In July, Germany’s Producer Price Index (PPI) dropped by 0.1%. This was unexpected, as many anticipated a 0.1% rise. The data was released by Destatis on August 20, 2025. Energy prices had a significant impact. When energy costs were excluded, producer prices actually fell by 0.2% for the month. Compared to the previous year, producer prices decreased by 1.5%, mainly due to falling energy prices.

Producer Prices Without Energy Costs

Excluding energy costs, producer prices increased by 1.0% compared to July of last year. The surprising decline in German producer prices indicates that inflation is slowing down quicker than expected. This may reduce the pressure on the European Central Bank (ECB) to increase interest rates. This trend aligns with the recent Ifo Business Climate index, which fell to 89.5—a level not seen since late 2024. This suggests increasing pessimism. As a result, futures tied to the Euribor are likely to reflect a lower chance of further rate hikes this year. This signal of disinflation makes German government bonds, known as Bunds, more attractive. The yields on the 10-year Bund, currently at 2.45%, are likely to come under downward pressure. We might consider purchasing call options on Bund futures, as this could profit if bond prices rise and yields fall.

Impact on the German DAX Index

For the German DAX index, this news indicates weakening demand rather than just lower input costs, which is a negative sign for corporate earnings. With industrial production figures from last week showing a 0.5% contraction, it might be wise to buy protective put options on the DAX. This would hedge against a possible market decline due to recession fears. A less aggressive ECB stance could negatively affect the Euro, especially as the US Federal Reserve maintains a strong position. The interest rate gap is widening in favor of the US dollar, with fed funds futures indicating a 50% chance of one more American rate hike. This strengthens the outlook for the EUR/USD currency pair, which may test and possibly break below its recent support level around 1.0750. We saw a similar situation from 2014 to 2016 when falling producer prices preceded significant ECB stimulus. The growing uncertainty between slowed growth and central bank actions could lead to higher market volatility. Therefore, it could be wise to establish long positions in VSTOXX futures or options to guard against larger market fluctuations. Create your live VT Markets account and start trading now.

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