German manufacturing orders increased by 7.8% in one month, fueled by demand in defense and transport. Orders that excluded major items also went up by 1%, signaling growth in the sector.
On the other hand, the construction industry struggled due to bad weather, as shown by the January PMI dropping to 44.7. Despite this setback, the sector is hopeful for a recovery in the spring, backed by solid order books.
Industrial production fell in December, especially in the automotive and machinery sectors. However, defense-related output helped cushion these losses, providing some stability.
Looking back to early 2025, German manufacturing orders surged, raising hopes for an economic improvement. This increase was largely due to major defense and transport contracts. The data led to expectations that Germany’s industrial base would become stronger throughout the year.
However, data from late 2025 and into January 2026 indicate this strength is not widespread. The latest figures from Destatis show that industrial production struggled, with a 0.7% decline in December 2025, as energy-intensive industries remained weak. This suggests that the initial enthusiasm from large orders did not lead to a broader recovery.
The expected rebound in construction didn’t happen fully either, due to high borrowing costs and low housing demand. The January 2026 HCOB Construction PMI stood at 43.1, reflecting nearly two years of ongoing contraction in the sector. This points to deeper structural issues beyond last year’s bad weather.
In the upcoming weeks, this situation calls for caution regarding the overall German market. We recommend selling call options on the DAX index with strike prices above recent highs. This way, we can pick up premiums while betting that the weak economy will limit any significant uptrend. This strategy benefits from a sideways or slightly declining market.
The defense sector remains a clear outperformer, a trend that started in 2024 and has accelerated. Traders should consider buying call options on defense companies like Rheinmetall to benefit from their full order books. On the flip side, buying put options on major construction or building material firms can safeguard against further sector weakness.
This ongoing weakness in Germany, the largest economy in the Eurozone, is likely to affect the Euro. We expect the European Central Bank may need to adopt a more cautious approach than the US Federal Reserve. Therefore, using options to position for a lower EUR/USD exchange rate in the next month or two seems wise.
here to set up a live account on VT Markets now
