Week ahead: French election results key for European markets

Could the French election yet trigger a crisis for the euro? The market reaction to Marine Le Pen’s National Rally winning the popular vote in round one was maybe more muted than feared – a hung parliament seemed to be the assumption. But there is still ample scope for volatility in the Euro and CAC 40 index come Monday morning when the second round of voting in the French election is complete and the makeup of the 577-deputy National Assembly becomes known.

Here are the week’s key events:

Monday, July 8th: French Election Results

Will there be much fallout from the second round of voting in the French election?

There has been some volatility in the euro and CAC 40 index since the first round, which was won by the right-wing Rassemblement National (RN), but it’s unclear what the market will make of the result. The French election risks may be underpriced.

Even the more moderate aspects of the RN agenda involve conflict with Brussels on fundamental pillars of the EU – domestic subsidies (the Single Market), a rebate for France (the EU Budget), and deficits (Stability & Growth Pact).

Tuesday, July 9th: Fed Chair Jay Powell Speaks

Federal Reserve chair Jay Powell is due to testify on monetary policy in front of the Senate Banking Committee. Last week in Sintra he indicated the Fed is not in a rush to cut rates: “We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of … loosening policy.”

But staying put on interest rates means tightening since real rates are on the rise. We are seeing bear steepening in the Treasury curve – the view is that Trump back in the White House is going to pile on more debt, cut taxes and drive growth, which ought to be good for stocks, bad for bonds. Markets seem to be, tentatively at least, positioning for a more inflationary environment than we have now. Which might explain why the Fed is playing for time.

Wednesday, July 10th: RBNZ Meeting

The Reserve Bank of New Zealand (RBNZ) will likely leave its official cash rate (OCR) on hold at 5.5%, and likely emphasise the upside risks to inflation. The central bank was unexpectedly hawkish at its last meeting in May, revising up its forward OCR profile. This new outlook suggested an increased chance of a further rate hike (perhaps in November) and a delay to eventual cuts to August next year.

Wednesday also sees the release of consumer and producer price inflation data from China. A month ago, the CPI data showed consumer inflation held steady whilst the decline in producer prices eased. However, the picture remains fragile and the underlying trends points to Beijing needing to do more prop up domestic demand.

Thursday, July 11th: US CPI Data Due

With the case for the Fed to cut rates seemingly building, all eyes are on the latest round of CPI inflation from the US. CPI was flat month-on-month in May, up 3.3% for the year. Core CPI increased 0.2% on the month and 3.4% from a year ago, which was a slower pace than expected.

Following this report, May’s core PCE inflation data – the Fed’s preferred gauge – also came in cooler than expected at just +0.1% MoM, further adding to the sense that the series of hot inflation reports earlier this year are now firmly behind us.

Friday, July 12th: French CPI Figures, US PPI Due

The week finishes with a smattering of economic data, starting with some China trade figures and the final French CPI inflation numbers. But the real focus for traders will be a clutch of US releases, including the producer prices index (PPI), which fell 0.2% in May for its sharpest decline since October on a steep fall in energy prices. University of Michigan consumer sentiment and inflation expectations should also be watched.

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