Markets Enter Consolidative Mode Ahead of Weekend
Neither the terrorist attack in Paris nor the strong eurozone flash PMI has managed to shake investors. Judging from the social media, many suspect that the terrorist attack plays into Le Pen's hands, but investors do not seem particularly concerned. The French interest rate premium over Germany has narrowed, and gold is flat. UK retail sales fell sharply, yet sterling isholding on to the bulk of this week's gains, which are the most here in 2017.
The US 10-year yield is holding on to the lion's share of its gains as well. It had bottomed on Tuesday near 2.16% and rose to 2.25% yesterday and is at 2.24% now. Treasury Secretary Mnuchin's claim that tax reform will be passed by the end of the year seems to be more a statement of intent than a reliable forecast. As President Trump's 100th day in office approaches, the legislative agenda still seems to be tied up between the different wings of the Republican Party. Indeed, the attempt by the Republicans to forge a majority instead of reach across the aisle to some Democrats is proving more difficult and frustrating than manyanticipated.
Although it is too late to have much impact on the French election, the flash PMI reading for April was impressive as it pulls further ahead of Germany, if such comparisons are valid. French manufacturing rose to 55.1 from 53.3, and the service reading rose to 57.7 from 57.3. This lead to the composite is rising to 57.4 from 56.8. All were above expectations.
The German manufacturing edged to 58.2 from 58.3, and the service PMI fell to 54.7 from 55.6. The latter was weaker than expected. The composite stands at 56.3 from 57.1.
The flash EMU composite of 56.7 represents a new six-year high. The chief caveat is that survey data has been running ahead of real sector data. The US and UK report Q1 GDP next week, but Europe's estimates are in the first week in May. Next week's highlights will include the flash CPI readings, with a small uptick expected, and the ECB policy meeting. There is room to adjust the securities lending program to relieve strain in the repo market.
The most market friendly French election result would likely be a Macron-Fillon run-off in the second round, assuming that it is unrealistic than any candidate garners more than 50% of the vote. Many suggest that the euro could rally on a Macron-Le Pen second round, given the tradition of forging a united front against the National Front. Yet this would seem to be the least surprising result. Nearly every poll suggeststhis is the most likely scenario. And as we have noted, investors are relative calm.