EGBS: Markets Optimistic Lecornu Will Survive, OAT/Bund Below 80bps
The 10-year OAT/Bund spread has tightened further since French PM Lecornu’s address concluded, now 4.5bps narrower on the session at ~78.5bps (the tightest since mid-September). Markets are cautiously optimistic that Lecornu’s Government will not fall to a censure vote after temporarily suspending pension reform until the end of 2027 (alongside abandoning the use of Article 49.3 to pass a budget).
- See our Political Risk team’s latest post above for more colour on what to watch from the Socialists.
- Zooming out, the OAT/Bund spread remains above the year-to-date average of ~73bps. Suspension of pension reform necessarily implies less fiscal consolidation.
- While Lecornu aims to bring the deficit below 5% GDP in 2026, the independent budget watchdog has also noted that the government’s growth forecasts and intended polices may be too optimistic.
- Breaking down the OAT/Bund spread into respective French and German swap spreads, today’s narrowing has clearly been driven by the OAT leg. The 10-year OAT swap spread is above -80bps for the first time since early September.
- It’s notable that throughout September, widening in the 10-year OAT/Bund spread was mostly driven by Bund outperformance versus swaps, with the OAT swap spread relatively steady around -85bps during this period.
- It highlights that markets have not been expressing French political/fiscal uncertainty solely via domestic bond markets (i.e. OAT swap spread narrowers), but also via the Bund (i.e. safe haven) leg.
Figure 1: 10-year OAT/Bund Spread Expressed As Swap Spread Differentials (Source: Bloomberg Finance L.P)
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AUSSIE 3-YEAR TECHS: (U5) Bounces Further Off Support
- RES 3: 97.190 - High May 5 2023
- RES 2: 96.932 - 76.4% of Mar-Nov ‘23 bear leg
- RES 1: 96.860 - High Apr 07
- PRICE: 96.550 @ 15:36 BST Sep 12
- SUP 1: 96.430/95.900 - Low Sep 3 / Low Jan 14
- SUP 2: 95.760 - Low 14 Nov ‘24
- SUP 3: 95.480 - Low Jan 11 2023 and a major support
Aussie 3-yr futures are trading off recent lows. A resumption of gains from here would further narrow the gap with resistance at 96.730, the Sep 17 ‘24 high, leaving 96.860 as the next key level. Any continuation lower would instead strengthen a bearish threat. This would refocus attention on 95.760, the 14 Nov ‘24 low. Conversely, a reversal higher would open 96.860, the Apr 7 high.
FED: MNI Fed Preview-September 2025: A Reluctant Return To Easing
We've published our preview of the upcoming FOMC meeting - Download Full Report Here
- The Federal Reserve is set to resume its easing cycle at the September 16-17 meeting with a 25bp cut to the funds rate range to 4.00-4.25%.
- The decision to cut after a 5-meeting pause was well-telegraphed by Chair Powell, whose Jackson Hole speech described a “shifting balance of risks” toward a weaker labor market that “may warrant adjusting our policy stance”.
- The updated quarterly projections aren’t likely to bring many changes to the macroeconomic variables, but as usual the signal sent from the Fed rate “Dot Plot” will garner attention. A Committee split between expecting one or two further cuts this year is likely, keeping each of the remaining meetings of 2025 “live”.
- The Statement will downgrade the description of the labor market to reflect a rise in the unemployment rate and poor payrolls growth, and is likely to include at least one dissent to the rate decision.
- But with a Committee that is fairly divided on the way forward, Powell will be noncommittal on future action, reiterating that policy is not on a preset course, and upcoming decisions will be data-dependent.
- A key undercurrent is an increasingly activist approach to Fed personnel management from the White House, which leaves the composition of the FOMC uncertain not just over the medium-term but also at this meeting.
MNI’s separate preview of sell-side analyst summaries to follow on Monday Sep 15
RATINGS: Fitch: France Cut To A+ From AA, Portugal Up To A From A-
Fitch has downgraded France's sovereign rating to A+ (with stable outlook) from AA-. Release here.
- Among other factors in the decision, Fitch cites "High and Rising Debt Ratio", "Political Fragmentation Hinders Consolidation", "Weak Fiscal Record", "High 2025 Deficit", "Uncertain Fiscal Consolidation Path", and "Fiscal Rigidities".
- In "Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade", Fitch cites "Public Finances: A sustained increase in government debt/GDP over the medium term, due to failure to implement fiscal consolidation measures and/or a persistent increase in financing costs" and "Macro: Materially lower economic growth prospects and weakened competitiveness." Conversely, potentially leading to positive ratings action would be "Public Finances: Confidence that government debt/GDP will be put on a downward trajectory over the medium term, for example, due to fiscal consolidation and/or stronger economic growth".
- Fitch also raised Portugal to A (stable outlook) from A-, while elsewhere, S&P raised Spain to A+ (stable outlook) from A.
- As MNI wrote earlier, we expected France to be downgraded to A+ and Portugal to be upgraded to A.
