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Prime Minister Sir Keir Starmer refused to publicly back his Chancellor of the Exchequer, Rachel Reeves, in a testing session of PMQs in the House of Commons. Following a major U-turn by the gov't on welfare reforms on 1 July (see 'UK: Starmer Faces Tough PMQs After Gutting Welfare Reform Bill To Avoid Defeat', 11:04BST), Leader of the Opposition Kemi Badenoch called on Starmer to rule out tax rises in the autumn budget and confirm that he would keep the chancellor in place. Starmer declined to do either, to Reeves' visible distress. 

• Centre-right Conservative party leader Badenoch levelled the accusation that "Labour MPs are saying the Chancellor is toast… She is a human shield for [Starmer's] incompetence!'.
• Mikey Smith at The Mirror posts on X: "I don't normally buy into fuss about the PM not saying the Chancellor will be in post for x amount of time. But he really needed to answer that question just then [confirming his confidence in Reeves], and didn't."
• There will be notable focus on whether Reeves remains in place, given that the 'fiscal rules' that garner such market interest are Reeves' rather than the government's. 

Option desks report mixed SOFR & Treasury option flow overnight, lighter volumes at the moment, Treasury options leaning toward low delta put structures with underlying futures continuing to retreat from Tuesday's highs. Projected rate cut pricing cools slightly vs. late Tuesday (*) levels: Jul'25 at -4.8bp (-5.3bp), Sep'25 at -28.1bp (-28bp), Oct'25 at -44.3bp (-44.8bp), Dec'25 at -63.5bp (-63.9bp).

• SOFR Options:
  • +2,000 SFRQ5 96.00/96.18 call spds, 4.25 ref 95.98
  • +2,000 SFRN5 95.87/95.93 3x2 put spd, 2.75 ref 95.98
  • +8,000 SFRZ5 95.75/95.87/96.25/96.37 put condors, 6.0 vs. 96.225/0.05
  • +2,000 SFRU5 96.12/96.25/96.37 call flys, 1.5 ref 95.975
  • Block/screen -5,000 SFRU5 96.00/96.31 call spds, 6.0 ref 95.975
• Treasury Options:
  • 1,800 TYQ5 111.5/112.5 call spds, 25 ref 111-21
  • +1,500 110/111 2x1 put spds, 8 vs. 111-18.5/0.05%
  • 3,000 TUQ5 103.25/103.5/103.62/103.75 broken put condors ref 103-27.88
  • over 7,700 TYQ5 110 puts, ref 111-22.5
  • over 6,700 TYQ5 110.5 puts, ref 111-21
  • +2,000 FVQ5 109/109.75 1x2 call spds, 4 vs 108-22.75/0.08%
  • +2,500 TYU5 109/110/111 put trees, 9 vs. 111-17/0.03%

As was widely expected, PM Francois Bayrou comfortably survived a censure motion in the National Assembly on the evening of 1 July. The centre-left Socialist Party (PS) brought the motion after a breakdown in 'conclave' talks involving the gov't, the PS, trade unions and employers' organisations on the 2023 pension reforms resulted in the PS saying it has lost faith in the Bayrou gov't. 

• The PM's saving grace proved to be the far-right Rassemblement National (National Rally, RN), which declined to back the motion, claiming that the timing was not right, and instead raising the prospect that negotiations over the 2026 budget could spark their own censure motion. RN leader in the National Assembly Marine Le Pen said "What is the benefit for the French? Zero. The left is making people believe that if we vote for the motion we will return to the old legal retirement age. That is a lie. We are not lying to the French: this censure brings nothing."
• In the event, 189 of the 577 deputies backed the motion, well short of the 289 required for an overall majority. In the event, almost all assembly members from the left-wing New Popular Front (NFP) alliance voted in favour of censure, as well as three lawmakers from the Liberties, Independents, Overseas and Territories (LIOT) group.
• Data from Polymarket shows bettors assigning a 43% implied probability that Bayrou is out as PM in 2025, up from 36% on 17 June, but down from a peak of 80% on 26 March.
• The budget process in the autumn is likely to see more concerted efforts to remove Bayrou and force a snap election. 

Chart 1. 1 July Censure Motion Vote (In Favour)

Source: Le Monde, MNI