Eurozone industrial production fell 1.4% month on month in December, but rose 1.2% year on year. The monthly drop followed weak December data from Germany and France.
Pressure on industry is still high. Natural gas prices in Europe remain more than three times higher than in the US.
Trade And External Pressures
Chinese exports to Europe are still rising quickly. European exporters also face higher import tariffs in the US.
A European Commission business survey in January showed export orders remained weak, while overall orders improved. This suggests stronger domestic demand within the eurozone.
German stimulus plans are expected to support demand. German industrial orders rose by nearly 20% over the last four months of 2025.
Inventories also look closer to normal, with stock levels near their long-term average. Manufacturing is expected to add to eurozone growth in 2026, even though these structural issues remain.
Investment Positioning And Market Implications
The eurozone industrial sector looks to be in a cyclical recovery, despite the dip in production in December 2025. We see this as a sign of underlying strength, especially after the sharp rise in German industrial orders late last year. This suggests domestic demand in the bloc is becoming a bigger driver of growth.
Recent data from early 2026 supports this view. For example, the German Ifo Business Climate Index for February rose to 91.5, its highest level in more than a year. This adds weight to the idea that the inventory correction has largely ended and that business confidence is improving.
In the coming weeks, we may want to position for further gains using equity derivatives. Long call options on indices such as the EURO STOXX 50 provide a direct way to gain broad exposure to a European manufacturing rebound. With volatility still possible, bull call spreads can help limit downside while keeping upside potential.
This improving backdrop may also help support the euro. Even though high energy costs remain a headwind, with European natural gas still near €85 per MWh, stronger domestic demand could support long EUR/USD positions. Call options on the pair offer exposure to potential upside while limiting the upfront cost.
The recovery also matters for interest rates. It makes near-term rate cuts from the European Central Bank less likely. Flash inflation estimates for January 2026 held at 2.3%, supporting the view that the ECB will stay cautious. This is similar to the period after 2010, when a cyclical rebound pushed rate expectations higher faster than many expected.
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