Manufacturing revival complicates inflation fight
June 2026, On the Horizon
Rising inflation worldwide is prompting central banks to abandon the rate‑cutting cycle earlier than expected or, in some cases, to resume hiking rates. Fiscal policy is pulling in the other direction as governments use fuel subsidies and other support measures to soften the growth hit from the Iran war. A revival in global manufacturing now looks set to add to these pressures, which would make inflation broader and more durable than markets expect.
Nations such as the UK, New Zealand, and Australia will have to contend with the growth effects of a potential longer‑term shortage of refined oil products such as jet fuel and diesel, leaving central banks to grapple with stagflationary outcomes that make their policy decisions much more difficult.
Further complicating this backdrop are clear signs of a sustained pickup in global manufacturing Purchasing Managers’ Indexes (PMIs) after a three‑year downtrend in the manufacturing cycle (Figure 1). Additionally, last year the Chinese government announced its “anti‑involution” drive to curb overinvestment and support profit margins across various industrial sectors. While the actual impact of this policy is debatable, its effects reached the Chinese economy around the same time that the global manufacturing cycle reached a bottom and started to turn positive.
Manufacturing PMIs are recovering
As of April 30, 2026.
Sources: S&P Global Business Surveys—Manufacturing PMI (seasonally adjusted index data). PMIs above 50 indicate expansion and below 50 indicate contraction.
The year‑over‑year change in China’s producer price index turned positive in March. Conversations with management teams at Chinese industrial companies suggest that nearly all have been raising prices to offset higher raw material costs and to respond to firmer demand.
Markets have priced in the short‑term implications of the supply‑driven rise in oil prices but not the more persistent inflation tied to the upturn in the global manufacturing cycle and industrial price increases driven by more expensive raw materials. This has created a scenario where markets are trying to look through a short‑term inflationary spike on the assumption that the Strait of Hormuz will be opened relatively quickly—but investors may be disappointed by structural inflation that could remain after the immediate energy supply crunch.
Investment implications
- Positioning for U.S. yield curve flattening could benefit from a combination of less disinflation from Chinese imports and an accelerating manufacturing cycle.
- Long inflation breakeven1 exposures could become hedges to consider for portfolios that have underlying credit exposure.
ETFs are bought and sold at market prices, not NAV. Investors generally incur the cost of the spread between the prices at which shares are bought and sold. Buying and selling shares may result in brokerage commissions which will reduce returns.
202606-5513003
Adam Marden
Portfolio Manager
Strategies to Consider
June 2026
On the Horizon
Supply shock sparks energy security push
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1 Long inflation breakeven is a strategy that aims to profit if the spread widens between nominal bond yields and Treasury inflation protected securities (TIPS) yields. Investments that employ this strategy often involve shorting nominal bonds or using derivatives such as inflation swaps.
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