French government collapse does not impede market optimism
European equity markets rose overnight, supported by expectations of imminent and deeper Federal Reserve (Fed) rate cuts, improved German economic data, and as markets looked past the widely expected collapse of the French government.
French Prime Minister François Bayrou’s minority government collapsed after he attempted to pass a budget aimed at reining in France’s national deficit, which is the highest as a percentage of gross domestic product (GDP) in the European Union (EU). Concerns over this issue helped propel European and United States (US) long bond yields higher last week.
President Emmanuel Macron is likely to nominate a replacement, marking the fifth prime minister in five years, who will probably face the same challenging task of passing a budget that brought down Bayrou.
Ironically, over the past week, yields in Europe and the US have fallen after US jobs data bolstered expectations of the resumption of the Fed’s rate-cutting cycle next week.
German industrial production provides positive signs
In the lead-up to Thursday’s European Central Bank (ECB) interest rate meeting, industrial production in the German economy increased for the first time since March, rising 1.3% month-over-month (MoM) in July following a revised 0.1% decline in June.
The stronger industrial production numbers indicate that the euro area economy is performing better than feared, which will help shape the outcome of this week’s ECB meeting.