German retail sales fell again in April, with Destatis reporting a 0.3% month-on-month decline versus expectations for a 0.4% drop. March sales also fell 0.3%, revised from a previously reported 2.0% fall, extending the run of weak consumer spending data.
On an annualised basis, retail sales decreased 0.3%, compared with a prior reading showing a 0.2% decline that had been revised from a 2.0% drop. Markets showed little response: the euro saw no immediate move, and EUR/USD was down 0.04% at 1.1655 at the time of writing.
Continued Consumer Weakness And Broader Economic Pressures
The German retail sales figures for April, released today, show a continued slowdown in consumer spending. While the monthly drop was slightly less than expected, it confirms a pattern of economic weakness. This trend suggests the consumer in Europe’s largest economy is still under significant pressure.
We see this consumer weakness is not happening in a vacuum, as the latest manufacturing PMI reading also came in at a contractionary 45.4. German inflation also recently ticked up to 2.8% in May, creating a challenging backdrop for the economy. This combination of slow growth and persistent inflation complicates the European Central Bank’s path forward.
ECB Policy, Currency Outlook, And Market Positioning
This leads us to believe the ECB will have little choice but to proceed with a planned interest rate cut this month. The persistent economic softness makes any further policy tightening highly unlikely. We are looking at derivatives tied to the Euribor rate, expecting them to price in a more dovish ECB for the remainder of the year.
For our currency positions, this underlying German weakness points to more downside for the Euro. We are considering buying EUR/USD put options with July and August expiries to position for a potential slide towards the 1.15 handle. Historically, periods of German industrial and consumer weakness, like that seen in 2023, have led to sustained underperformance for the single currency.
The slowdown also has negative implications for German stocks, particularly in the retail and consumer goods sectors. We believe buying put options on the DAX index is a sensible hedge against a potential market dip in the coming weeks. This growing uncertainty could also increase market volatility, making long positions on the VSTOXX index an attractive tactical play.
