Weekly focus: Political risks rise again in France

Danske Research Team Danske Bank A/S

Geopolitics and political events dominated the agenda this week. On Monday evening, president-elect Donald Trump announced 25% tariffs on imported goods from Canada and Mexico, and an additional 10% tariff on China. This would bring the total China tariff to 35%. Mexico has already threatened to retaliate while Canadian Prime Minister Justin Trudeau said he was prepared to work with the US in "constructive ways". China is also expected to retaliate, and we could be in for a tit-for-tat escalation similar to what we saw in Trump's trade war. In theory at least, Trump could implement tariffs with an executive order on his first day in the office. In practice, the timing remains highly uncertain. Most likely, the tariffs will have to be linked to Trump's planned tax cuts, and such a complex legislative package would take time to get Congress approval.

Also in the geopolitical sphere, Israel and Hezbollah agreed on a ceasefire that entered into force on Wednesday. Israel could consider its mission in Lebanon accomplished, with most of Hezbollah leadership eliminated and much of its arsenal destroyed. While the truce in Lebanon is a sign of hope in a region plagued by conflicts, there is a long road to sustainable peace. We have written more about the recent events in our monthly Geopolitical Radar: The world prepares for Trump 2.0, 27 November.

Political risks are on the rise in France, and this has also been reflected by the widening of the German-French bond spread to its highest level since 2012. On Monday next week, the minority government must pass a social security budget, which could result in a no-confidence vote against the government, potentially leading to a collapse. Hence, uncertainty remains in French politics, and it remains unclear if the concessions from PM Barnier will be enough to satisfy the National Rally, whose support the government needs.

This week's main data releases were inflation reports from Euro area and the US. In the euro area, inflation picked up pace in November but less than expected. Headline inflation rate increased to 2.3% from 2.0% from October, in line with expectations, but the core inflation was unchanged at 2.7% (exp. 2.8%). In the US, PCE headline inflation rose to 2.3% in October from 2.1% in September, as expected, while the core inflation accelerated to 2.8%, also in line with expectations. Overall, we conclude that the disinflationary process on both sides of the Atlantic remains well on track.

Heading into next week, already over the weekend we get Chinese PMIs for November. In the past two months, we have seen a decent increase in the official PMI manufacturing from NBS rising to 50.1 in October. Now, we expect to see a flat reading, reflecting somewhat better activity after the recent round of stimulus. We also look for a small rise in the Caixin PMI manufacturing (Monday) coming from 50.3 in October.

In the US, we will get the ISM manufacturing index on Monday, JOLTs data on Tuesday, ADP report on Wednesday, and non-farm payrolls report on Friday. Also, a bunch of Fed speakers will be on the wires before the quiet period begins on Saturday. In the Euro area, the most important release will be the ECB-preferred wage data due on Friday. Also, retail sales data is due on Thurssday and we are keen to see if the rebound continued in October.

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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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