A further slowing in growth
The final results of the first round of voting in the French presidential election aren't yet confirmed.
Yet the certainty of a Le Pen/Macron one-two, with Le Pen not scoring much more than pre-election poll predictions of the low to mid 20 percents, means markets are happy to buy what they see as the fact – that 39 year old Emmanuel Macron will be confirmed as the next president of the French republic in two weeks’ time. The defeated candidates have been quick to throw their support behind Macron in the second round, happy to distinguish between someone they saw as a political revival and an ‘enemy of the republic’.
Unlike in the UK and United States, the results look like they represent a victory for French opinion polls. We’d also note that for the first time in modern French history, the 2nd round run off on June 7th won’t include a candidate from any of the mainstream French political parties. This in turn makes the elections for the national assembly (on June 11th and 18) of particular importance in terms of the new President’s prospects for enacting legislation. Remember Macron campaigned on a socially liberal platform but with business-friendly structural reforms at the heart of the economic philosophy of this formerly Socialist economy minister.
Market reaction at time of writing has seen the Euro gain the best part of 2% against the U.S. dollar (high of 1.0937 against Friday’s close of 1.0728) USD/JPY gains of 1.3% to around ¥110.5 and the still risk-sensitive AUD up about 0.6% to a high of 0.7588. When Europe opens later today, the main reaction is like to be sharp compression in the spread between French and equivalent German bonds, as well as a rise in German Bund yields themselves. That said, it is far too early to see today’s results as providing the green light for the ECB to start signalling any intentions with regards to its exit from current ultra-easy policy settings. European equities – in peripheral Eurozone markets in particular – are also likely to do well today. In our time-zone, the Nikkei will open with a need to celebrate the bounce in USD/JPY.
Markets went out on a quiet note of Friday whether in FX, interest rate to equity market and where the main offshore news event was an announcement from President Trump that he will unveil tax proposals this Wednesday. This reportedly left his own Treasury officials ‘speechless’. It would seem though that we will get no more than a broad outline of tax plans this week. Of note is that administration officials are saying that at this stage at least, these will not include plans for a so-called border-adjustment tax. This is important because without the revenue assumed to accrue from this (potentially more than $1 trillion) Trump won’t be abler to present plans for tax cuts that are revenue or deficit neutral. However, it appear this means there may well be deficit busting tax cut plans but which will contain so called sunset clauses, meaning they expire in 10 years. This will then greatly improve chances of Congressional approval since they could pass in the Senate by a simple majority (i.e. be ‘filibuster’ proof without requiring 60 of the 100 Senate votes). As such we should not simply dismiss what emerges this week as cheap talk. The Trump element of the ‘reflation’ trade may be battered and bruised, but is not yet completely dead.
Locally, Q1 CPI data on Wednesday is the highlight, following tomorrow’s ANZAC Day holiday on both sides of the Tasman. NAB sees risks for the headline number skewed slightly to the upside of the +0.6% q/q consensus (2.3% Y/Y up from 1.5% in Q4). We don’t beg to differ with the consensus for the core measures printing at 0.5% (1.8% y/y up from 1.6/1.5% in Q4 for the trimmed mean and weighted median measures respectively). Such outcomes won’t shift the dial on RBA expectations one way or the other. RBA Governor Phil Lowe speaks on Thursday.
Internationally, we have the ECB on Thursday, where notwithstanding yesterday’s election result Mr Draghi is fully expected to keep the hawkish contingent on the Governing Council firmly in their box, with no change to the forward guidance. The earliest that conceivably changes is June, a meeting that will be accompanied by updated forecasts and when the French election outcome will be known with certainly. ‘Nothing to see here’ is also likely to be the message out of the BoJ policy meeting on Thursday.
The bigger market draw this week may come from Washington, where as well as Trump’s tax policy an announcement, the stop-gap funding bill that gives the government the right to spend money expires on Friday. The presumption is that a crisis will be avoided with an omnibus spending bill cobbled together and passed by the weekend. If not, there will be trouble….
Friday also sees Q1 US GDP, with the consensus currently sitting at 1.1% but where the likes of the Atlanta Fed GDP tracker suggests growth of just 0.5%. The Fed has already indicated it is will likely look through a print with a 1 in front of it – if instead it prints with a minus sign in front of it that might be harder to ignore. We also get Q1 UK GDP on Friday, expected to print growth at half the pace of Q4 (i.e. around 0.4%) – now with downside risk after very weak March retail sales numbers on Friday.
On global stock markets, the S&P 500 was -0.30%. Bond markets saw US 10-years +1.60bp to 2.25%. In commodities, Brent crude oil -1.94% to $51.96, gold+0.4% to $1,287, iron ore +4.4% to $68.22, steam coal +0.1% to $84.20, met.coal +0.0% to $270.00. AUD is at 0.7587 and the range since Friday 5pm Sydney time is 0.7516 to 0.7588.
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