Macro & Markets: French fizz

Macro

The International Monetary Fund (IMF) meeting kicked off in Washington, DC, where the IMF released its World Economic Outlook report with the snappy title, ‘Global Economy in Flux, Prospects Remain Dim.’¹ It is worth pointing out that since the April report, the IMF has upgraded 2025 growth numbers for the United States, the euro area, Japan, the United Kingdom, China, India, Latin America and the Middle East. Only Canada and Russia turned negative. Markets like to look at the direction of travel, which isn’t quite so dim.

The German ZEW economic survey published in the past week showed a resumption of weakness,² somewhat contradicting the strengthening PMI data.³ Three UK companies have had their say. First, Page Group noted that the -11% this quarter in Germany was better than the -21% last.⁴ Second, Whitbread PLC described the Hotel accommodation market as experiencing ‘softer demand in Q2.’⁵ Third, SIG was particularly discouraging about both Europe and Germany: ‘The German market weakened unexpectedly’ and ‘European construction at a low point in the cycle and with longer-than-anticipated delays to the start of meaningful recovery’.⁶ This indicates to us the interest-rate cuts are not yet being felt on the ground and the Merz package is much needed.⁷ It could also suggest that the European Central Bank (ECB) is far from finished cutting rates.

Bonds

Such data about the weakness of Europe’s core economy may have led, in part, to the rally in bonds we have seen over the last two weeks, with a drop in yields of 10 basis points (bps) across the board for German Bunds and more-or-less similar declines elsewhere, especially in France. Markets greeted the news that Sebastien Lecornu had formed a cabinet, version 2.0, with a 15-bps rally in French bonds. This move seems odd given that Lecornu dropped the pension fund reform until after the France’s presidential election due in 2027. This was one of the key long-term cuts for government expenditure post-2026. While Lecornu won the no-confidence motions, will the budget still be lost? This rally could be short-lived.

Equities

Staying in France, finally some good news from the luxury sector: The chief financial officer of LVMH said during their third-quarter results presentation, ‘We are encouraged by the pockets of improvement we see in all sectors.’⁸ China was also notable for seeing a quarter-on-quarter improvement along with the United States. The stock price rallied 12% and held there, dragging the other luxury goods and drinks companies up with it. Pernod, the French spirits and champagne producer, echoed these comments, and its stock price rose 8% on figures as well. Both of these stocks likely benefitted from a short squeeze,⁹ but the start of a recovery after two miserable years may be on the way. They are certainly value stocks today, in our view.

Parting shot

In the UK press, the gloom about the looming budget almost manages to produce as many headlines as market doomsters predicting a crash, cheerfully hoping for a repeat of 1929, the 2000 ‘dot.com’ crash or even the global financial crisis. It is worth remembering that in each of these instances the US Federal Reserve was raising interest rates, not cutting them as it is now.

UK Chancellor of the Exchequer Rachel Reeves, while attending the IMF meeting, gave the following comment, ‘Those with the broadest shoulders should pay their fair share of taxes.’ This is an amusing re-working of a line from Conservative-Party Chancellor George Osbourne’s 2015 summer budget speech: ‘Those with the broadest shoulders are bearing the greatest burden.’ That was three years after he had reduced the top rate of tax from 50% to 45%. Could it be that the Labour Party is preparing to break its manifesto promise of no tax rises—just as Gordon Brown did in the 2009 budget—and raise income tax for higher earners to 50%? History doesn’t repeat itself, but it often rhymes!¹⁰