FRANCE: OATs Outperform; Cautious Budget Optimism May Be Playing A Role
The 10-year OAT/Bund spread has narrowed 2.5bps back below 73bps today. While EGBs generally outperform Bunds (e.g. the BTP/Bund spread is also 2bps tighter), OATs may be finding an additional tailwind from optimism that the fractured National Assembly can reach a compromise on the 2026 budget ahead of the year-end deadline. Passing of a budget looks to be a necessary condition for OAT/Bund to move below the 70bp figure.
- This morning, Socialist leader Faure said that a compromise is possible: “I, of course, think we can get there and I believe we must get there,”
- This echoes remarks from Socialist sources to local media yesterday, as well as members of the cabinet (e.g. Finance Minister Lescure).
- The National Assembly overwhelmingly rejected the Revenue section of the budget over the weekend. The initial version of the draft (i.e. without the rejected amendments) is now with the Senate for review.
- Today, the Senate is set to vote on the suspension of the 2023 pension reform (in the Social Security bill), which was approved by the National Assembly last week. The Senate is dominated by the conservative Les Republicans, and has openly expressed its opposition to the suspension of the pension reform.
- Our Political Risk team noted that if the Senate and the National Assembly cannot agree on an identical Social Security text, a joint committee will be convened. The gov't can ask the National Assembly to make the final decision in the event that the joint committee cannot agree on a draft text, stripping the Senate's ability to block the finance bill.
- The National Assembly can either take up the draft joint text from the committee or the last text it has passed, including amendments passed by the Senate. However, given that the National Assembly has not yet passed the PLFSS, it would either be forced to enact the legislation via ordinance, via special legislation, or implement the 'provisional twelfths' system of appropriating funds equivalent to 1/12 of the previous budget for each month of 2026.
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FED: MNI Fed Preview - October 2025: QT, Or Not QT
MNI's preview of the October FOMC has been published - Download Full Report Here
- The Federal Reserve is overwhelmingly expected to cut the funds rate by 25bp for a 2nd consecutive meeting on October 29, bringing the target range to 3.75-4.00%.
- This will again be framed as a risk management cut, with the limited data available since the September meeting not disconfirming that the shift in the balance of risks had tilted toward labor market downside.
- Dissent to this decision should once again be limited to Gov Miran in favor of a 50bp cut.
- With limited new developments and official data to opine on, Chair Powell’s press conference will be eyed for affirmation that a December cut remains on track, as signalled by the most recent Dot Plot.
- He’s unlikely to give much away, but it would be surprise given the lack of data and relevant developments if he suggested that a further 2025 cut was in any greater doubt than it was 6 weeks earlier.
- Instead, we think focus in terms of action at this meeting will be on the balance sheet, with the Fed likely to announce an end to quantitative tightening amid diminishing reserve levels and nascent evidence of funding market pressures.
- We will also be watching for any news on the Fed’s communications framework, with an updated “Dot Plot” potentially unveiled at some point by year-end.
MNI’s separate preview of sell-side analyst summaries to follow on Monday Oct 27
RATINGS: Moody's Lowers France's Outlook To Negative, Maintains Aa3 Rating
Moody's has lowered its outlook on France to negative from stable.
- Moody's was expected to at least lower the outlook, so this is not a surprise - there had been some risks perceived of a downgrade to A1 (from Aa3) in the domestic and foreign currency long-term issuer and domestic-currency senior unsecured ratings.
- Per the Moody's release: "The decision to change the outlook to negative reflects the increased risk that the fragmentation of the country's political landscape will continue to impair the functioning of France's legislative institutions. This political instability risks hampering the government's ability to address key policy challenges such as an elevated fiscal deficit, rising debt burden, and durable increase in borrowing costs, thus leading to a more rapid weakening in France's key fiscal metrics than we currently expect."
- Both S&P and Fitch have already downgraded France’s sovereign rating to the single-A bucket this year.
USDCAD TECHS: Corrective Pullback
- RES 4: 1.4200 Round number resistance
- RES 3: 1.4167 50.0% retracement of the Feb 3 - Jun 16 bear leg
- RES 2: 1.4111 High Apr 10
- RES 1: 1.4080 High Oct 16 and the bull trigger
- PRICE: 1.4016 @ 16:33 BST Oct 24
- SUP 1: 1.3979/3907 20- and 50-day EMA values
- SUP 2: 1.3829 Bull channel base drawn from the Jul 23 low
- SUP 3: 1.3769 Low Sep 19
- SUP 4: 1.3727 Low Aug 29 and a bear trigger
USDCAD has pulled back from its recent highs. The trend condition is bullish and a move lower is considered corrective. Moving average studies are in a bull-mode position, highlighting a dominant uptrend. Sights are on 1.4111, the Apr 10 high, and further out, scope is seen for an extension towards 1.4167, a Fibonacci retracement. First key support lies at 1.3907, the 50-day EMA. Support at the 20-day EMA lies at 1.3979.
