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Week Ahead: Markets React to French Elections and Economic Indicators
An action-packed but shortened trading week in the U.S. sets the stage for the second half of 2024. European markets experienced a rally on Monday following the initial round of French assembly elections, which suggest a hung parliament and policy gridlock. Although the French far-right coalition received the largest share of the vote, it fell short of an overall majority, potentially leading to another three years of political "co-habitation" with the strong presidency.
The high voter turnout means next Sunday's second round of voting will involve more than half of the parliamentary seats, with tactical voting likely to limit the far-right's success. This potential outcome has served to alleviate some investor concerns over significant policy shifts and conflicts with Brussels. Consequently, the CAC40 French stock index saw a rise of more than 2%, recovering losses incurred since the election announcement and returning to positive territory for the year to date. Additionally, the risk premium on French 10-year government bonds narrowed, and the euro strengthened against the dollar, achieving its best levels in over two weeks.
This development has also impacted the dollar's performance across the board, potentially overshadowing the expected response to the soft U.S. Personal Consumption Expenditures (PCE) inflation report for May. The report indicated that U.S. core inflation came in slightly lower than anticipated, with the annual rate dropping to 2.6% for the first time in three years. German states' inflation data for June also suggested further easing of national price pressures. However, Federal Reserve officials remain cautious, emphasizing the need for consistent data showing disinflation before considering interest rate cuts. In contrast, the European Central Bank (ECB) has already reduced rates this year and is expected to act again before the Federal Reserve considers any changes. ECB President Christine Lagarde will speak at the bank's annual forum in Portugal on Monday while Fed Chair Jerome Powell is scheduled to attend on Tuesday.
The Bank for International Settlements (BIS) issued a warning on Sunday, signaling that rising government debt amid numerous major elections this year could unsettle global financial markets. BIS General Manager Agustin Carstens emphasized the necessity for governments to curb public debt and accept that interest rates may not revert to pre-pandemic lows.
The U.S. trading week is interrupted by the Independence Day holiday on Thursday but features significant labor market data, some of which are released ahead of schedule due to the holiday. Notable releases include the JOLTs job openings on Tuesday and the weekly jobless report on Wednesday, with the national payrolls report following on Friday.
Elsewhere, the UK is set to hold its general election on Thursday during the U.S. holiday. As of Monday, sterling and UK stocks were bolstered by opinion polls predicting a substantial majority for the opposition Labour Party. Meanwhile, Japan's yen continued to hover near 38-year lows against the dollar, with no indications of official intervention.
In the U.S., stock futures and bond yields were higher ahead of Monday's market opening. Key developments to watch include: U.S. June manufacturing surveys from ISM and S&P Global, a speech by New York Federal Reserve President John Williams, and remarks from ECB President Christine Lagarde at the ECB's annual forum in Portugal. Additionally, the U.S. Treasury will auction 3- and 6-month bills.
