Market Views

GLOBAL CREDIT BULLETS | Monday, 8 July 2024

France – Hung parliament but extremes avoided
The left-wing NFP alliance surprisingly won the second round of French elections with 182 seats, despite polls predicting a right-wing RN win. Macron’s Ensemble came second with 168 seats, while RN only won 143 seats. The outcome is a gridlock, hung parliament whereby no party or alliance has an absolute majority and now coalitions need to be formed or a technocrat government must be appointed. The positives are that no majority for expansive fiscal policy was found, and that pro-European parties outperformed. In a gridlock government however, fiscal tightening required by the EU is also less likely to be achieved.
In terms of next steps, current PM Attal will now resign, although Macron may ask him to stay as a caretaker. The parliament meets again on July 18th, so Macron can watch coalition negotiations before appointing a new prime minister. A grand coalition between Macron’s Ensemble, and centrist parties from the left and right blocks is possible.

US Elections – September cut in sight
Friday’s nonfarm-payrolls print surprised to the upside at 206k versus expectations of 190k, but looked softer under the hood as private payrolls surprised to the downside at 136k and 70k jobs came from the government instead. Temporary help services dropped by 49k, a sign that less extra help is needed in the labour market. Job gains in the prior two months were revised lower by 111k. The unemployment rate rose by 0.1% to 4.1%, above the Feds recent year-end forecast of 4.0%.
Earlier last week, the ISM surveys both surprised to the downside with manufacturing at 48.5 and services at 48.8, with both employment sub-components softening too. US data has been slowing decently through June and July, with Citi’s economic surprise index now at -47, lows not seen since mid-2022. Recent Fed-speak has been mixed, but is slowing aiming towards a September cut. Markets start to think of September as their base-case, and assign 72% odds. The next major US macro event is US CPI on Thursday, where consensus expects headline CPI to slow by 0.2% to 3.1%, but core YoY to stay unchanged at 3.4%

UK – Labour Landslide
The Labour party won the UK elections with 411 seats, gaining 209, while the Tories lost 244 seats for a total of 121. The results came in line with expectations and resulted in little market reaction, with Sterling appreciating only marginally to 0.845 against the Euro. The new Labour government will announce their ministers over the next days, and will clarify their policies in the King’s speech on July 17th. Markets focus lies on the upcoming spending and budget review for autumn, which may come as soon as September. Labour will be wary not to spook markets with any fiscal programs, unlike Liz Truss and the resulting UK bond market selloff.

Algebris Investments’ Global Credit Team

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