GERMAN DATA: IFO Employment Barometer Suggests Further Labour Market Softness

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Moody’s downgraded France’s outlook to Negative from Stable on Friday, but it’s not had any market impact. At least an outlook downgrade was likely, and there may instead be some relief that an outright downgrade to A1 was avoided. Ongoing budget negotiations remain the focus for OATs this week, with PM Lecornu having to tread a fine line to maintain tacit support from the Socialist and LR parties. Should his government fall to censure, it would promote a fresh widening impulse in OAT/EGB spreads.

• The 10-year OAT/Bund spread is currently 0.5bps narrower at ~80bps. The spread may struggle to meaningfully unwind political risk premium while budget negotiations are ongoing.
• Moody’s noted that “the decision to change the outlook to negative reflects rising risks of a weakening of France's institutions and governance as well as of a partial reversal of structural reforms”.
• Although avoided at the latest review, Moody’s wrote that “A downgrade of France's ratings would likely result from further evidence that the ability of the legislative institutions to effectively tackle the country's key credit challenges has durably weakened. This would likely be evidenced by continued difficulties to materially reduce the fiscal deficit and contain the expected weakening of the government's debt burden and debt affordability metrics. A lasting pause or reversal of key provisions of previous structural reforms, most notably on pensions, would also add to downward pressure on the rating.”
• After voting on other budget proposals took too long over the weekend, a vote on the Socialist’s wealth tax proposal has been delayed till later in the week. The Socialists have emphasised that taxes on rich individuals are a necessary condition for non-censorship of Lecornu’s government

• Risk sentiment has been positively impacted to start the week, amid optimism surrounding US-China trade negotiations ahead of Thursday's Trump-Xi meeting. AUD outperforms all others in G10 today, reacting positively in particular given its high beta status and sensitivity to the Chinese economy.
• Additionally, RBA Bullock's comments playing down recent job weakness and mentioning they are in a "pretty good" position on both jobs and CPI added to topside momentum for AUDUSD, now up 0.68% on the session at 0.6552. Today’s extension higher has strengthened a bullish theme, narrowing the gap to initial resistance at 0.6574, the 50.0% retracement of the Sep 17 - Oct 14 bear leg.
• Higher core yields initially weighed on the Japanese Yen, with USDJPY extending its most recent rally ahead of the European open. The pair traded to within one pip of 153.27, the Oct 10 high and a bull trigger. Clearance of this hurdle would confirm a resumption of the medium-term uptrend. Japan officials noted they were monitoring FX markets for disorderly moves, and although USDJPY has reverted back below the 153.00 handle, the remarks didn't suggest intervention risks were more heightened for now.
• Despite the generally flat USD Index, USDCNH is breaking lower again, building on a strong session for China FX overnight. The rate is testing 7.1050 at typing for the lowest print since September, narrowing the gap with key support into 7.0851, the cycle low. Moves follow the stronger-than-expected CNY fix (7.0881, the lowest in over 12 months), consistent with the bank's long-held push for further internationalization and expanded use - which the bank reiterated on Friday last week after the conclusion of the government's 4th plenum.
• Central banks highlight this week's calendar, with the Bank of Canada and the Fed holding policy meetings on Wednesday, before the Bank of Japan and the ECB follow Thursday.