European stocks and euro rally after French legislative election results + More

Euro area PMI reports show improvement from May

by Faruk Imamovic
European stocks and euro rally after French legislative election results + More
© Getty Images/Alecander Heimann

European stocks and the EUR are rallying back up this morning, as traders digest the result of Sunday's 1st round of France's snap legislative election. The populist-right National Rally (RN) is seen to have won roughly 33% of the popular vote across this 1st "elimination" round, but that was no more than what it had garnered in the European Parliamentary elections and less than pre-election poll estimates of about 36%. The result for the RN may not be enough to guarantee that the RN and its allied deputies in the National Assembly will have a working majority within the 577-seat legislative body. Rather, the polling firm Ifop expects the RN to win between 240 and 270 seats based on these vote shares, short of the 289 required for a majority. The polling firm Elabe estimated that the RN and its allies would win between 255 and 295 seats, also leaving the majority of possible outcomes for the RN without a working majority. These estimates may solidify further as the final list of candidates for the 2nd round of voting becomes clearer by tomorrow, but may still stay wide if the number of three-way races in the 2nd round is high. In any case, should the RN not win a majority in the National Assembly, President Emmanuel Macron might still be able to enact budgetary decrees without the need for acclamation from a majority bloc within the National Assembly.

As such, there's a breath of relief from traders who've feared that a working majority for the populist-right or the far-Left would have pursued a budget-busting agenda should they gain control the National Assembly. The President could still pledge to converge the budget balance to the -3% (of GDP) target under the EU's Growth and Stability Pact. That's why France's OAT yields have declined this morning. The EUR/USD has rallied too (by 35 pips, to 1.075), on the presumption that retaining some fiscal responsibility will avoid future pressure on the ECB to monetize the debts of France, or ease the burden of high debt by keeping policy rates low.

In new data, the regional CPI reports in Germany have generally been soft, and point the national core CPI near 2.9% for the release to come later this morning. The HCOB PMI reports for the major economies of the Euro area, which were more robust than in May. EUR OIS yields have shifted higher this morning - i.e., toward fewer rate cuts from the ECB in 2024. Still, there is doubt that the EUR/USD will regain more ground until we know the result of the 2nd round of France's election and the actual distribution of seats in the National Assembly. Even after that, political analysts will continue to lament the political polarization in France and Germany, and economists will warn about the inflationary implications, over time, of the high debt burdens in France, Italy, etc. I.e., we'll return to a status quo characterized by a high degree of apathy around Euro area growth. It's hard to see a EUR/USD rally past 1.09 that becomes durable.


In the US, traders remain focused on the fall-out from last week's presidential debate, and whether it means that President Joe Biden will seek to no longer run for president. Yet no firm news suggesting as much has emerged since last week. Still, given the premise that Donald Trump has a better chance of winning the election now than he did before the debate, the most frequent question is whether a new Trump administration would be inflationary or dis-inflationary, and whether the USD would be advantaged under a Trump administration. For a variety of reasons having to do with fiscal policy, tariff policy, and immigration policy, a prospective Trump administration in 2025-2028 will be more inflationary than a Biden administration. 

For now, though, the USD's fortunes will turn on the Fed's rhetoric (it's remained somewhat surprisingly hawkish) and the US data flow (which has softened significantly in Q2). Today's PMIs will offer a look into June activity, and we'll be paying particular attention to whether the PMIs track weaker, as did most regional Fed survey indexes so far have for June.

Donald Trump And Joe Biden Participate In First Presidential Debate
Donald Trump And Joe Biden Participate In First Presidential Debate© Getty Images/Andrew Harnik


Finally, we'll note that in Colombia, BanRep lowered its policy rate (the Minimum Repo rate) on Friday by 50 bps, from 11.75% to 11.25%, in line with our expectation and the consensus view. Yet this was a split decision, with two of BanRep's seven board members voting for the larger 75 bps cut. The Board's statement underlined the slowdown in the disinflation process, owing mainly to the food inflation staying high. The Board found comfort in reducing the policy rate, however, because the 1-year-ahead survey-based inflation expectation median fell from 4.6% to 4.3%, while the median expectation for year-end 2025 remained unchanged at 3.8%. The Board also noted that most market-based inflation expectations suggest a decline in inflation over time, although they have remained mostly unchanged and above the 3%-target until the end of 2025. GDP growth in Q1 2024 was seen to exceed staff projections and the economy "continued its recovery path" according to the Statement. BanRep Governor Leonardo Villar also suggested that BanRep might raise its 2024 GDP growth projection in its July Monetary Policy Report, from the staff's current projection is 1.4%. This allowed Villar to introduce some "hawkishness" into his discourse, as did his admonishment that the Board needs to see a faster reduction in inflation before considering an acceleration of the rate-cutting pace. (Year-over-year CPI inflation has leveled off near 7.2% in May.) Other factors that are blocking faster rate cuts include tighter global financial conditions and the recent depreciation of the COP, both of which were informing a more hawkish monetary policy disposition, according to Villar.