FRANCE: Suspension Of Pension Reform Would Risk Intra-Coalition Rancour
Caretaker Prime Minister Sebastien Lecornu, speaking outside Matignon after the first day of meetings with various political parties in an effort to break through the country's political paralysis, claims that "talks so far are showing a willingness to get this budget through by year-end". Lecornu will present his findings to President Emmanuel Macron later this evening. Adds, "Reducing the deficit is key for France's credibility."
- As noted earlier, there have been some signals that the caretaker administration is considering rolling back Macron's flagship pension reforms in order to gain support from the centre-left Socialist Party (PS).
- Lecornu says that among parties of the centre and centre right, "there is a desire to have a budget for France before December 31 of this year," adding, "This desire creates a movement and a convergence, obviously, which removes the prospects of dissolution."
- The caretaker PM meets with representatives of the PS at 09:00BST/10:00CET, the environmentalist Ecologists at 11:15BST/12:15CET and the left-wing Communists later in the day.
- Education Minister and former PM Elisabeth Borne's raising of the prospect of suspending the 2023 pension reform may draw PS support for a budget, but risks rancour with the right of the governing coalition. Arnaud Pericard, spokesperson for the centre-right Horizons, said to FranceInfo, "I understand that it is being put forward, but it is not a good idea," with the conservative Les Republicans (LR) also likely to object. Should Horizons and LR vote down (rather than abstain) on any repeal, their votes would outweigh those of the PS.
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BONDS: Bunds Testing Friday's Highs; Core FI Curve Flatten With Exception of JP
Bund futures are testing Friday's 129.20 high (currently +8 ticks at 129.17), clearance of which would expose the August 6 high at 129.31.
- Headline flow has been relatively light this morning, while there was little impact from the stronger-than-expected German industrial production reading earlier.
In cash markets, the German curve leans bull flatter, with yields flat to 1.5bps lower.
- 5s30s is 1.1bps lower at 106.5bps, after marking a fresh multi-year high of 111bps on Wednesday.
- Global core FI curves have seen modest relief flattening over the past few sessions, but the technical trend remains for a steeper curve across the US, UK and Germany.
As noted earlier, the JGB curve twist steepened overnight following the resignation of LDP leader Ishiba on Sunday.
- Thatcherite MP Sanae Takaichi is a front-runner among many opinion polls - and also ran against Ishiba in the last leadership race. While politically conservative, she's made clear her preference for easy monetary policy and a bigger role for fiscal spending - reminiscent of the Abenomics policy set from 2012 - 2020.
- These dynamics clearly lean in favour of lower short-end, but higher long-end yields.
FRANCE: Markets May Already Price French Budget Concessions [2/2]
Focus for markets isn’t really on the vote itself, but its fallout. Parties on the right and left of the political spectrum have expressed a lack of confidence in Bayrou's fragile administration, exacerbated by his contractionary 2026 budget plans presented before the summer recess. Sources suggest President Macron wants to avoid calling another snap legislative (not Presidential) election, suggesting the only path forward for French politics is for a new PM to find support for a watered down set of 2026 budget proposals.
- The Socialist Party have proposed a budget that includes E22bln of fiscal consolidation measures, half of the E44bln planned by Bayrou.
- While a less fiscally tight budget would be more likely to gain support in the National Assembly (hence reduce political risk premium), it would have a negative impact on France’s already weak fiscal trajectory.
- However, the current analyst consensus and the EC’s Spring forecasts for the budget deficit/GDP ratio are notably less optimistic than the French Government’s (see chart). That suggests market prices may already incorporate an expectation for a new administration to make budget concessions. This may limit the scope for further OAT/Bund spread widening following the no-confidence vote.
- The 10-year OAT/Bund spread is 0.5bps narrower at ~78bps today. While off this year’s closing high of 81.5bps on Aug 27, it still incorporates around ~12.5bps more political risk premium than compared to mid-August levels.
- Outright 10-year yields have pulled back alongside global FI peers in recent sessions, currently at 3.435%. While off year-to-date highs of 3.631%, 10-year yields remain up almost 25bps this year. This will place upward pressure on French interest expenditure for its extremely large debt burden.
FRANCE: Bayrou To Speak At 1400BST/1500CET; Expected To Be Ousted [1/2]
French PM Bayrou is expected to be ousted by a no-confidence vote today. According to the National Assembly website, Bayrou will deliver a “general policy statement” at 1400BST/1500CET, after which a debate and vote will take place.
- That means the outcome of today’s no-confidence vote will depend on Bayrou’s (possibly lengthy) address, and the National Assembly’s (possibly lengthy) debate.
- Looking at the time recent no-confidence vote results were published, there isn’t an obvious trend to note. It’s possible that the result won’t be known until after the cash close:
- Bayrou Feb 10: ~1515UK/1615CET (survived no-confidence vote)
- Bayrou Feb 5: ~1730UK/1830CET (survived no-confidence vote)
- Barnier Dec 5: ~1930UK/2030CET (did not survey no-confidence vote)
