A Look at the Day Ahead in European and Global Markets

By Vidya Ranganathan

France’s new government faces a significant test today. Prime Minister Francois Bayrou is expected to outline a deal to modify pension reforms in exchange for support from leftist parties for the 2025 budget.

Bayrou’s government, formed after the collapse of his predecessor’s administration last month, is seeking assurances from opposition parties, particularly the Socialists, that they will not oppose the proposed budget.

Analysts predict he will secure the vote. While the specifics of the speech remain undisclosed, Bayrou’s team indicated it would reflect discussions with party leaders and unions.

Despite this, market nerves are frayed as there are concerns Bayrou may reverse aspects of pension reform, particularly the increase in the minimum age for full pension eligibility, which could save the financially troubled government billions of euros.

The risk premium on French debt, indicated by the yield gap between French and German 10-year bonds, is approaching its highest level in over 12 years, fueled by worries about political instability and a rising public deficit.

Markets will also be watching U.S. producer prices and metrics influencing the Fed’s PCE deflator, ahead of Wednesday’s more crucial consumer price index, amid expectations of inflation rising when President-elect Donald Trump reveals his policies on tariffs, immigration, and taxes upon his inauguration next week.

Investor anxiety has heightened since last Friday’s robust U.S. payroll report, which led to increased yields and reduced market expectations for Federal Reserve interest rate cuts. Currently, markets are anticipating only 29 basis points of cuts from the Fed this year.

Ten-year Treasury yields have reached 14-month highs, pushing the dollar upward and prompting a sell-off in technology stocks, which extended to early Asian trading. Japan’s Nikkei index dropped following a holiday break, with U.S. inflation data on investors’ minds.

On Monday, the U.S. dollar index peaked at its highest in over two years before slightly declining after a Bloomberg News report suggested that the incoming Trump administration is considering a gradual tariff implementation rather than an abrupt one.

Key Developments Influencing Markets on Tuesday:

• Data: U.S. PPI
• Speakers: ECB’s Robert Holzmann, Bank of England Deputy Governor Sarah Breeden, Riksbank Deputy Governor Aino Bunge, Kansas City Fed President Jeffrey Schmid
• Earnings: Games Workshop Group PLC
• Debt Auctions: Germany reopening of 5-year, UK 30-year.

(By Vidya Ranganathan; Editing by Edmund Klamann)