Germany’s Producer Price Index (PPI) rose by 2.5% month-on-month in March. This was above the forecast of 1.4%.
The data indicates producer prices increased faster than expected during the month. The report provides a snapshot of price changes at the producer level in Germany.
This morning’s German producer price data came in much hotter than expected, signaling that inflationary pressures are not fading as we had hoped. This places significant pressure on the European Central Bank to reconsider its previously neutral stance on interest rates. Consequently, the market is now pricing in a much more hawkish path for the ECB through the remainder of 2026.
We believe the most direct response is to anticipate higher interest rates for longer, making short positions on German bond futures attractive. The yield on the German 10-year Bund has already jumped 12 basis points to 2.95% on the news, its highest level this year. We are positioning for this trend to continue by selling Euribor futures contracts, as the probability of an ECB rate cut by September has now collapsed from 60% to below 15%.
This inflation surprise should provide a tailwind for the euro, particularly against the U.S. dollar, where recent data has shown a slight economic slowdown. We are buying EUR/USD call options with expirations in the third quarter to capitalize on this expected policy divergence. The pair has already pushed through the 1.1050 resistance level, and foreign exchange option markets show a growing bias for further euro strength.
For equities, this is a clear headwind, as higher borrowing costs will pressure corporate earnings. Looking back, we saw how the DAX index dropped nearly 15% during the initial inflation shock of 2022, a period of similar uncertainty. Therefore, we are buying put options on the DAX, as the European VSTOXX volatility index has spiked 18% today, indicating traders are bracing for increased market turbulence.
