French Politics Hangs in the Balance

In focus today

Attention shifts to French politics as the minority government faces a crucial test in passing a social security bill, which could trigger a no-confidence vote against the government. Previously reliant on tacit support from the National Rally, tensions have risen since Thursday last week, where they called the current proposal “unacceptable”. Hence, uncertainty remains in French politics, and it remains unclear if the concessions from Barnier will be enough to satisfy the National Rally. For an in-depth analysis, refer to our recent article, Weekly Focus – Political risks rise again in France, 29 November.

In Sweden, we get manufacturing PMI for November at 08:30. Compared to the major euro economies where PMIs are well below 50, the Swedish manufacturing sector has held up relatively well (October at 53.1). Last week, NIER’s manufacturing index bounced higher, though it remains in contraction territory. The weak krona and a solid US market are tailwinds, while the bleak outlook for Europe is a headwind.

This afternoon, the US ISM Manufacturing index is due for release. Flash PMIs for November was below 50, although they showed slight improvement.

The week ahead will be dominated by US data releases, including JOLTs, ADP and ISM services. On Friday consensus expects the US jobs report to show a rebound in the employment growth of 200k, while we call for 165k. The FOMC’s blackout period before the December meeting begins on Saturday, yet prior to that, a long list of public remarks is scheduled for the week.

In the euro area, unemployment figures are released on Tuesday, while we receive retail sales data on Thursday. We will also have revisited Q3 GDP figures on Friday, which will include details on the growth composition.

Economic and market news

What happened over the weekend

In the US, president-elect Donald Trump threatened the BRICS countries with tariffs of 100%, if the group continues to work on a global alternative to the US dollar. Trump requires a commitment from the countries to neither create a new currency, nor back any other currency to replace ‘the mighty US dollar’. The threats aimed at the BRICS follow similar warnings of steep tariff increases on China, Mexico and Canada earlier last week.

In the euro area, HICP inflation rose to 2.3% y/y in November as expected (cons: 2.3%, prior: 2.0%). The increase in headline inflation was mainly due to base effects on energy inflation. Core inflation rose less than expected to 2.7% y/y (cons: 2.8%, prior: 2.7%). Most importantly, service prices increased only around 0.10% m/m seasonally adjusted in a positive sign for the ECB. Our 3m/3m SAAR measure of momentum declined to 2.7% in November from 3.4%. Hence, the trend lower in momentum of underlying inflation continued in November, which supports further rate cuts by the ECB.

In Sweden, Friday’s Q3 GDP surprised upside at 0.3% q/q and 0.7% y/y (cons: -0.1%, 0.1%, prior: -0.1%, -0,1%). The strong reading corroborates the positive NIER confidence data from last Thursday, hinting that the October decline in the NIER survey might have been an anomaly. Additionally, October’s retail sales data also came in positive at 0.4% m/m and 0.9% y/y (prior: 0%, 2.1%), suggesting a recovering retail sector on the back of improving sentiment among households and in the retail trade sector continued to improve in yesterday’s NIER survey.

In China, both measures of PMIs came out marginally better than expected in November. The official PMIs showed a marginal uptick in the manufacturing index, which printed at 50.3 (cons: 50.2, prior: 50.1), while the non-manufacturing index dropped to 50 (prior: 50.2) and finally composite at 50.8 (prior: 50.8). Additionally, the Caixin manufacturing PMIs surpassed expectations at 51.5 (cons: 50.5, prior: 50.3), with both new orders and employment rising. The positive readings follow the efforts from the government to support growth through the recent round of stimulus, which appears to be starting to take effect.

In the Middle East, rebels captured much of the Syrian capital Aleppo over the weekend, sparking renewed tensions in the region. President al-Assad has promised to restore order ‘with the help of friends and allies’, which suggests that the regime is awaiting support from Russia, Iran and Hezbollah to regain control. According to Bloomberg, the rebel alliance consists of Hayat Tahrir al-Sham, once linked to Al Queda, and several Turkish-backed groups.

Equities: Global equities were higher on Friday, with gains across most regions and all sectors. With last week’s stellar performance, we saw several indices setting new all-time highs, with November performance particularly driven out of the US. Although the US elections now seem distant, we must recall that just a month ago the VIX was above 20, accompanied by a considerable amount of uncertainty. Following last week’s drop, the VIX ended close to 13, and investors are now considerably more confident and feel much less uncertain, which largely explains the substantial equity returns harvested in November. It is also worth noting that November’s performance was not just driven by the MAG 7; the best performing sector was financials, and the best performing style was small caps. In the US on Friday, the Dow was up by 0.4%, the S&P 500 by 0.6%, Nasdaq by 0.8%, and the Russell 2000 by 0.4%. This morning, most Asian markets are higher, led by Taiwan. US futures are marginally lower, while European futures are starting the week almost 1% lower.

FI: Friday last week, European rates continued the almost uninterrupted streak of decline through November. The entire German curve has essentially shifted 30bp down across all tenors with the 10y Bund yield ending at 2.08%. We have another busy week ahead of us with tap auctions from Germany, France and Spain. Reading the Markets EUR – Look out for funding statements in December, 29 November. In France, tensions are building with Le Pen intensifying the language and potentially going for a no-confidence vote, following intense disagreement on the budget. The French-German spread has tightened some 5-6bp since the midle of last week, but still stands at a wide 80bp spread. We do not expect a material tightening from here.

FX: EUR/USD traded about one figure higher last week, fluctuating within the 1.05-1.06 range, as the broad USD had its largest weekly drop in three months. This week, a packed US calendar is set to prove pivotal for the Fed’s December meeting and by extension for EUR/USD. USD/JPY slid down towards the 149-mark in a week when the JPY saw broad gains as market expectations for a BoJ rate hike in December gained traction. Friday’s set of data releases out of Norway failed to deliver any significant news to our macro- or FX-narrative for Norway: private goods consumption remaining weak, unemployment grinding modestly higher and an unchanged pace of Norges Bank fiscal FX transaction purchase into December. We remain strategically bearish on the NOK.