FRANCE: Gov't Suspends Budget Debates, Use Article 49.3 Or Ordinances Looming
As highlighted through this week, it looks likely that PM Lecornu will have to resort to Article 49.3 (or, perhaps more controversially, ordinances), to push his 2026 budget through parliament. This risks his government falling to a censure vote. The Socialist party’s actions remain key – a party-wide abstention from any confidence vote should keep Lecornu’s government in place, but no such guarantees have been made. A reminder that tacit Socialist support last year came because Lecornu had promised not to use Article 49.3 to pass his budget.
- The news may be contributing to light OAT underperformance this morning – the 10-year OAT/Bund spread is up around 1bp to 68bps. However, widening pressures are fairly contained given the latest developments haven’t come as a huge surprise.
- That said, the re-introduction of heightened political uncertainty, alongside existing concerns around the Government’s ability to meet its <5% 2026 deficit target, may generate fresh underperformance for OATs versus EGB peers such as BTPs over the coming weeks.
- Yesterday evening, the Government cancelled budget debates scheduled for Friday and Monday. Ahead of Tuesday’s session, a decision on whether to use Article 49.3 may have been made. Minister for Relations with Parliament Laurent Panifous noted yesterday that “We are definitely moving away from a compromise text acceptable to a majority of MPs”
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BTP TECHS: (H6) Recovery Extends
- RES 4: 121.33 High Oct 21 and a key resistance area
- RES 3: 121.37 High Nov 13
- RES 2: 121.24 High Nov 26
- RES 1: 120.34/77 Intraday high / High Dec 3
- PRICE: 120.28 @ 08:07 GMT Dec 17
- SUP 1: 119.54 Low Dec 12
- SUP 2: 119.13 Low Dec 10 and the bear trigger
- SUP 3: 118.00 Round number support
- SUP 4: 118.84 2.000 proj of the Nov 13 - 20 - 26 price swing
Gains in BTP futures appear corrective. However, the contract has traded above initial resistance at 120.17, the Nov 20 low. A continuation higher would signal scope for an extension towards 120.77, the Dec 3 high. On the downside, a reversal lower would refocus attention on key support at 119.13, the Dec 10 low and a bear trigger. Clearance of this level would confirm a resumption of the downtrend.
US TSY OPTIONS: TY Calls Lifted
Some upside exposure sought in recent trade:
- TYF6 113.50 calls paper paid 0-03 on ~4K over a few clips
- TYG6 114.00 calls paper paid 0-10 on 2.5K over a couple of clips
STIR: Risks To Tomorrow's ECB Decision More Balanced As Hawkish Repricing Fades
Risks to tomorrow’s ECB decision are becoming increasingly more balanced, with the EUR front-end fading a degree of recent hawkish repricing. ECB-dated OIS now price just 3bps of hikes the end of next year, down from an extreme of 10bps last Wednesday.
- Primary focus for tomorrow remains on the updated macroeconomic projections and the balance of risks to inflation and growth. Analysts expect upward revisions to both GDP and core HICP projections.
- We expect a repeat of a data-dependent and meeting-by-meeting approach, with no pre-determined path.
- MNI’s full ECB preview is here
- Markets still judge the next move in ECB rates to be a hike, with the ESTR 1y1y rate at 2.09% (versus an overnight rate of 1.93%). Improving regional growth momentum and the expected impulse from higher German fiscal spending have raised the bar to near-term cuts.
- Intraday, Euribor futures are +0.5 to +3.0 ticks through the blues, with dovish spillover from the softer-than-expected UK inflation report.
