The French Theme Will Keep Yields and Euro in a Tight Spot

Markets

The front end of the European yield curve outperformed going into the weekend. Rates dropped almost 5 bps in the 2-yr German tenor, enough to lose the symbolical 2% barrier to close at a 2-year low. It followed European inflation numbers coming in at the expected 2.3% headline, which prompted ECB’s de Guindos and Villeroy but also Nagel downplaying the acceleration above 2%. Core inflation missed the bar slightly with an October-matching 2.7% instead of 2.8% expected. The ECB’s chief economist Lane in a podcast with the Financial Times talked about the matter and the implications for monetary policy. In comments recorded prior to the CPI release Lane said once inflation was sure to return to 2%, the ECB needs “to be driven by upcoming risks rather than being backward-looking”. He refrained from giving time specifics but it suggests the central bank may already change some of its wording in the December policy statement so that “data dependence falls down in priority”. US yields were headed south as well. Net daily changes varied between 7.6 and 9.4 bps but we wouldn’t read too much into it. The US trading session was a shortened one due to Black Friday. The traditional start of the holiday shopping season was a strong one with sales growing at a faster pace this year. Joe Sixpack to the economy is a gift that keeps on giving. The dollar underperformed in currency markets, a product of falling yields and stock optimism. JPY was able to make the most out of it, thanks to consensus-beating Tokyo inflation numbers. USD/JPY dropped below 150. EUR/USD stranded just shy of 1.06 before going in reverse again this morning towards 1.052. French politics are once again cause of concern. Le Pen over the weekend said PM Barnier needs to amend the budget to some of the RN’s demands by today or have her Rassemblement National supporting a no-confidence motion. The finance minister Armand responded in a Bloomberg interview in early Asian trading by saying they won’t be blackmailed and don’t take ultimatums. French OAT futures currently tank, yields prepare for a sharply higher open. Spreads vs swap and German Bund are bound to rise. Watch out for French yields to surpass those in Greece. Last week was a dress rehearsal. The French theme will keep yields and the especially the euro in a tight spot at the very minimum in a daily perspective but more likely for the next two weeks going into December 12, when parliament gets to vote on the budget for a last time. In the US the monthly economic update kicks off with the manufacturing ISM today, followed by the services gauge and ADP job report on Wednesday and the official payrolls report on Friday. Fed’s Waller speech at “Building a Better Fed Framework: The AIER Monetary Conference” tonight is worth mentioning.

News & Views

Rating agency Moody’s on Friday changed Hungary’s credit rating outlook to negative from stable. The rating was maintained at Baa2. It reflects the agency’s assessment related to risks related to the quality of Hungary’s institutions and governance. The country may ultimately lose out on a substantial amount of EU funds because it doesn’t meet the conditions for the release. Moody’s thinks this could also lower trend GDP growth and weaken fiscal and debt metrics. As this happens in a context of weak growth in Germany, an important trading partner, this could amplify the negative pressure on the economy. Moody’s mentions a potential sharp increase in government spending ahead of the 2026 parliamentary elections. The rating agency still sees a partial reversal in 2025 of the weakening in debt affordability from the past two years. At the same it mentions institutional weakness weighing on the debt profile, including in adherence to the rule of law, interference in civil society and concerns over central bank independence and monetary policy. The agency sees growth returning to an average of 3.0% in the 2026-28 period.

GDP growth in India slowed to 5.4% Y/Y from 6.7% Y/Y in Q3. Expectations were for a 6.5% Y/Y growth. Growth in the agricultural sector held up fairly well (3.5% Y/Y from 2.0%) but mining contracted 0.1%. Manufacturing slowed from 7.0% to 2.2% and growth in the sectors of electricity, gas and water (3.3%), construction (7.7% from 10.5%) and financial services/real estate (6.7%) were lower than Q2. On the demand side, private consumption growth slowed from 7.4% Y/Y to 6.0%, as did growth capital formation (5.4% from 7.5%). The disappointing growth performance might pressure the RBI of India not to wait too long with its easing cycle. The bank has kept its policy rate unchanged at 6.50% since February 2023. The rupee is setting new all-time lows against the dollar this morning (USD/INR 84.68).