The motion of censure tabled by the opposition accentuated the distrust of the markets, the government having resorted to article 49.3 of the Constitution to have its budget adopted without a vote.
- Political tensions in France and Germany are weighing on the confidence of purchasing directors.
- The slowdown in inflation in the euro zone will allow the ECB to continue easing its monetary policy.
- Activity in the United States remains solid, while in Japan, inflation has resumed its upward trajectory.
In France, doubt has arisen as to the sustainability of the Barnier government. The 10-year sovereign yield gap between France and Germany has widened to a weekly high of 82 basis points and France now borrows at the same rate as Greece.
The motion of censure tabled by the opposition, the government having used article 49.3 of the Constitution to have its budget adopted without a vote, accentuated the mistrust of the markets. In order to avoid a motion of censure being passed and to gain the support of the National Rally, Michel Barnier decided to withdraw a planned increase in taxes on electricity but Marine Le Pen’s party has already indicated that it would be necessary additional concessions from the government. The probability of a fall of the government is therefore more and more likely, which would lead to an institutional crisis in France to the extent that Emmanuel Macron could certainly appoint a technical government, but without any guarantee that it will succeed in validating a new budgetary text while new legislative elections cannot be called before next summer. The risk of a closure of state services in the event of non-validation of the budget, however, remains relatively low, because the government will ultimately be able to renew the taxes collected this year identically. In any case, political uncertainty will continue to fuel investors’ distrust of French debt, and even that of rating agencies, as S&P will publish this Friday the review of France’s sovereign rating, currently at AA- with a stable outlook. The market is already anticipating a deterioration of the outlook from stable to negative.
These political tensions in France and Germany are weighing on purchasing managers’ confidence: the euro zone composite PMI index is returning to contraction territory at 48.1. Household consumption is also affected. While retail sales in Germany have been recovering for several months, they fell by 1.5% in October. In France too, consumer spending fell by 0.4% in October.
The slowdown in inflation in the euro zone (2.3% over 12 months, -0.3% in November) will allow the ECB to continue easing its monetary policy. On the other hand, the pace and the landing point were the subject of fierce debates ahead of the next meeting on December 12. Isabel Schnabel tempered expectations of a 50 bp cut in key rates in December by recalling her preference for a gradual approach and her wish not to lower rates below the neutral rate, refusing that monetary policy comes in support of the activity.
Unlike Europe, activity in the United States continues to be robust. Household consumption expenditure increased by 0.4% in October, while PCE inflation accelerated slightly to +2.3% year-on-year.
In Japan, inflation has resumed its upward trajectory, which should lead the Bank of Japan to raise rates again in December. The Yen strengthened against the dollar and the euro.
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