Germany’s Producer Price Index (PPI) for June shows a 0.1% increase, slightly above the anticipated 0.0%. The previous month’s PPI stood at -0.2%.
Year-on-year, producer prices have decreased by 1.3%. This reduction is largely attributed to falling energy prices. When excluding energy costs, producer prices have actually risen by 1.3% compared to the previous year.
Underlying Pressure Persists
We see the latest release from Destatis shows a slight monthly uptick in producer prices when markets expected none. While the annual figure shows a decline, this is distorted by falling energy costs. The more important metric, producer prices excluding energy, is actually up 1.3% year-on-year, signaling persistent underlying pressure.
This pattern aligns with recent Eurozone data, where May 2024 services inflation was a high 4.1% even as headline numbers eased. It reinforces the cautious tone from ECB officials like Schnabel, who has repeatedly warned about the “last mile” of disinflation being the most difficult. We believe this makes the central bank less likely to accelerate any rate cuts they might have planned for later this year.
Market Implications and Strategies
For derivatives traders, this suggests that bets on aggressive ECB rate cuts are misplaced. We should consider positioning for higher interest rates for a longer period, perhaps by selling futures on the Euro-Bund. The historical parallel is the 2023 period, where markets were repeatedly surprised by central bank resolve despite falling headline inflation.
This underlying price pressure, combined with weak industrial data like the recent 0.2% monthly fall in German factory orders, creates a stagflationary headwind. We see value in buying protective puts on rate-sensitive indices like Germany’s DAX, as expectations for monetary easing may prove too optimistic. Volatility options could also be attractive, as the divergence between headline and core data is likely to create market uncertainty.
