Germany’s preliminary PMI for July indicates marginal improvements in both the manufacturing and services sectors. The manufacturing PMI stands at 49.2, slightly below the expected 49.5, while the services PMI measures 50.1, surpassing expectations of 50.0. The composite PMI is at 50.3, falling short of the forecasted 50.7.

Industrial output is at a five-month low, yet production in manufacturing has expanded for five consecutive months. Export orders have increased, leading to slower job cuts in the sector. Recent government measures, such as more favourable depreciation conditions, are supporting a potential recovery. Meanwhile, US tariffs do not seem to alter this positive outlook in the manufacturing sector.

In the services sector, new business is experiencing growth for the first time in nearly a year. Inflation is easing, with falling prices in industry due to a stronger euro and declining import prices. The service sector experiences a disinflationary trend, with less rapid wage growth. The overall GDP nowcast points to solid growth in Q3, although this remains a preliminary assessment due to limited data.

Based on this latest data, we believe derivative traders should adopt a cautiously neutral to slightly bullish stance on German assets. The readings suggest the economy is no longer in freefall but is struggling to gain meaningful momentum. This environment is less suited for aggressive directional bets and more for strategies that profit from range-bound price action and theta decay.

The disinflationary trend mentioned in the report is a key takeaway for interest rate markets. With Germany’s latest annual inflation rate falling to 2.2% in June, its lowest level in three years, pressure on the European Central Bank to maintain a hawkish stance is diminishing. We would therefore be sellers of calls on Euribor futures, as the path of least resistance for rates appears to be sideways to down.

For equity derivatives, the stabilization in services and the five-month expansion in manufacturing output, however slight, provides a floor for the DAX index. We would look at selling out-of-the-money puts on the index to collect premium, capitalizing on the view that a major economic downturn is becoming less likely. The unexpected 0.9% drop in German factory orders reported for May, however, tempers our outright enthusiasm and makes buying calls an expensive proposition.

The outlook for the euro appears mixed, limiting opportunities for trend-following strategies. While a recovering services sector is supportive, the fragility in manufacturing and the effect of a stronger currency on exports will likely cap any significant rally. Given the EUR/USD has been largely range-bound between 1.07 and 1.09 for the past month, we see more value in volatility-selling strategies on the currency pair.

Historically, periods of tentative recovery after a prolonged slump, as seen in PMI data from late 2023, are often characterized by choppy markets rather than strong trends. This historical pattern reinforces our view that implied volatility on German-related options may be overstated. We see an opportunity to construct trades like iron condors on the DAX, which would profit from the index remaining within a defined range over the next several weeks.