Markets will keep shaky French regime on a leash

LONDON – France’s debt problem would be hard to tackle even if Emmanuel Macron had been a popular president supported by a comfortable parliamentary majority. The current stalemate, with the united left coalition and centrist parties fighting to form the next government, makes it harder. And the next government will have another awkward partner: the bond market.

Whoever ends up governing France will inherit a country with a budget deficit and public debt at 5% and 112% of GDP respectively last year. The political stasis could lead to fiscal insouciance. A minority or coalition government led by the New Popular Front left grouping may want to implement at least part of its platform, which includes 100 billion euros of extra spending by the end of 2025. And even if a centrist-led government emerges, led by Macron’s Renaissance movement, it may suspend the 20 billion euros of savings that current finance minister Bruno Le Maire had penciled in for this year.

The new regime’s first problem will be to abide by the European Union’s requirement to shrink the country’s debt. Paris could ignore the EU’s concerns, but it would risk penalties, and the suspension of some 10 billion euros of subsidies remaining from the pandemic-era Recovery and Resilience Plan.

And political games wouldn’t help France with bond markets. Paris is vulnerable to changes in investors’ sentiment, with 54% of government debt in foreign hands — up from under 50% two years ago. The European Central Bank still holds around 20% of French sovereign debt, providing a cushion in case of a market sell-off. But France can’t count on further central bank support if it doesn’t comply with EU requirements.

That leaves France at the mercy of investors who could worry about its ability to bring down a debt load that has doubled in the last 20 years. To stabilize it, Paris would need to cut its deficit before interest costs from the current near-3% of GDP to below 1%, according to a Breakingviews calculation assuming borrowing costs of around 3% and nominal growth of 3.2% in 2025, based on International Monetary Fund estimates. It has managed that just once since 2008. The most likely scenario is a fragile government allowing debt to continue drifting upwards.

Investors remained calm after Sunday’s vote, relieved that neither the far right nor the left obtained a majority. Paris, however, still has to pay a premium of more than 65 basis points over German debt to borrow for 10 years, up from below 50 basis points before the election. That looks low given Spain, with less debt load and faster growth, pays around 80 basis points. Whether or not yields shoot higher is for France’s future government to decide.

CONTEXT NEWS

The New Popular Front, a coalition of left-leaning parties, became the French parliament’s largest party after national elections on July 7, with 182 seats in the 577-strong National Assembly.

The movement supporting French President Emmanuel Macron’s policies, Renaissance, came in second with 168 seats. Marine Le Pen’s far-right Rassemblement National came in third place, with 143 MPs.

The premium demanded by bond investors to hold 10-year French government bonds rather than German debt stood at 59 basis points on July 9, down from the 80 basis point level reached between the two rounds of the French election.

(Editing by Neil Unmack and Streisand Neto)

Oil rises settles higher; US inflation data feeds rate cut hopes

NEW YORK – Oil prices rose for the second consecutive session on Thursday with the Brent benchmark settling above USD 85 a barrel as hopes rose for US interest rate cuts after data showed an unexpected slowdown in inflation.

Brent crude futures rose 32 cents, or 0.4%, to settle at USD 85.40 a barrel. US West Texas Intermediate crude futures rose 52 cents, or 0.6%, to USD 82.62 a barrel.

Data showed US consumer prices fell in June, stoking hopes the Federal Reserve will cut rates soon. After the data, traders priced an 89% probability of a rate cut in September, up from 73% on Wednesday.

Slowing inflation and interest rate cuts will likely spur more economic activity, Growmark Energy analysts said.

Fed Chair Jerome Powell acknowledged the recent improving trend in price pressures, but told lawmakers more data was needed to strengthen the case for rate cuts.

The data pulled the US dollar index lower and that should support oil prices, said Gary Cunningham, director of market research at Tradition Energy. A softer greenback can lift demand for dollar-denominated oil from buyers using other currencies.

Prices also rose on Wednesday, snapping a three-day losing streak after US data showed a draw in crude stocks in the world’s top oil market along with declining inventories and strong demand for gasoline and jet fuel.

Front-month US crude futures recorded their steepest premium to the next-month contract since April. Market participants’ willingness to pay premiums for earlier delivery dates, a structure known as backwardation, is typically a sign of supply tightness.

Some still believe the oil demand outlook is tenuous. In its monthly oil market report, the International Energy Agency (IEA) saw global demand growth slowing to under a million barrels a day this year and next, mainly reflecting a contraction in China’s consumption.

Still, producer group OPEC in its monthly report on Wednesday kept forecasts for world demand growth unchanged, at 2.25 million for this year and 1.85 million bpd next year.

“OPEC and the IEA demand forecast are wider apart than usual, partly due to the differences of opinion over the pace of the world’s transition to clean fuels,” StoneX analyst Alex Hodes said.

(Reporting by Shariq Khan in New York, Robert Harvey and Paul Carsten in London, Arunima Kumar in Bengaluru, Arathy Somasekhar in Houston, and Colleen Howe in Beijing; Editing by Emelia Sithole-Matarise, David Gregorio, and David Evans)

Oil prices tick up as crude, gasoline inventories ease

Oil prices edged higher on Thursday as crude stocks fell after US refineries ramped up processing and as gasoline inventories eased, signaling stronger demand.

Brent futures rose 35 cents, or 0.4% to USD 85.43 a barrel. US West Texas Intermediate (WTI) crude rose 36 cents, or 0.5%, to USD 82.47 a barrel.

US crude inventories fell by 3.4 million barrels to 445.1 million barrels in the week ended July 5, far exceeding analysts’ expectations in a Reuters poll for a 1.3 million-barrel draw.

Gasoline stocks fell by 2 million barrels to 229.7 million barrels, much bigger than the 600,000-barrel draw analysts expected during the US Fourth of July holiday week.

The Organization of the Petroleum Exporting Countries also stuck to its forecast for relatively strong growth in global oil demand in 2024 and next year, saying on Wednesday that resilient economic growth and air travel would support fuel use in the summer months.

Gains were, however, capped as supply disruptions at refineries and offshore production facilities from hurricane Beryl were minimal.

Meanwhile, US inflation data due this week include the Consumer Price Index on Thursday and the Producer Price Index report on Friday, both of which could set the tone for the market.

Expectations of a 25-basis-point rate cut by September ticked up to 74% from around 70% on Tuesday and 45% a month ago, according to CME’s FedWatch.

Lower interest rates decrease the cost of borrowing, which can boost economic activity and oil demand.

Federal Reserve Chair Jerome Powell said on Wednesday the US central bank will make interest rate decisions “when and as” they are needed, pushing back on a suggestion that a September rate cut could be seen as a political act ahead of the fall presidential election.

(Reporting by Arathy Somasekhar in Houston; Editing by Muralikumar Anantharaman)

China announces more short-selling curbs to stabilize stocks

BEIJING – China’s securities regulator on Wednesday announced more curbs on short-selling and pledged tighter scrutiny of computer-driven program trading in its latest effort to bolster a flagging stock market.

Short-selling, involving the sale of borrowed shares, is often blamed in China by regulators and investors for exacerbating market declines.

The China Securities Regulatory Commission (CSRC) said securities re-lending – in which brokers borrow shares for clients to short sell – would be suspended. In addition, margin requirements would be raised for short-sellers.

The CSRC also urged stock exchanges to publish detailed rules to regulate program trading, especially high-frequency trading.

The new measures come after seven straight weeks of losses for China’s blue-chip CSI300 index amid concerns over the health of the country’s economy.

China has taken a series of measures to discourage short-selling since last August, and the latest moves are “in response to investor concerns, and aimed at stabilizing the market,” the CSRC said in a statement.

The latest curbs are “timely, and will help boost market sentiment,” said Yang Delong, chief economist at First Seafront Fund Management Co.

New securities re-lending will be suspended from Thursday, while existing contracts must lapse by the end of September, the regulator said.

Meanwhile, stock exchanges will raise the minimum margin requirement ratio to 100% from 80% for short-selling, the CSRC said, adding the bar would be higher for hedge funds.

The regulator, which launched a crackdown on computer-driven quant funds early this year, said it would further restrict high-frequency trading to ensure a fair market.

High-frequency trading accounts have slumped more than one-fifth so far this year to about 1,600 at the end of June, according to the watchdog.

(Reporting by Beijing newsroom and Shanghai newsroom; Editing by Andrew Heavens and Mark Potter)

Dollar adrift ahead of US inflation test; sterling firms

SINGAPORE – The dollar fell a touch on Thursday although moves were largely subdued ahead of a US inflation report due later in the day, while sterling firmed on receding expectations for an August rate cut from the Bank of England (BoE).

The British pound rose to a one-month high of USD 1.28545 in early Asia trade, extending a 0.48% gain from the previous session after comments from BoE policymakers caused markets to scale back bets for an easing cycle to begin next month.

BoE Chief Economist Huw Pill on Wednesday said price pressures in Britain’s economy were persistent and that the timing of a first rate cut was an “open question”. His colleague Catherine Mann signaled she is unlikely to vote for an interest rate cut in August.

“Ahead of BoE’s 1 August meeting, the Monetary Policy Committee (MPC) will have only one more set of data,” ANZ analysts said in a note.

“One set of data is unlikely to be sufficient for the MPC to be able to gain confidence on the path of inflation, and the MPC may lean in favor of waiting for more data. Our view is as data improves over summer, the MPC will have greater confidence to cut rates in September.”

In the broader market, the dollar was on the back foot, though currencies were mostly trading sideways as investors were hesitant to take on fresh positions ahead of the US inflation report.

Against the greenback, the euro gained 0.04% to USD 1.0834, and the Aussie dollar rose 0.01% to USD 0.6754.

The dollar was little changed at 104.95 against a basket of currencies.

Expectations are for core inflation in the US to have risen 0.2% on a monthly basis in June, putting the annual figure at 3.4%.

“The consensus is looking for a benign 0.2% lift in the core CPI. We think that may also be the case,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

“That outcome will obviously build confidence that the FOMC will be able to cut rates fairly soon, so I think a 0.2% (rise) may perhaps push the dollar a bit lower modestly if market pricing for a September (cut) increases.”

Markets are now pricing in a more than 70% chance of a rate cut from the Federal Reserve in September, compared to a near-even chance a month ago, according to the CME FedWatch tool.

Fed Chair Jerome Powell said on Wednesday the US central bank will make interest rate decisions “when and as” they are needed, pushing back on a suggestion that a September rate cut could be seen as a political act ahead of the fall presidential election.

Elsewhere, the New Zealand dollar rose 0.11% to USD 0.60885, nursing some of its losses from the previous session, when it fell 0.7% in the wake of the Reserve Bank of New Zealand’s dovish tilt in its monetary policy statement.

The yen continued to be weighed down by stark interest rate differentials between the US and Japan, and last stood at 161.54 per dollar, near a 38-year low.

Many Japanese private banks who met with the Bank of Japan (BOJ) on Tuesday called for the central bank to halve its monthly bond purchases by around 2026, two officials with direct knowledge of the deliberations told Reuters.

The BOJ is expected to lay out a plan on how to taper its huge bond buying at its upcoming policy meeting on July 30-31, as it works gradually towards policy normalization.

(Reporting by Rae Wee; Editing by Tom Hogue)

US inflation report to set the tone

Thursday’s US inflation report could test markets, with consensus coalescing around the first Federal Reserve rate cut of this cycle in September.

The consumer price report for June is expected to show an annual change of 3.1%, moderating from 3.3% the prior month. As it stands, Fed funds futures are showing a 70% chance that the central bank will ease at its September meeting, according to CME FedWatch. But rate-cut expectations have swung wildly this year, and a surprise inflation spike could further jolt projections and rattle asset prices.

Fed Chair Jerome Powell, back on Wednesday for his second day of testimony before Congress, said the central bank will make rate decisions “when and as” they are needed. He pushed back on a suggestion that a September rate cut could be seen as a political act ahead of the Nov. 5 US presidential election.

Ahead of the CPI report, the mood was buoyant on Wall Street. The S&P 500 and Nasdaq Composite both gained slightly over 1% and finished at record highs. Nvidia shares added to their monster run for the year, rising 2.7% with all of the “Magnificent 7” megacaps posting gains.

Second-quarter earnings season is soon to heat up, with major banks led by JPMorgan reporting on Friday.

The dollar edged lower on Wednesday while US Treasury yields slipped as traders assessed Powell’s comments.

Rate decisions were a hot topic elsewhere around the globe. Bank of England Chief Economist Huw Pill undercut hopes for an August interest rate cut, noting price pressures in Britain’s economy.

New Zealand’s central bank held its cash rate steady on Wednesday, but opened the door to monetary policy easing over time should inflation slow as expected.

The Bank of Korea is expected to keep its policy rate on hold at a 15-year high on Thursday, with a cut seen in the next quarter, a Reuters poll found.

In China, meanwhile, the fears were of deflation and weak demand. Data on Wednesday showed China’s consumer prices grew for a fifth month in June but missed expectations. China shares closed lower after the data, with the blue-chip CSI300 index dropping 0.3%.

Japan’s Nikkei, meanwhile, closed up 0.6% at a record high as its 2024 run rolled on.

Here are key developments that could provide more direction to markets on Thursday:

– Bank of Korea meeting

– Malaysia central bank meeting

– US consumer price index report (June)

(Reporting by Lewis Krauskopf; Editing by Josie Kao)

US yields dip as Fed’s Powell’s comments keep September easing bets intact

NEW YORK – US Treasury yields slipped on Wednesday, as Federal Reserve Chair Jerome Powell’s comments overall leaned dovish, affirming expectations that the central bank will start its easing cycle later this year.

A solid US 10-year note auction also marginally added bids to Treasuries that weighed on yields as well.

Powell spoke for a second day in Congress, this time before the House of Representatives Financial Services Committee for his semi-annual monetary policy testimony. Powell said he was not yet ready to declare victory over inflation, but felt that the economy is on a stable path to steady prices and continued low unemployment.

“What we’re seeing is that the market is incrementally believing in September as the first rate cut,” said Rob Haworth, senior investment strategy director at US Bank Wealth Management in Seattle. “We have seen the odds increase for the September cut. The question is: is the Fed ready to set up the July meeting to confirm to the market that they’re ready to go in September?”

Powell’s comments on Tuesday before the US Senate Banking Committee were perceived as somewhat dovish, prompting a selloff in Treasuries that pushed their yields higher.

Powell said on Tuesday the Fed will not be cutting rates until it gains “greater confidence” that inflation is headed toward the 2% target. For now though, inflation remains above the 2% goal but the most recent monthly readings have shown further, modest progress, Powell noted.

In afternoon trading, the US 10-year yield edged lower to 4.284%, down 1.6 basis points (bps).

The auction of USD 39 billion in US 10-year notes was stronger than expected. The high yield was 4.276%, lower than the expected rate at the bid deadline, suggesting that investors were willing to take a lower yield to buy the note.

The bid-to-cover ratio, a measure of demand, was 2.58, a little higher than the 2.52 average, but slightly lower than last month’s 2.67 cover.

In other maturities, US 30-year yields fell 2.3 bps to 4.472%.

The two-year yield, which typically reflects interest rate expectations, was flat at 4.63%.

The yield curve, measuring the difference between US two- and 10-year yields, flattened, increased its inversion, to minus 35 bps.

Wednesday’s curve is what is described as a “bull flattener” in which longer-dated rates are falling more sharply than shorter-term ones, which reflects lower inflation expectations. Analysts said a bull flattener typically precedes a cut in interest rates.

The curve, however, has been on a steepening trend since late June. Investors believe that the front end of the curve has peaked and the Fed is not going to need to raise interest rates again. That is holding the front end of the curve relatively steady.

US rate futures markets are pricing in 50 basis points (bps) of rate cuts by the end of December, with the first probably in September, according to LSEG calculations.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Sharon Singleton and Will Dunham)

Nvidia leads Nasdaq and S&P 500 to record high closes

The Nasdaq and S&P 500 rallied to record-high closes on Wednesday, fueled by gains in Nvidia and other Wall Street heavyweights ahead of inflation data and quarterly earnings reports due this week.

It was the Nasdaq’s seventh straight record-high close and the S&P 500’s sixth straight. The S&P 500 crossed 5,600 for the first time after Federal Reserve Chair Jerome Powell stoked expectations for an interest-rate cut in September.

Powell said in his second day of Congressional testimony that he was not ready to conclude that inflation was moving sustainably down to 2%, although he expressed “some confidence of that”.

The Philadelphia semiconductor index surged to record highs after contract manufacturer Taiwan Semiconductor Manufacturing Co. posted strong quarterly revenue.

“TSMC’s report supported the AI narrative so that more than anything else today is a pretty important data point,” said Thomas Martin, senior portfolio manager at Globalt Investments in Atlanta.

Micron Technology, Nvidia, and Advanced Micro each rallied.

Apple climbed to a record high, lifting its stock market value to around USD 3.6 trillion.

With just a handful of large-cap stocks fueling Wall Street’s rally this year, some investors worry about a potential selloff if those companies’ earnings fail to meet high expectations.

According to preliminary data, the S&P 500 gained 56.46 points, or 1.01%, to end at 5,633.44 points, while the Nasdaq Composite gained 214.73 points, or 1.17%, to 18,644.02. The Dow Jones Industrial Average rose 425.39 points, or 1.08%, to 39,717.36.

US inflation data due this week include the Consumer Price Index on Thursday and the Producer Price Index report on Friday.

Expectations of a 25-basis-point rate cut by September ticked up to 74% from around 70% on Tuesday and 45% a month ago, according to CME’s FedWatch.

Second-quarter earnings season, which kicks off this week with major banks reporting on Friday, will test whether high-flying megacaps can justify expensive valuations and extend their strong runs.

Intuit dropped after the TurboTax owner said it plans to lay off about 10% of its workforce.

Gene-sequencing equipment maker Illumina jumped after it said it was acquiring privately held Fluent BioSciences.

(Reporting by Noel Randewich in Oakland, California, and by Lisa Mattackal and Ankika Biswas in Bengaluru; Editing by Pooja Desai and David Gregorio)

Debating the fate of rates

Is a US interest rate cut coming? If so, when?

Federal Reserve Chair Jerome Powell told Congress on Tuesday that the US is “no longer an overheated economy,” remarks that suggested the case for rate cuts is strengthening.

Some investors had anticipated the Fed chair, in his testimony to a Senate banking panel, might do more than he did to telegraph that a cut was on track for the central bank’s September meeting. Yet, as of late Tuesday, that still appeared to be the market’s broad expectation: Fed Funds futures were pricing in a nearly 75% chance of a cut in September, according to CME FedWatch.

More insight may come on Wednesday, when Powell returns to Capitol Hill to testify before a House of Representatives committee. And Thursday’s consumer price index report is sure to be closely watched to see if inflation is, in fact, moderating to the central bank’s liking. A surprise spike could throw the case for rate cuts into doubt.

Markets took Powell’s testimony largely in stride. The benchmark US S&P 500 index and MSCI all-country equity index were both little changed. The dollar moved slightly higher, indicating that some investors were looking for more dovish talk from the Fed chief.

There was sharper stock action in Europe, where indexes were weighed down by weakness in French stocks as political uncertainties lingered. Europe’s STOXX 600 index fell 0.9%, its biggest one-day drop in nearly a month. France’s benchmark CAC 40 index sank 1.6%, as investors assessed the political situation following Sunday’s legislative election.

Politics threatened to cast a shadow over markets more broadly, as US President Joe Biden faced some pressure to drop his re-election bid after his shaky debate performance against former President Donald Trump.

Meanwhile, the debate over rates was also set to extend to the Reserve Bank of New Zealand, which meets on Wednesday. The RBNZ is expected to hold its key cash rate for an eighth straight meeting and cut rates just once before year-end, according to a Reuters poll of economists.

Also on Wednesday, producer and consumer price inflation figures are due in China, which could sway markets. On Tuesday, China’s blue-chip CSI300 index rose 1.2%, lifted by tech shares.

Here are key developments that could provide more direction to markets on Wednesday:

– Reserve Bank of New Zealand meeting

– China PPI/CPI (June)

– Fed Chair Powell testifies for second day at Congress

(Reporting by Lewis Krauskopf; Editing by Josie Kao)

US yields rise as Fed’s Powell viewed as less dovish in Senate testimony

NEW YORK – US Treasury yields climbed on Tuesday as Federal Reserve Chair Jerome Powell struck a less than dovish tone in his testimony before Congress, and said further progress on inflation would set up interest rate cuts later this year.

US yields on the longer end of the curve, 10-year notes to 30-year bonds, rose after four straight days of declines. Yields on short-dated Treasuries advanced for a second straight session.

In prepared remarks to the US Senate Banking Committee, Powell said a policy rate cut is not appropriate until the Fed gains “greater confidence” inflation is headed toward the 2% inflation target. Inflation remains above the 2% goal but the most recent monthly readings have shown further, modest progress, he noted.

“More good data would strengthen our confidence that inflation is moving sustainably toward 2%.”

“The market was looking for Powell to be a little more dovish given the recent run of data that has been on the softer side. He was a little less so,” said Thomas Urano, co-chief investment officer and managing director at Sage Advisory in Austin, Texas.

“I think the Fed just needs to hold the line, get a few more prints on the inflation side that shows the disinflation trend is continuing. If he got in front of Congress and alluded to the fact that they have rate cuts coming up …, the market would have front-ran that move and dragged rates sharply lower.”

Futures markets are anticipating 50 basis points (bps) in rate cuts by the end of December, with the first probably in September, according to LSEG calculations.

US labor market strength and continued progress on inflation are key factors cited by the Fed in influencing the timing and pace of rate cuts.

The benchmark US 10-year Treasury note yield rose 2.5 bps to 4.293%.

US 30-year yields were up 3.1 bps at 4.489%.

US three-year yields edged up to 4.402% after a better-than-expected three-year note auction on Tuesday.

The note picked up a high yield of 4.399%, less than expected, at the bid deadline, suggesting investors were eager to purchase this debt at a lower rate.

The bid-to-cover ratio, a measure of demand, was 2.67%, higher than the June cover of 2.43 and above the 2.63 average.

The two-year US Treasury yield, which typically reflects interest rate expectations, was flat to slightly higher at 4.622%.

With long-end yields higher than those on the front end, the US two-year/10-year yield curve steepened, or reduced its inversion, to minus 32.60 bps US2US10=TWEB, suggesting rates on the short end are anchored and unlikely to rise sharply, with the Fed’s next move expected to be a rate cut.

The rise on the long end of the curve, however, reflects persistent inflation concerns.

At the same time, increasing market expectations that former President Donald Trump will win the November US presidential election are prompting investors to question whether there could be another resurgence in inflation, said Charlie Ripley, senior investment strategist for Allianz Investment Management.

“What’s happening on the political front is becoming a bigger factor, but that could change with any headline coming out with (President Joe) Biden and his candidacy for the Democrats,” he said.

(Reporting by Gertrude Chavez-Dreyfuss and David Randall; Editing by Nick Zieminski, Susan Fenton, and Richard Chang)

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