Budgetary Concerns

The macro point

Every week brings its share of surprises. In recent sessions, it is the surge in bond yields that has caused some worries. Long-term sovereign bond issues from Japan (30 and 40 years) have not gone well – unusually low demand. Additionally, U.S. rates continue to rise. The 10-year sovereign rate – which is the bond market's barometer – is not far from the sensitive 5% zone. Another point of concern, liquidity is unusually low, including on French debt. This is a sign that the usual buyers (mainly institutions like banks and insurance companies) are staying away.

Why? As is quite regularly the case, questions about the sustainability of public debt are resurfacing. There is nothing very new. It is the period of budget discussions in several developed countries. Should we be worried? The surge in rates is probably short-lived. However, it could put pressure on the most indebted states to make budgetary efforts. We will obviously think of France, which must announce a new plan for public finance recovery in record time by July. If there is no reduction in social spending (this is the main expenditure item!), it is feared that the announced objectives will not be achieved.

The correlation between the bond market and currencies is far from perfect. A rise in rates generally results in a strengthening of the U.S. dollar and other safe-haven assets, but to a limited extent.

Economically, there is good and bad. The good news is the resilience of the American consumer according to the latest publication by the Conference Board. Sooner or later, it is likely that the increase in customs duties will slightly erode their purchasing power. But we are far from the catastrophic scenario announced by some at the beginning of April following the "Liberation Day" (recession, even financial instability).

On the downside, the publication of annual accounts by INSEE reveals that French company investment is suffering more than expected. In the first quarter of 2025, business investment is only 4.4% higher than its level at the end of 20219 (just before the pandemic). The consensus was for a figure of 6.3%. Added to this is that French companies' capital spending has been contracting since mid-2023 (slow economic downturn and negative effect of the dissolution of the National Assembly last year). An economic bright spell in France seems unlikely in the near term. Therefore, we will have to get used to low growth. In the second quarter, GDP growth should be anemic, at 0.1%, as in the first.

Technical point

On the foreign exchange market, the U.S. dollar has regained some strength, stabilizing around 1.13 with the EUR/USD pair. The solid U.S. confidence indicator and a temporary easing of the trade war have helped. However, more will be needed for the dollar to gain ground sustainably. The dollar index, which measures the evolution of the greenback against the currencies of the United States' main trading partners, is down 8.1% since the beginning of the year.

Caution if you are exposed to the Japanese yen. The latest weekly report from the U.S. regulator (the COT, Commitment of Traders) confirms that being long on the yen is the trade of the moment. It's never good when there is such market consensus. Caution is therefore advised.

Announcements to follow

This week is packed with statistics. The money market is unanimous about the European Central Bank's (ECB) rate cut. It is expected to bring its main key rate to 2%. But further rate cuts are planned, with a terminal rate that could reach 1.5% by mid-2026, according to us.

No change, however, from the Bank of Canada (BoC), which is in pause mode until the previous quarter.

Finally, attention will need to be paid to the evolution of U.S. unemployment. April's figures were good: unemployment rate at 4.2%, and job creation at 177,000. It is likely that the momentum will still be positive in May. The mass layoffs feared due to the trade war have yet to materialize. In any case, this should not currently influence U.S. monetary policy. We consider that the Federal Reserve (Fed) will opt for the status quo in June and July. Depending on summer statistics, it might decide to resume the rate-cutting cycle in September. This will mainly depend on the direction of inflation.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice or an offer to sell or a solicitation to buy, and should not be used as a basis or considered as an incentive to engage in any investment.