Looking for some Glue

Although the ranking of the three blocks in the final round of the French elections came as a surprise relative to the first round and the polls (far-right RN ended in third position), the likeliest scenario we have been contemplating since the announcement – that none of the main groups would secure an absolute majority – has materialised. Another surprise though is that the most extreme factions taken together will not have the numbers to pass a motion of no confidence to stop a “central coalition” from governing. This is positive in terms of political stability for France, but forging such coalition is still likely to prove difficult. Numerically, the components of the left excluding hard-left LFI, together with the centrists may - just – get to an absolute majority but finding a political agreement would be tricky, as the left is starting from a quite demanding position on the economy. “Institutional glue” is in short supply in the traditionally adversarial political system of France. A minority, technical government is an option, to break the deadlock, but this would likely only focus on delivering “minimalist” policies – albeit crucially a budget for 2025.

With uncertainty lingering in France, and a far from shiny dataflow in Germany, the continuation of the removal of monetary restriction by the ECB would help. The June print for the Euro area CPI was not concerning – the momentum for services prices has improved – but inflation is on a plateau still visibly above 2% which we expect to continue until the autumn. In a context of labour market resilience (a point highlighted by Christine Lagarde in her speech in Sintra), the Governing Council is unlikely to accelerate the rate cuts (we still expect them for September and December).

In line with the points we made last week, the US dataflow continues to build a compelling case for a Fed cut in September, with the rise in the unemployment rate getting tantalisingly close to the “Sahm rule” threshold. There is still no sense of urgency there – New York Fed President Williams made it plain last week – but dithering too long could prove costly.