French PM loses confidence vote

In focus today

In the US, the Bureau of Labor Statistics will publish its preliminary estimate of the annual benchmark revisions for Nonfarm Payrolls at 16CET. The revision affects data from April 2024 to March 2025. We expect a negative revision of -400k jobs.

In France, attention turns to President Macron and his reaction to the collapse of the government. The Elysee Palace has announced that Macron will appoint a new prime minister in the coming days, aligning with our baseline scenario. This eliminates the immediate downside risk of a snap election. However, political uncertainty is expected to persist, as a new government will still have a hard time passing a budget, particularly with significant spending cuts.

Economic and market news

What happened yesterday

In France, PM Francois Bayrou lost a confidence vote yesterday after seeking parliamentary support to reduce the country's debt burden. President Emmanuel Macron plans to appoint a new prime minister in the coming days, but no obvious candidate has emerged who could get parliament's backing for a budget. Bayrou warned that the country is "drowning in debt", but opposition parties continued to rebuff his proposals for spending cuts. The market reaction was muted, with the euro and French bond futures little changed as investors had expected Bayrou's downfall.

In Norway, the general election ended with a majority for the 'red-green' side. This implies that the Labour party will continue as a minority government, seeking support mainly on the red-green side. Even if this could prove challenging, we think the effect on financial markets is negligible, as fiscal policy still will be restricted by the fiscal rule (an oil-adjusted budget deficit limited to 3 % of the Petroleum Fund).

In the euro area, the Sentix investor confidence indicator came in lower than expected at -9.2 (prior: -3.7), signalling a rough start to September for consumer sentiment. The report revealed a drop in the Current Situation Index to -18.8 from -13, while the Expectations Index slipped to 0.8 from 6.0.

In Denmark, foreign trade data showed a 3.3% rise in exports for July, driven by services and goods produced abroad by Danish companies. At the same time, industrial production, excluding pharma, increased modestly and thus continues to recover along the rest of the European manufacturing sector. The outlook remains positive, supported by expected growth in neighbouring countries. However, US demand will be monitored closely as uncertainties persist around items like medicine and wind turbines, as well as the broader economy.

Equities: Equities were mostly higher yesterday, with the Stoxx 600 closing up 0.5% and the S&P 500 rising 0.2%. Just as Friday, lower bond yields explained the strength in equities. Growth stocks and small caps outperformed, led by sectors such as tech and consumer discretionary. Although absolute moves were mild, this was a risk-on session, with global cyclicals outperforming defensives by 1 p.p.

As our readers know, this goes against our expectation of how yields and their impulse on equities would unfold. The weaker-than-expected labor market explains the divergence. While we remain in the positive camp, expecting higher equities, our call was based on accelerating macro data and rising long-end yields. In the short term, this leaves us wrong on the value trade in the equity space.

FI&FX: While political developments in France - and to a minor extent Norway - have caught the headlines market reactions have thus far been very modest. Instead, the big story for rates and FX market has been the continued decline in yields and the bullish flattening of global curves as the steepener trade has lost steam. In both the US and Norway easing bets are on the rise in a week with key data releases ahead of next week's FOMC and Norges Bank meetings. When it comes to currency moves the rally in US fixed income has weighed on the USD with EUR/USD moving back close to 1.18. EUR/NOK and EUR/SEK remain little changed relative to Friday's close.