Inflation could see a modest pickup in Q3 2025 as the impact of tariffs becomes more acutely felt. Much will depend on the scope and timing of the tariffs, as well as how successfully businesses can absorb or offset rising input costs. For now, the broader disinflation trend remains intact, though the Fed will closely monitor any tariff-driven price pressures. The market is now anticipating three rate cuts from the Fed in the second half of 2025 and an additional two cuts in 2026. The Fed does appear to have more heightened concerns about stagflation, a period of low growth paired with high inflation, which could restrict the degree to which it can ease monetary policy. While inflation has moderated in recent months, any renewed price pressures from tariffs or supply shocks, coupled with slowing economic activity, would complicate the Fed’s path forward. 
  
In the U.S., the ISM Manufacturing PMI was 49 in June, marking the fourth consecutive month in contraction territory and confirming ongoing weakness in factory activity. Capacity utilization for manufacturing held steady at 77.3%, remaining below its long-run average, signaling underused factory resources despite an uptick in output. Firms appear hesitant to ramp up capacity amid uncertain demand. 
  
Eurozone GDP grew by 0.6% quarter-over-quarter in Q1 2025, and 1.5% year-over-year, marking an acceleration from the 0.3% growth seen in Q4 2024. But the strong start to the year may be short lived. The outlook for the rest of the year has dimmed, with the European Commission and ECB now forecasting just 0.9% GDP growth for 2025, down from earlier estimates of 1.3% to 1.5%, as rising trade tensions and tariff uncertainty weigh on business sentiment. Inflation in the euro area has settled near the ECB’s 2% target, offering some relief after a long tightening cycle. However, persistent services inflation and the potential for renewed price pressures from tariffs or energy shocks remain key risks to the outlook. 
  
Eurozone manufacturing showed tentative signs of stabilization in June. The HCOB Manufacturing PMI rose slightly to 49.5, a 34-month high, still below the neutral 50 mark but signaling only a marginal downturn. Output expanded for a fourth consecutive month, supported by stabilizing order books and improved business confidence, the strongest since early 2022, even as employment and purchasing activity continued to decline. 
  
Asia’s manufacturing landscape is sending mixed signals as regional economies respond to shifting global demand and evolving trade dynamics. In China, the official manufacturing PMI for June came in at 49.7, still below the neutral 50 threshold but improving for the third consecutive month as easing trade tensions supported domestic activity. However, underlying weakness remains, with May industrial profits falling 9.1% year-over-year, driven by margin pressure in electronics and autos. This highlights the ongoing struggle of China’s manufacturing sector to maintain profitability amid deflationary pressures and intense price competition, even as sentiment stabilizes. 
  
Elsewhere in Asia, high-tech exports continue to outperform. The Bank of Japan’s Q2 Tankan survey showed large manufacturers’ sentiment improving to +13, above expectations, fueled by rising demand for electronics. May industrial production rose 0.5% month-over-month, led by autos and semiconductors. In South Korea, June exports increased 4.3% from a year earlier, with semiconductor shipments climbing 11.6%, marking the fourth straight month of gains. Taiwan also reported strong momentum, with year-to-date electronics export orders surpassing $100 billion, up 25% year-over-year, driven by high-performance computing and AI hardware. Together, these trends reflect a broader recovery in the electronics supply chain, even as China’s industrial economy struggles to regain its footing. 
  
The global economy enters the second half of 2025 with growing risks and diverging regional dynamics. While the U.S. faces weakening consumption and investment under the weight of tariff pressures, the eurozone’s early-year momentum is fading. In contrast, some of Asia’s tech-driven economies are showing relative strength, with strong export performance in Japan, South Korea, and Taiwan helping offset softness in China. The electronics supply chain remains a bright spot, but overall momentum is fragile as policymakers weigh the delicate balance between supporting growth and containing inflation.