Spain’s consumer price index (CPI) rose by 0.4% month-on-month in February. This compares with a -0.4% month-on-month reading in the previous period.
The change marks a shift from a monthly fall in prices to a monthly rise. The data shows a 0.8 percentage point turnaround between the two readings.
Reversal Signals Persistent Inflation Pressures
The jump in Spain’s monthly inflation from negative to a firm positive is a warning sign. This reversal suggests underlying price pressures are stickier than anticipated across the Eurozone. We must adjust our view that the European Central Bank (ECB) would have a clear path to cutting interest rates this year.
This data point gains importance when viewed alongside Germany’s preliminary February inflation, which also came in unexpectedly strong at 0.5% month-over-month. Eurozone wage growth data from last week, which settled at a robust 4.5% year-over-year, further complicates the picture for the ECB. The market is likely underestimating the chance that interest rates will be held at current levels through the summer.
Given this, we should consider selling short-term interest rate futures, such as those tied to EURIBOR, to position for a more hawkish ECB outlook. Entering interest rate swaps where we pay a fixed rate is also an attractive strategy now. These positions will benefit if the market reprices to expect fewer, or later, rate cuts.
For equities, this environment increases downside risk, particularly for sectors sensitive to borrowing costs like real estate and technology. We should look at buying put options on the Euro Stoxx 50 index as a hedge or a speculative position for the coming weeks. An increase in implied volatility across European markets also makes long-volatility option strategies, like straddles, worth considering.
The Euro should find support if the ECB is perceived as more hawkish than its peers, especially the US Federal Reserve. Recent US data showed personal consumption expenditures inflation tracking at a more subdued 2.4% annually, reinforcing the potential for policy divergence. Therefore, we see value in establishing long positions on the Euro against the US dollar through call options or futures contracts.
Positioning Implications For Rates Equities And Fx
Looking back from our perspective in 2025, we saw how markets in 2022 were caught off guard by underestimating inflation’s persistence. That period led to aggressive and sudden policy tightening that roiled asset prices. The current data from Spain suggests a similar risk is emerging, and it is prudent to position for that possibility now rather than later.
