Vidya Ranganathan’s view of the day ahead in European and global markets
The new French government faces a major test today. In a speech, Prime Minister Francois Bayrou is expected to outline a deal to ease pension reforms in exchange for the left’s support in passing the budget.
Bayrou’s government, which was formed last month after the fall of his predecessor’s administration, has been trying to get assurances from some opposition parties – notably the Socialists – that they will not vote against the 2025 budget.
Analysts expect him to win the election. Bayrou’s entourage declined to reveal details of the speech, but told Reuters the content would take into account his talks with party leaders and unions.
Markets are nevertheless nervous, fearing that Bayrou will reverse parts of the pension reform that include raising the minimum age for full retirement, which could save billions of euros for the strapped government.
The risk premium on French debt, measured by the yield spread between French and German 10-year yields, is hovering near its highest levels in more than 12 years as investors worry about political instability and a growing public deficit.
Markets will also trade with one eye on US producer prices and items affecting the Fed’s PCE deflator to be released later. That’s ahead of Wednesday’s more important consumer price index, as inflation is expected to pick up when President-elect Donald Trump announces policies on tariffs, migration and taxes as soon as his inauguration next week.
Investor nerves have been high since an unambiguously strong U.S. payrolls report sent yields higher on Friday and dampened market prospects for a rate cut by the Federal Reserve. Markets are pricing in just 29 basis points of tapering from the Fed this year.
Yields on 10-year government bonds hit a 14-month high, fueling a surge in the dollar and a wave of selling in tech stocks that spread to Asia in early trade. slipped after the holiday break and US inflation data on investors’ minds.
It hit its highest level in more than two years on Monday, before retreating slightly on a Bloomberg News report that the new Trump administration was discussing a gradual, rather than sudden, tariff plan.
Key events that could affect the markets on Tuesday:
Data: US PPI
Speakers: ECB’s Robert Holzmann, Bank of England Deputy Governor Sarah Breeden, Riksbank Deputy Governor Aino Bunga (NYSE:), Kansas City Fed President Jeffrey Schmid
Earnings: Games Workshop Group PLC
Debt auctions: Germany reopens 5-year, UK 30-year.
(Author: Vidya Ranganathan; Editing: Edmund Klamann)
