manufacturers were able to keep on top of workloads. In fact, they even managed to make inroads into their backlogged orders in June for a second straight month. This was despite a continued reduction in factory payroll numbers. The extent to which jobs fell was moderate and slower than in May.

A notable finding in the latest PMI survey data was regarding prices. The rate of input cost inflation, albeit still elevated, declined in June and was its softest since March. This followed on from a sustained upward climb in the underlying sub-index that goes as far back as September last year. As for their own price-setting, eurozone manufacturers were less aggressive. The rate of output charge inflation eased to a three-month low.

Finally, business confidence picked up again in June, indicating a further improvement after slumping to a 17-month low in April. Expectations for the year ahead remained slightly below their historical trend, however.

China: Manufacturing conditions improve further in June, completing strongest quarter since 2020

The headline seasonally adjusted RatingDog China General Manufacturing Purchasing Managers’ Index™ (PMI) posted above the 50.0 no-change mark for the seventh month running in June, indicating an improvement in manufacturing conditions. The PMI eased to a three-month low of 51.7, from May’s 51.8, but remained above the long-run survey trend of 50.8 since 2004. Moreover, the average reading for the second quarter was 51.9, the strongest for any quarter since the fourth quarter of 2020. The PMI had positive overall contributions from all five components in the latest period.

The volume of new orders received by Chinese manufacturers rose for the thirteenth month running in June, the joint-longest sequence (with June 2020 to June 2021) since 2018. June data did highlight a second successive monthly fall in new export business, but at only a marginal pace.

Higher new orders supported further growth of Chinese manufacturing production in June. The rate of expansion eased to a three-month low but was still comfortably above the long-run survey trend. On a quarterly basis, output growth in the second quarter was the strongest since the second quarter of 2024.

New export business fell for the second month running, albeit marginally.

To support rising new orders and production, manufacturers boosted employment for the first time in three months in June. Moreover, the rate of job creation was the strongest since August 2023.

Despite higher staff levels, the level of backlogged work increased for the fifth month running. That said, the rate of growth was stable and remained below the long-run survey trend, and manufacturers were able to raise their inventories of finished goods for the third month running.

A key theme of the latest survey findings was easing cost pressures. Average input prices paid by Chinese manufacturers rose for the twelfth successive month in June, the longest sequence of inflation since the first half of 2022. That said, the rate of increase slowed further from April’s four-year high to the weakest since January.

Although costs rose more slowly in June, the rate of output price inflation edged up slightly since May. Charges have increased for six consecutive months, the longest sequence since 2021.

The 12-month outlook for manufacturing production in China remained positive in June. Local goods producers linked confidence to expected increases in new orders, business development, new products and improvements to production capacity. The overall degree of optimism was the softest since January, however.

Suppliers’ delivery times lengthened for the fourth month running in June, but the extent of delays was only marginal and the lowest over this sequence. Moreover, longer lead times were confined to the investment goods sector, with speedier deliveries for makers of consumer and intermediate goods.

Manufacturers ordered more inputs in June, and the rate of growth in buying activity was stronger than the long-run survey trend for the fifth successive month. Stocks of purchases rose for the seventh month running, the joint-longest sequence (with June to December 2020) since 2007.

ASEAN manufacturing sector loses growth momentum in June

(…) The slowdown in the ASEAN manufacturing sector at the end of the first half of the year reflected weaker expansions in new orders and output. Production was raised only marginally, the rate of increase being the joint-softest in the current 12-month run of growth (equal to April).

Meanwhile, new export orders fell strongly and at an accelerated pace. (…)

Turning to prices, both cost burdens and charges rose at moderated rates in June. That said, the degree of moderation differed, with the pace of input cost inflation softening notably since May, while charge inflation slowed only slightly.

Japan: June PMI data rounds off best quarterly performance since Q1 2014

Manufacturing companies operating in Japan continued to see a marked improvement in business conditions in June. Furthermore, the latest PMI® data pointed to another solid rise in production amid the quickest upturn in sales since the start of 2022.

New order growth was partly fuelled by the ongoing conflict in the Middle East, however, as clients looked to build up their inventories amid severe supply chain disruption and sharply rising prices. (…)

Challenges around supply were underscored by widespread reports of vendor shortages and shipping delays due to the war, which led to a further rapid lengthening of average lead times. (…)

At the same time, inventories of finished goods fell for the twenty-second month in a row as companies used current stock to fulfil orders.

Greater strain on supply chains and product shortages led to further upwards pressure on prices in June. Notably, the rate of input cost inflation was unchanged from May’s 44-month record and among the quickest seen since the survey began in 2001. Higher prices were cited for a range of inputs, including raw materials, oil and transport.

To help reduce pressure on margins, manufacturers in Japan raised their own selling prices again in June. Although easing since May, the rate of charge inflation remained among the quickest in the series history.

May 2026 JOLTS Report: More of the Same

Today’s JOLTS data prove that the job market is definitely not broken, which is good news, but it’s also not really moving. There are a good number of job openings, but people aren’t going anywhere, and that represents a problem of its own. (…)

The quits rate is one of the most reliable signals of worker confidence in the labor market, and stood at just 1.9% in May. It has now been at or below 2% for almost a year straight, well below pre-pandemic norms and the 3% peak in the Great Resignation era of early 2022. Workers tend to quit jobs when they believe something better is within reach, and right now the data indicate that many clearly don’t.

Since peaking in May 2022, the quits rate has fallen in almost every sector. The rate in the typically churn-heavy leisure and hospitality sector dropped from 5.8% to 4%, and the information sector, home to most tech jobs, dropped from 1.9% to 1.1%. The message is consistent: workers’ confidence in their ability to quit and find a better opportunity elsewhere has fallen dramatically over the past four years.

This low confidence extends beyond current employees; headline job opening numbers don’t automatically translate to real opportunities for job seekers. Total hires remained unchanged at 5.2 million, continuing a puzzling divergence as job openings and total nonfarm employment rise but actual hiring remains subdued. This is not a contradiction; it just means that recent employment gains are being driven more by a historic drop in separations than by new hiring activity. Fewer people are losing or leaving their jobs, but not many more people are getting them.

Ed Yardeni:

• Total job openings ticked up to 7.5 million in May, the highest since May 2024, signaling improving labor demand. Meanwhile, the share of small businesses with job openings fell to 29.0% in May, and the share of consumers describing jobs as plentiful edged down to 24.9% in June. We give more weight to hard data (e.g., today’s JOLTS report) than to soft data from surveys.

• The World Cup footprint is visible in the labor data too. Robust hiring during May in leisure, hospitality, retail, and transportation likely reflects firms staffing up for the tournament. Beyond the World Cup effect, solid hiring in construction and manufacturing is consistent with the AI building boom.

What will murder the bull market? As the investment adage goes, stock runs don’t die of old age

(…) Every major bull market peak of the past 125 years was preceded by a sharp rise in policy rates. But the equity market reversals from the previous peak valuations, seen in 1907, 1929, 1973 and 2000, were preceded by major policy moves, with rates rising between 2 and 4 percentage points — not the 0.5 point rise currently discounted in futures markets.

For this bull market to come to an end, the momentum of the AI “bubble” will have to burst. For now, AI earnings remain strong and sales remain healthy.

But many investors are getting concerned about the scale of the AI capex build-out, its impact on capital issuance, and hyperscaler cash flows. So far, the willingness and capacity of investors to fund the likes of Anthropic, OpenAI and SpaceX remains strong.

Even if these companies raise a collective $200bn in their initial public offerings, US retail investors have $2.3tn of cash available to invest, according to Fed data, while US institutions have a further $6tn. This suggests that there should be funds available for these issues without major market disruption.

The other concern is that AI hyperscaler capex is expected to reach $2.5tn over the next three years, potentially creating cash flow stress for them.

But, for us, the key lesson from the end of the dotcom bubble is that the main risk will probably come from deterioration in the cash flow of the AI sector’s prospective customers. So, investors should be more concerned about any deceleration in the earnings and cash flow of the potentially heavy AI user sectors, such as financials, manufacturers, media, transportation, education and healthcare.

The key to the eventual end of the bull market will be rate rises of a scale to challenge economy wide corporate profits and cash flows. For now, it is likely that this AI-driven bull market will probably persist. So, while we may be in the end game of this bull market, we are not yet at the end of the game.

FYI:

Rubner Citadel: The fastest growth in equity ownership is occurring among households that historically had the lowest market participation rates. Today, the bottom 50% of US households own more than $615 billion of equities and mutual funds, a record high. (@MikeZaccardi)

FYI #2:

The US Supreme Court threw out longstanding federal limits on spending by political parties in coordination with candidates, in a ruling likely to help Republicans in the November midterms.

The 6-3 decision extends a line of Supreme Court rulings rolling back campaign finance regulations as violating the Constitution’s free speech clause. The case divided the court along ideological lines, with the three liberal justices in dissent.

The majority overruled a 2001 Supreme Court decision that upheld the caps as a means of tackling corruption and preventing the circumvention of separate limits on direct contributions to candidates.

Right with the times. Who cares about corruption in the USA nowadays?

• Trump Made More Than $1 Billion on Crypto Deals, Part of 2025 Windfall The president also brought in vast sums from licensing and legal settlements, according to an annual disclosure.
• Trump made far more trades than previously known. Stock trades made in Trump’s name reveal bursts of buying and selling around important announcements by companies and his administration.
• US president also earned hundreds of thousands of dollars from licensing of Bibles, watches and perfume
• Trump Cut a Billion-Dollar Mining Deal. His Sons Stand to Profit. An agreement between the U.S. and Kazakhstan has given a group of American investors with ties to the president and the commerce secretary access to one of the world’s largest untapped reserves of tungsten.
• Trump’s Friends Gave Him Tickets to World Cup, Super Bowl and Ryder Cup Federal disclosures show the president received dozens of tickets from team owners and allies to major sporting events.
• Trump’s financial disclosure stretches more than 900 pages.
• Political Speech Wins Again at the Supreme Court

$peech ain’t free…

(AI generated)

Why Wall Street Bulls Aren’t Worried About Sky-High Stock Prices Net profit margins are higher than average across multiple sectors, indicating corporate America has grown more resilient

It’s the metric giving Wall Street comfort over stocks’ sky-high valuations.

A historic surge in corporate profits has helped lift a key indicator of underlying business health to a record high, giving some investors reassurance about the sustainability of the market’s runaway gains.

The net profit margin for companies in the S&P 500 rose to 14.8% in the first quarter, according to FactSet. This marks the highest net margin, a measure of the profit generated from every dollar of revenue, reported by the index since the data provider began tracking this metric in 2009. The previous peak of 13.2% was set just a quarter earlier.

It isn’t just tech companies, either. In the first quarter, multiple sectors including financial services and industrials reported net margins above their five-year averages. For investors, the broad-based strength suggests corporate America has gotten more resilient to geopolitical conflicts that could trigger an inflationary jump and economic slowdown.

“This is a productivity‑driven environment, much like the 90s were, and productivity is spreading across sectors,” said Nancy Tengler, chief executive of Laffer Tengler Investments. “It’s thanks to not just AI, but all the new technologies.”

While the margin expansion is broad-based, the tech sector still drives the bulk of recent growth, fueled by companies such as Nvidia and Micron Technology. Excluding the tech sector, the S&P 500 would have reported a net profit margin of 12.4% for the first quarter, according to John Butters, senior earnings analyst at FactSet. (…)

The earnings growth rate for companies in the S&P 500 surged to 28.8% in the first quarter, the highest level since the fourth quarter of 2021.

Already, analysts are predicting a robust second quarter, which could serve as a key test of how profit margins held up against the inflationary pressures stemming from the conflict in the Middle East and heavy spending on the AI infrastructure boom. (…)

A key concern is the sustainability of the expanding margins. Because the technology sector has driven outsize growth, any reversal in its pricing power or demand could cause earnings to decline rapidly. OpenAI, for instance, is considering slashing the prices it charges users to win customers from rival Anthropic, the Journal reported.

“The problem is this can whipsaw pretty fast, and if the dynamics change on pricing, on the insatiable demand for semiconductors, in particular, this reversal could be significant,” said Matt Miskin, co-chief investment strategist at Manulife John Hancock Investments.

Valuations also remain a concern, though robust corporate earnings have so far justified elevated stock prices. The S&P 500 is trading at about 20 times its projected earnings over the next 12 months, higher than the 10-year average of 19, according to FactSet.

Profit margins could also face pressure from tighter financial conditions and elevated interest rates, which could translate into higher borrowing costs across the economy. (…)

Several warnings here:

1- The WSJ reporter, like most pundits, fails to mention that Q1 earnings were boosted by hyperscalers’ mark-to-market gains from equity stakes in private companies. “Alphabet and Amazon generated “other income” totaling $53 billion in Q1 2026, which accounted for nearly 60% of those two companies’ income in Q1 and 34% of the total $155 billion in income this quarter across the five largest hyperscalers.”  (GS)

These huge, unusual, non-operating profits boosted the S&P 500 YoY earnings growth by about 12%, from 16% to 28%.

For some “strange” reason, there is little effort to publish normalized earnings, even though Q1 earnings are meaningfully distorted and will serve as an inflated base for future earnings.

And that is before upcoming earnings results which will need to mark-to-market the continued appreciation in private AI companies during Q2 and Q3. Particularly GOOG, NVDA and CSCO.

Rough calculations suggest that 2026 S&P 500 EPS are currently inflated by about $20 and its P/E ratio by about 1.3x.

2- Normalized profits are still up a spectacular 16%, but the bulk of the growth comes from hyperscalers. Goldman Sachs calculates that ex-AI, S&P 500 earnings are not being upgraded and that median earnings growth will be around 9% in coming quarters.

 

As I wrote yesterday, only 4 sectors (Energy, Materials, IT and Comm. Services) are growing earnings faster than the S&P 500 average this year. The other 7: +9.1% on average. For 2027, only 3 sectors (Health Care, Industrials and IT) should be growing earnings faster than the S&P 500 average. The other 8: +7.3% on average.

3- Obviously, failing to normalize profits results in large distortions to profit margins. True, margins have also increased outside of IT but not that much as Ed Yardeni illustrates:

4- In the wake of the pandemic and the wars in Ukraine and the Middle East, consumers accepted price increases as inevitable and justified, particularly since their own incomes were also rising amid a rather strong economy. That’s no longer true. Real income from labor or total disposable income have been essentially flat YoY since March.

The recent Fed Beige book carried many corporate statements on the changing landscape:

• “Output prices rose slightly on average, although many firms left prices unchanged. Input prices increased modestly overall, but some contacts reported significant cost pressures.”
• “Most contacts did not plan to raise their output prices in the near term, even though many were concerned that cost pressures linked to the Middle East conflict could persist for a while.”
• “Firms continued to report moderate increases in prices received for their own goods and services. However, a dichotomy has emerged. Increases in prices received by consumer-facing firms have held steady at about 2.0 percent for the past six months.”
• “Most contacts across many sectors reported a reluctance to raise prices, citing consumer price sensitivity and softening demand.”

5- While on costs vs selling prices, the WSJ is right questioning the sustainability of tech margins. “Because the technology sector has driven outsize growth, any reversal in its pricing power or demand could cause earnings to decline rapidly. OpenAI, for instance, is considering slashing the prices it charges users to win customers from rival Anthropic, the Journal reported.”

But now consider Chinese vs Western LLM pricing. Chinese providers have turned LLM pricing into an explicit competitive weapon, cutting API prices multiple times since 2025 and capturing a majority of token volume on aggregators like OpenRouter.

In case you question Chinese LLM quality. At the very far right, Zhipu’s LLM (Z.ai) performance has almost reached Anthropic’s best model, at a fraction of the cost.

Apollo’s Torsten Slok:

The first chart below shows that so far there are no signs of profit margins rising outside the tech sector. This is ultimately what we are waiting for, because the value of AI companies today rests entirely on the promise that margins in the S&P 493 will eventually climb.

That promise is the link to current market prices, since implicit in the valuations of AI companies are assumptions about future earnings. That’s why the current debate about token costs, model routing and token marketplaces is important. If token costs converge toward zero for most AI use cases, then there is not enough revenue for all hyperscalers even in a situation where compute demand surges higher.

The key issue is the length of the ROI runway outside the tech sector. In a handful of sectors, software and tech above all, implementation is nearly immediate, since these firms can fold AI into their own products and processes overnight.

But that is the exception. Across most of the economy, and especially in capital-intensive, heavily regulated sectors, deep process re-engineering and data governance requirements could delay structural productivity gains well beyond what the market currently projects.

The list of slow-moving sectors is long, spanning health care, banking and insurance, energy and utilities, defense and aerospace, pharma and life sciences, manufacturing, transportation and logistics, construction and real estate, education, legal and the public sector.

This creates a dangerous divergence between aggressive, front-loaded valuations today and a much slower cash flow reality, since equity markets priced for instant earnings growth will face a painful repricing if the productivity hockey-stick takes five years rather than five months, see the second chart below.

Put differently, companies will slow their AI spending if they don’t see ROI quickly, and the current focus on token optimization is an early warning that AI implementation could be a bumpier, slower road than expected.

The bottom line is that a mismatch between current earnings expectations and the actual time firms need to generate ROI on AI investments could have significant implications for many AI company valuations today.

Beware of extrapolations, particularly on unusually inflated numbers.

AFFORDABLE LEVERAGE?

Karoline Leavitt, the White House press secretary, described it as “one of the most significant pieces of housing affordability legislation in American history,” adding that the “historic bill signing is another promise made, promise kept.”

But Mr. Trump sharply reversed course on Wednesday morning. In a series of social media posts, he said the housing bill was “of minor importance” to other priorities.

Democrats and Republicans began the day on a jubilant note, as they prepared to commemorate a new set of policies meant to lower housing costs — a long-sought priority that both parties hoped to trumpet to voters anxious about the economy ahead of the midterm elections.

But Mr. Trump swiftly and unexpectedly upended those plans. Hours after his own aides praised the bill and promised the president would sign it, Mr. Trump instead canceled a scheduled event at the Capitol. Eschewing an opportunity for rare bipartisan accord, the president opted to turn the bill into political leverage, aiming to force Congress — and members of his own party — to bow to unrelated demands over voting restrictions and the war with Iran.

Mr. Trump insisted on social media that he would only sign the housing measure into law if Congress first approved the SAVE America Act, a divisive measure that would impose new requirements for voter identification and limits on mail-in ballots. Republicans have been unable to advance that bill over fierce Democratic opposition. (…)

The White House declined to say if the president might sign the bill another time, or if he might take the more extreme step of vetoing a law that his party views as a way to convince voters that Republicans are doing something to address the cost of living. (Axios)