One Week at a Time

The far-right came out a clear first, and Macron’s alliance a distant third, from the first round of the French elections, but RN fared 2 to 3 points below what some of the latest polls were suggesting. Yet, seat projections still put the RN close to the majority threshold. These extrapolations were however “dead on arrival” since the left alliance and the centrists will withdraw from the second round their candidates who came in third position to try to stop the RN from crossing the threshold, even if the exact scope of these “mutual withdrawals” remains unclear. What is however quite clear is that while the Macronists have lost all hope to even come close to a majority, a victory by the left alliance would now be arithmetically very difficult given the substantial number of constituencies in which they came third. An absence of solid majority by any of the main blocks remains a very plausible outcome.

A piece in the FT last week reactivated interest in the conditions under which the ECB’s Transmission Protection Instrument could be triggered to help France. Our interpretation is that the fact France – and Italy – are now back under Excessive Deficit Procedure would not necessarily be an impediment as long as the government displays some readiness to comply with the recommendations of the EU council. Yet, given the misgivings in some key countries, the ECB would need to ensure action would be “proportionate” to the risk, which suggests that a spread widening would need to seriously affect the economy for TPI to be triggered. The tool is there to mitigate a crisis, not to nip it in the bud. Whatever any French government decides to do, it should not count on immediate ECB support.

Finally, looking at the US news flow last week, we are paradoxically even more confident the Fed will cut rates in September, amid better news on inflation and more signs the economy is gently softening, but also more concerned about the possibility it could not cut much more in 2025 – with knock-on effects on long-term rates – as the likelihood of a Trump victory, and implementation of his inflationary platform, is rising.