Aux Champs-Élysées

July 01, 2024

Aux Champs-Élysées

  • • French legislative election results boost EUR, French bonds, and stocks.
  • • Japan’s Tankan Q2 business sentiment survey was encouraging.
  • • China’s June PMIs point to a sluggish growth outlook.

Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

EUR is outperforming, French government bond futures edged higher, and futures on the French CAC 40 are up almost 3%. The hard-right National Rally party won the first round of the legislative elections but may struggle to get an absolute majority in the second and decisive round of voting next Sunday. In line with polls, Marine Le Pen’s National Rally took 33.1% of the national vote, the hard left alliance 28%, and President Emmanuel Macron’s centrist Ensemble group got 20%.

The two most likely scenarios for France’s second round of voting July 7 are either an absolute majority for the hard-right National Rally or a hung parliament. In our view, both scenarios are bearish for EUR and French bonds. It is still not clear how much of the National Rally’s fiscal spending plans are funded while a hung parliament will generate more political instability and lead to policy gridlock.

Germany’s EU Harmonized CPI (1:00pm London) will offer a preview of tomorrow’s Eurozone preliminary CPI print. German headline inflation is expected to slow three ticks to 2.5% y/y in June. Last week, the annual EU harmonized CPI inflation for France and Spain slowed in June to 2.1% (from 2.3%) and 3.5% (from 3.8%), respectively. Italy’s annual EU harmonized CPI inflation quickened in line with consensus to 0.9% in June from 0.8% in May.

The annual ECB Forum on Central Banking – the Sintra Forum – kicks-off today. The theme will be “monetary policy in an era of transformation.” ECB President Christine Lagarde gives the introductory speech this evening (8:00pm London).

USD is down from Friday’s high on EUR strength. In our view, the cyclical USD uptrend is intact. First, Fed policy continues to diverge with that of most other major central banks. Second, the favourable US macro backdrop and easy financial market conditions justify a reassessment in Fed funds rate expectations. Fed funds futures price-in 45 bp of cuts by December 2024 while the Fed has only 25 bp of cut pencilled-in. Third, the June composite PMI prints show growth momentum favours the US economy.

The US June ISM manufacturing index is today’s highlight (3:00pm London). Headline is projected to recover to 49.1 vs. 48.7 in May. The regional Fed manufacturing business surveys suggest risks are balanced. Of note the US S&P Global manufacturing PMI rose to a three-month high at 51.7 in June vs. 51.3 in May.

USD/JPY is firm around 161.00. Japan’s Tankan Q2 business sentiment survey was encouraging. The large manufacturing index unexpectedly improved to 13 (consensus: 11) vs. 11 in Q1 and the outlook rose to 14, matching the Q3 2021 high. The large non-manufacturing index was softer but stayed at a favorable level. The large non-manufacturing index dipped to 33 vs. 34 in Q1 and the outlook stayed at 27 for a third consecutive month.

The Tankan survey also showed a small uptick in medium- to long-term inflation expectations. Businesses three and five-year inflation expectations rose 1pts to 2.3% and 2.2%, respectively. Inflation expectations one year ahead was unchanged at 2.4% for a third consecutive quarter. Overall, we doubt the Bank of Japan (BOJ) will tighten more than is currently priced-in because Japan underlying inflation is in a firm downtrend and near the 2% target. The swaps market price-in 62% odds of a 10 bp BOJ policy rate hike at the next meeting July 31, and a total of 36 bp of tightening over the next 12 months.

China’s June PMIs point to a sluggish growth outlook. In June, the manufacturing PMI remained for a second consecutive month at 49.5 (matching consensus) and the non-manufacturing PMI dipped more than expected to 50.5 (consensus: 51.0) vs. 51.1 in May. As a result, the official composite PMI fell to 50.5 vs. 51.0 in May. The private survey Caixin manufacturing PMI came in stronger at a three-year high of 51.8 (consensus: 51.5) vs. 51.7 in May. The official PMIs tends to be more closely correlated to real economic activity than the Caixin readings. Bottom line: with the PBOC still in easing mode and the Fed staying hawkish, downside pressure on CNY and CNH are intact.

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