German manufacturing orders experienced a 7.8% month-on-month increase, driven by demand in defence and transport. Orders excluding significant items also rose by 1%, indicating growth in the sector.
In contrast, the construction industry’s performance dipped due to adverse weather, with the January PMI dropping to 44.7. Despite the slowdown, the sector anticipates recovery in the spring, supported by robust order books.
Industrial Production Decline
Industrial production faced a decline in December, notably in the automotive and machinery sectors. However, output related to defence partially mitigated these losses, providing a degree of stability.
Looking back to early 2025, we saw a surge in German manufacturing orders that gave hope for an economic upswing. This was mainly driven by large-scale defence and transport contracts. The data created an expectation that Germany’s industrial base would strengthen throughout the year.
However, data through late 2025 and into January 2026 shows this strength has not been broad-based. The latest Destatis figures show industrial production is still struggling, with a 0.7% decline in December 2025 as energy-intensive sectors remain weak. This suggests the initial optimism from one-off large orders did not translate into a wider recovery.
Construction Sector Challenges
The hoped-for rebound in construction also never fully materialized due to persistently high borrowing costs and weak housing demand. The January 2026 HCOB Construction PMI just came in at 43.1, marking nearly two years of continuous contraction in the sector. This indicates deep structural issues beyond the bad weather we saw this time last year.
For the coming weeks, this divergence calls for a cautious stance on the broader German market. We consider selling call options on the DAX index with strike prices above recent highs to collect premium, betting that the weak underlying economy will cap any significant rally. This strategy profits from a sideways or slightly declining market.
The clear outperformer remains the defence sector, a trend that began back in 2024 and has accelerated. Traders should look at buying call options on defence-related companies like Rheinmetall to gain upside exposure, as their order books remain full. Conversely, buying put options on major construction or building materials companies could hedge against further weakness in that sector.
This persistent weakness in Germany, the Eurozone’s largest economy, is likely to weigh on the Euro. We anticipate the European Central Bank may have to consider a more dovish stance than the US Federal Reserve. Therefore, using options to position for a lower EUR/USD exchange rate in the next one to two months seems prudent.
