French election spooks (some) markets

The economic recovery in the euro area might not be as solid as previously thought. At least that is the impression the June PMI survey gives, and the less upbeat picture was confirmed by German IFO data. The service sector has lost some momentum and the manufacturing recession reaccelerated after we had seen promising signs of a stabilisation here in recent months. Price pressures moderated a bit in June in the euro area, but by and large, service inflation remains too high.

The ECB delivered the widely anticipated first 25bp rate cut but kept its forwardlooking guidance vague at its June meeting. We see the move as a roll-back of the September 2023 insurance hike and as we still see a sufficiently growth momentum and sticky inflation, we do not expect the next rate cut from the ECB until December.

In the US, the economy remains on a strong footing, with PMIs indicating continued strong growth momentum and 272,000 new jobs in May. It might be that things are moving too fast, as jobs growth went hand in hand with increasing wage growth and a worrying decline in the labour force. However, inflation data for May indicated a slowing price pressure and it remains our overall impression that the labour market is cooling. Thus, the jury is still out on the size of the inflation headache. We expect the Fed to find room for the first rate cut in September.

The Bank of Japan, largely out of sync with the other major central banks, has pledged to taper its large QE-programme and will decide on a detailed plan at its late- July policy meeting. With recent weakening price pressures and a sputtering economic recovery, we expect further rate hikes will not come until the fall despite a continued pressure for a weaker yen. Elsewhere in Asia, Chinese data paint the picture of a still fragile economy with the housing crisis remaining a key drag on demand. After a strong start to the year, production seems to have lost some momentum, which is also reflected in a weak official PMI survey. We do however also see some bright spots ahead as we put more emphasis on the more upbeat private PMI measure, which is also aligned with solid PMI readings out of the ASEAN countries in June.

The result of the EU Commission’s anti-subsidy investigation on Chinese EVs was released in June and EU tariffs on Chinese vehicles will increase from 10% to 27- 48% depending on the car brand. China hit back with an anti-dumping investigation into imports of EU pork. While the EU-China trade tensions are clearly on the rise, we doubt it will evolve into a wider trade war as neither EU nor China have an interest in this given economic vulnerabilities in both areas.

The possibility of a new French parliament ready to run higher deficits has spooked markets through June. Rassemblement National won the first round of the parliamentary elections with 33% of the votes. This means the most likely scenario is a “hung parliament” and thus limited risk of France going down an increasingly unsustainable fiscal policy path.

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