Global industrial activity is picking up at the start of the year

Overview

► One of the uncertainties for 2026 has been lifted by Donald Trump. Indeed, the U.S. President has finally decided to nominate Kevin Warsh as a candidate to lead the Federal Reserve. Warsh has long been considered one of Donald Trump’s potential picks. He has consistently been viewed by markets—alongside C. Waller—as the most experienced candidate, having served as a Fed governor for five years, notably during the 2008–2009 financial crisis. His nomination therefore does not come as a major surprise.

►K. Warsh, having supported very conservative views on inflation in the past (including during the post‑2008–2009 crisis deflationary-risk period), may reassure markets on this issue. However, his views on the Federal Reserve have become increasingly critical. He has consistently opposed the expansion of the Fed’s balance sheet, seeing more risks than benefits, though without really grounding his argument in theoretical considerations or historical experience. More recently, during an IMF event (April 2025), he expressed strong criticism of certain positions taken by the institution, including on climate change and inclusion. With regard to the Fed, it is difficult to discern any active approach that incorporates these topics. Overall, K. Warsh remains hard to read. If he is appointed in mid-May to replace J. Powell, he will quickly be tested on his leadership and on his defense of the Fed’s independence. At this stage, we continue to believe that the Fed should remain cautious in 2026, and we see only one potential policy rate cut.

► President Trump has also announced a trade agreement with India. According to the President, the deal would involve reducing tariff rates to 18%, down from the previous 25%. Details remain limited, but again according to the President, India has committed to no longer importing Russian oil and to increasing its imports of U.S. products, particularly in the technology, agricultural, and energy sectors. Indian authorities have made no statement regarding Russian oil imports. In recent years, India had become one of the main importers of Russian oil, averaging 1.7 million barrels per month in 2025. However, imports had declined in recent months following sanctions announced by the U.S. administration. It is worth noting that this agreement comes just after the European Union signed a trade deal with India.

► France has finally adopted a budget for 2026. Indeed, S. Lecornu’s government managed to survive two no‑confidence votes and passed the budget law by invoking Article 49.3 of the Constitution. As anticipated, it was thanks to the Socialist Party that the budget was approved. This support came in exchange for multiple concessions, notably the decision to maintain the exceptional tax on large corporations, which is expected to bring in another €8 billion in 2026. However, the target for reducing the public deficit will be more modest, aiming for 5% of GDP. Overall, this has helped keep the yield spread with Germany relatively stable at 58 basis points (its lowest level in over a year) for the 10‑year maturity. Most importantly, this should bring some short‑term calm and visibility to economic agents and support economic activity.

►At the start of the month, manufacturing activity indicators for January were published for a large number of countries. They brought good news. Indeed, the global index compiled by J.P. Morgan, based on S&P’s PMI surveys, rose, indicating a renewed momentum. In particular, new global orders returned to growth, reaching their highest level in one year. At the regional level, the rebound was most notable in the United States and in several Asian economies, including India. In the Eurozone, the situation also improved, even though activity remains in contraction territory.

►In the United States, while the S&P indicator rebounded, the ISM survey for the manufacturing sector showed an even more pronounced surge, clearly moving back into expansion territory after having remained in contraction for a year. The ISM survey, considered the most reliable gauge for the manufacturing industry, showed that all its components improved, starting with new orders: the index climbed to 57.1, its highest level since February 2022. This is consistent with our view of an acceleration in activity during the first part of the year. However, the key factor needed to consolidate the recovery is an improvement in labour market dynamics. For now, despite a slight improvement in January, firms remain very cautious about hiring intentions, with the employment sub‑index still in contraction territory.

►In the Eurozone, S&P’s final PMI survey for January shows a very slight improvement in manufacturing activity, although it remains in contraction territory. The survey highlights the recovery of the manufacturing sector in France, which remains in expansion. In contrast, although activity in Germany is improving, it has not yet managed to return to expansion territory. We believe that the beginning of the year should continue to show a gradual recovery in industry thanks to the German stimulus plan.

►In China, the official PMI activity surveys delivered a message of weakness across the entire economy, with the composite index (services and manufacturing) falling back into contraction territory. At the same time, the private S&P (Ratingdog) manufacturing survey painted a slightly better picture, with the index just above 50, signalling only a very modest expansion in activity. These figures support our view that the authorities will need to provide additional support to the domestic economy and will find it difficult to rely solely on the current strength of exports to achieve their growth target.

►The improvement in the industrial outlook has supported risk assets, particularly in the United States and Europe. This occurred in a market environment marked by anxiety following the sharp and sudden decline in metal prices (‑14% for gold and ‑30% for silver), particularly precious metals. This adjustment appears to have been driven by several factors, including significant speculative positions on the Chinese domestic market. However, it also seems that the correction originated from an overly rapid surge in this segment, fuelled partly by objective factors such as projections of strong structural demand for industrial metals—especially copper—and, for precious metals, by investors’ search for safe-haven assets amid elevated geopolitical risks. This excessive enthusiasm appears to have ended abruptly. For industrial metals, renewed upward pressure could return now that the market has stabilised. In contrast, for precious metals, we expect a gradual return to calmer conditions.

►In Japan, January inflation figures for Tokyo came in more moderate than expected. Headline inflation stood at 1.5% year‑on‑year, compared with 2.0% the previous month, while core inflation (excluding fresh food and energy) eased to 2.4% from 2.6% in December. This moderation in inflation is good news for the BoJ. We continue to expect two additional policy rate hikes over the course of the year, which would bring the rate to 1.25%.