The Eurozone Producer Price Index (PPI) dropped by 0.6% in May, slightly below the expected 0.5% decrease. This decline follows a more significant 2.2% fall in the previous month. Year over year, the PPI saw a 0.3% increase, which matched forecasts and was down from the 0.7% rise observed earlier. A major factor in the monthly decline was a 2.1% drop in energy prices.

Excluding Energy Costs

When excluding energy, producer prices rose by 0.1% in May. Durable consumer goods saw a 0.3% increase, while non-durable consumer goods rose by 0.2%. On the other hand, prices for intermediate goods fell by 0.1%, and capital goods prices stayed the same. The PPI for the Eurozone, which often indicates future inflation at the factory level, decreased more than expected in May. It fell by 0.6% compared to the anticipated 0.5%. This decline continues a trend of easing price pressures, following a sharp 2.2% drop in the previous month. Annually, the index rose by just 0.3%, aligning with expectations but slower than April’s 0.7% increase. These numbers suggest input costs are stabilizing, mainly due to a sharp drop in energy prices. Energy prices alone fell by 2.1% for the month, significantly impacting the overall index. This decline reflects ongoing volatility in wholesale gas and electricity markets, indicating that previous price spikes are beginning to unwind. When we exclude energy prices, the overall picture is more stable, with a 0.1% rise in prices for May. Stock levels remain manageable across different sectors. Durable consumer goods increased by 0.3%, while non-durable goods rose by 0.2%, suggesting that consumer demand has not weakened significantly yet. This modest growth indicates that producers are managing cost increases despite uncertain broader demand. In contrast, prices for intermediate goods fell by 0.1%, continuing a trend of low activity. Capital goods prices were flat, which is expected due to longer production cycles and delays in price adjustments for heavy machinery.

Market Responses and Expectations

These price indicators help clarify the production sector’s cost base and suggest a trend of broad disinflation. While some resilience remains, especially in consumer goods, there is little evidence to indicate renewed price increases. Manufacturers’ pricing power seems limited, and lower energy costs are efficiently passing through supply chains. We can anticipate some volatility in short-term rates contracts related to expected policy changes. The lower headline and core PPI figures further argue against any aggressive policy shifts. With inflation inputs softening, forward expectations may adjust, particularly in fixed-income markets and short-term swap positions. This is also notable given the cautious tone of key monetary officials last week. Bearish pressure on inflation hedges may continue if June’s data follows a similar trend. However, we should not dismiss the possibility of strength in consumer-related data. Hedgers should keep an eye on upcoming retail sales figures as a potential indication before changing long positions. Short gamma profiles may perform better in the near term as implied volatilities decline. We are also monitoring the relationship between intermediate goods pricing and overall industrial sentiment. The negative trend here could indicate weakening purchasing manager indices. If this continues over the summer, it could lead to more cautious assumptions about future policy. Consequently, steepeners in the yield curve, particularly in the two- to five-year segment, may gain renewed interest in the coming weeks, especially as spot inflation and production pressures stabilize. Timing is critical, but the data provides early indications for traders focusing on short-term rate differentials. We believe there is potential for further declines in near-term inflation swaps, provided energy costs keep falling. Longer durations should remain relatively insulated unless secondary indicators—like wage growth or services inflation—show a rise. The May data gives clear guidance for short-term derivatives pricing. Create your live VT Markets account and start trading now.

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