Weekly focus – French public finances continue to steal the spotlight

Danske Research Team Danske Bank A/S

French public finances continued to be in focus, but the market turmoil has stabilised. On Tuesday, French presidential candidate Marine Le Pen presented National Rally's (RN) 2027 budget proposal and five-year fiscal plan. Both set highly ambitious fiscal tightening targets, with substantial spending cuts. The deficit reduction relies entirely on lower public spending, as the plan aims to cut taxes. The commitment to fiscal consolidation provided some relief to markets. However, the party strongly criticised the current government's 2027 budget proposal, leaving its path to approval uncertain despite RN's firm rhetoric on fiscal consolidation. Hence, uncertainty is likely to persist in the coming months. Despite the turmoil, we do not expect the ECB to intervene directly at current levels, but the turmoil makes a hike in October unlikely. We have therefore placed our call for a hike under review. The most obvious response if there is additional pressure would be to lower the pace of QT or pause it.

10Y US-treasury yields hit 5.36% and 30Y 5.73% during the week, both highest in 20 years. Towards the end of the week, they fell back, 10Y-yields at 5.24% and 30Y-yields at 5.61% this morning, after solid US Treasury auctions.

Energy prices moved higher towards the end of the week, with Brent crude oil briefly rising to 106 USD/bbl and European natural gas prices increasing above 80 EUR /MWh. The move followed a sharp drop in Strait of Hormuz traffic after record number of tanker attacks, and concerns over potential production disruptions in the US as Hurricane Isaias approaches. After US President Trump said he would not attack Iran again until after the mid-term election, prices eased again, with Brent trading between 103-104 USD/bbl this morning and European natural gas prices between 77-78 EUR/MWh.

Spanish Prime Minister Pedro Sánchez called a snap election for 29 November. Recent polls indicate that the centre-right People's Party could win and potentially govern with the far-right Vox party.

The Fed minutes contained no major surprises for the outlook for US monetary policy. FOMC members' concerns about downside risks to growth or the labour market appear to have faded, as the economic projections indicated. The minutes supported our view for gradual rather than back-to-back hikes. The ECB minutes from the September meeting provided little guidance for the future, but we see it as dovish relative to market pricing.

Next week's key data release from the US will be the September CPI due on Wednesday. We think it would take a clear upside surprise in CPI for the Fed to hike rates already in October. From the euro area, the final inflation release for September is released. On Thursday and Friday EU leaders meet to discuss trade measures against China. EU has set a deadline for October for China to take initiatives to address the large EU-China trade imbalance. China releases data on trade and inflation. On the trade front, exports are expected to show continued strength. Both PPI and CPI is expected to rise further. From the UK we get August GDP.

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Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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