French bonds / stocks under pressure

French bonds and stocks were under pressure yesterday, which weighed on European markets generally. The euro held in reasonably well though, losing a little ground to the dollar but nudging higher against sterling. Fed Chair Powell’s testimony on the US economy and monetary policy, which could be read as inching the central bank closer to cutting interest rates, had little enough impact overall. The euro is trading at around $1.0820 and 84.6p against the dollar and sterling respectively this morning, while the pound has slipped to just below $1.28 against the US currency.

French government 10-year bond yields rose by around 8bps yesterday, with the spread over equivalent German yields widening out by about 4bps. French stocks shed 1.6% on the day, while European equities generally lost over 1%. In the US, 10-year Treasury yields ended just marginally higher, while the S&P 500 inched up to another all-time high.

In his testimony to the Senate Banking Committee, Powell noted that recent inflation readings had been encouraging and “more good data would strengthen our confidence that inflation is moving sustainably toward 2%”, which in turn would increase the chances of the Fed lowering interest rates. He also noted though that “elevated inflation is not the only risk we face”, highlighting the recent cooling in the labour market, and said that “reducing (monetary) policy restraint too late or too little could unduly weaken economic activity and employment”.

ECB member Nagel says Euro area “inflation is retreating, and we expect that it will reach our 2% goal at the end of 2025 at the latest”, adding that the central bank will make its interest rate decisions on a meeting-by-meeting basis. The market fully expects it to stay on hold at next week’s meeting though.

It is very quiet on the economic data front today, with little of note due, ahead of the key CPI inflation report in the US tomorrow. Powell repeats his testimony to the House Financial Services Committee later today, while a couple of Bank of England MPC members, including the Bank’s Chief Economist, are scheduled to speak.