June may be remembered as a political storm, with a snap election called in France, result declared in India, full swing canvasing in the UK and ramping up in the US. However, in the world of rates we saw a subtle shift in G10 central banks towards a less restrictive policy stance. This started with the Bank of Canada responding to better inflation data and cutting policy rates by 25bps, without offering any forward guidance. This was swiftly followed by the ECB, with a more contentious 25bps cut. Some members in its governing council were obviously disappointed in the rate cut decision ignoring the most recent uptick in activity data. The cut of 25bp from the SNB, which was the second of this cycle, aimed at tackling CHF currency strength while its domestic inflation is close to target.
Rhetoric from other central banks, including the Fed and the BoE, shifted in June from the previous narrative of strictly following data dependency, towards a more nuanced “dual mandate” stance and the potential of policy rate cuts irrespective of “inflation persistence”. This shift raises questions about whether the inflation target will be reached, if the risk of persistent sticky inflation is being fully appreciated by central banks, or whether there has been an economic pivot towards higher unemployment and an output gap yet to appear meaningfully in public data.
Elsewhere in Europe, sovereign credit spreads increased volatility as the French 10y OAT bond spread widened 40bp from the equivalent German Bund on the back of a snap national election called by Macron. The President of France was so shocked by the number of domestic voters swinging to the far right Rassemblement National (RN) party in the European parliamentary elections, that he immediately dissolved his own parliament. This appears to have backfired as his own party, Ensemble, who have since come third in the first-round of voting and now rely on a deal with the far left, Nouveau Front Populaire, to prevent RN from securing a majority.
The odds of a Trump victory in the November US election increased after a poor showing from incumbent President Biden at their head-to-head CNN debate. This is beginning to be reflected in markets with an increased probability of tariffs vs Europe and China.
The above events are providing ample cause for spreads, rates curves and FX levels to move accordingly. We expect this political uncertainty to remain elevated for the remainder of the year.
The US 10y closed the month 10bps lower and 5s-30s swap was 2.5bps steeper.
