Spain’s calendar-adjusted industrial output rose 3.4% year on year in May, accelerating from 2% in the previous reading. The data point to a firmer pace of expansion in factory activity over the month.
On the same measure, the year-on-year growth rate therefore increased by 1.4 percentage points between the two periods. The release provides a snapshot of manufacturing momentum in Spain, based on output adjusted for calendar effects.
Implications For Economic Growth And Market Sentiment
This stronger-than-expected industrial output figure from Spain is a clear bullish signal. Coming in at 3.4% against a 2% forecast shows underlying economic resilience that the market has underestimated. We see this as an indication that fears of a significant slowdown in the Eurozone’s periphery may be overblown.
This data point doesn’t exist in a vacuum, as it reinforces the recent Spanish Manufacturing PMI for June which registered a solid 52.8, well into expansionary territory. The consistency across these data points suggests the positive momentum from May carried into the end of the second quarter. Therefore, we should anticipate upward revisions to Spain’s GDP growth forecasts.
For our equity positions, we are looking at bullish strategies on the IBEX 35 index for the coming weeks. The index, which has gained over 8% year-to-date, is heavily weighted towards banking and industrial companies that directly benefit from this robust activity. We will be considering buying call options with August and September expiries to capitalize on this trend.
Monetary Policy, Currency, And Fixed Income Insights
This surprising strength will likely make the European Central Bank more cautious about cutting interest rates further. With the deposit facility rate currently at 3.0%, this data reduces the probability of a rate cut at the ECB’s next meeting on July 24th. Consequently, we are evaluating positions that benefit from stable or slightly higher short-term rates, such as selling Euribor futures.
On the currency front, a more hesitant ECB relative to other central banks should provide support for the Euro. This data reinforces the EUR’s fundamental strength against currencies whose central banks are in a more aggressive easing cycle. We believe long EUR/USD positions, possibly through call options, are attractive as the pair tests resistance.
The data also improves Spain’s fiscal outlook, which should lead to a tightening of the yield spread between Spanish and German 10-year bonds. The spread has already compressed from over 100 to around 82 basis points in the last year, and we see potential for it to narrow further. We can structure a derivatives trade to profit from this convergence.
