April euro area PMI data show softer activity alongside rising price measures, raising stagflation risk. The composite PMI fell below 50, mainly due to weaker services, while manufacturing held up better.
Firms in manufacturing appeared to bring forward purchases in response to expected supply and energy disruptions linked to the Iran war. Price indices rose across Europe to levels last seen in 2022/23.
Composite Prices Reach New Highs
The euro area composite PMI output price index rose by 3.2 points to 57.0, its highest since early 2023. The composite PMI input price index increased by 3.1 points to 68.4.
Increases in manufacturing price indices were larger than those in services. The rise in output price indices was bigger than in March, indicating more cost pass-through to customers.
The latest April PMI data signals a challenging period of stagflation for the Euro area, a risk we need to act on now. With the composite PMI dipping to 49.8, below the 50-mark that separates growth from contraction, economic activity is clearly slowing. This weakness, combined with surging price inflation, creates specific opportunities for derivative traders in the weeks ahead.
Given the downturn in economic activity, particularly in the services sector, we should consider short positions on European equity indices. A straightforward approach would be to buy put options on the EURO STOXX 50 or short its futures contracts. This stagflationary environment also breeds uncertainty, which should drive volatility higher, making long positions on VSTOXX futures or call options attractive.
Rates Volatility And Bund Positioning
The European Central Bank is now in a difficult position, as stubborn inflation will prevent them from cutting interest rates to support the slowing economy. In fact, markets are now only pricing in a 20% chance of a rate cut by September, a major shift from last month. We can position for this by shorting German Bund futures, anticipating that yields will remain elevated or climb further.
This policy bind makes the Euro look particularly vulnerable against currencies with stronger economic backdrops, like the US Dollar. The EUR/USD has already fallen to a yearly low of around 1.0450 on these growing concerns. We see further downside, which can be traded by purchasing USD call options against the EUR or by directly shorting EUR/USD futures.
The data explicitly points to fears of an Iran war-related energy shock, with manufacturers hoarding supplies. This is a clear signal to take long positions in energy derivatives, as Brent crude oil is already trading above $110 per barrel. Buying call options or futures on Brent crude allows us to position for further supply-driven price spikes.
The jump in price indices to levels last seen in 2022/23 is a serious warning. From our perspective looking back at 2025, we recall the severe inflation of that period, which ultimately forced the ECB into a series of aggressive rate hikes. History suggests the central bank cannot ignore this renewed inflation, reinforcing the case for these trading postures.
