The Ultimate Guide to the 2017 French Elections – Part II

The first round of the French Presidential elections is due to be held in 25 days (on 23rd April), with the likely second round two weeks later on 7th May. In many ways this is proving to be a unique election campaign but the centre-left Emmanuel Macron still comfortably leads National Front candidate Marine Le Pen in second round polls.

This in-depth four-part Election Series examines all core elements of the upcoming presidential and legislative elections and takes a quantitative and qualitative approach. In Part II, I tackle seven questions, looking at past presidential elections where appropriate:

Q1: Who are the presidential candidates?

Eleven candidates, spanning the breadth of the political spectrum, will officially contest the first round in a bid to capture the 46 million or so votes up for grabs. However, Emmanuel Macron and Marine Le Pen remain comfortably ahead in the polls on around 25%.

Q2: What are their relative strengths and weaknesses?

The recent televised debate between the top five candidates was high calibre, in my view, and the front-runners have in recent months shown clear strengths…but also weaknesses.

Q3: What are the odds of a candidate winning an absolute majority in the first round?

No candidate has ever obtained more than 50% of the popular vote in the first round. This time looks no different and a second round is a near certainty based on latest polls.

Q4: Does the number of sponsors have a bearing on first round results?

The relationship is tenuous but does suggest that Le Pen will fail to win the presidency.

Q5: Does the number of candidates have a bearing on first round results?

The large number of candidates points to the winner and runner-up of the first round winning only just over half of the votes, broadly in line with recent opinion polls.

Q6: Does the first round result have a bearing on the outcome of the second round?

Precedent suggests that a small margin of victory in the first round makes the second round outcome harder to predict. This year’s election could prove a break with the past.

Q7: Does it matter who came third or fourth in the first round?

It has on a few occasions but assuming that Fillon comes third and the left-wing candidates fourth and fifth, polls point to a convincing Macron win versus le Pen in the second round.

Read The Ultimate Guide to the 2017 French Elections – Part II in full on my website.

BANK OF ENGLAND AND INFLATION – SENSE OF DÉJÀ-VU?

UK retail sales in Q1 likely contracted from Q4 2016, despite their rebound in February.

Falling real wages and slowing household borrowing are likely to further dampen retail sales and consumption growth going forward.

The still large pool of available workers is seemingly limiting their wage-bargaining power, with nominal wage growth falling behind rising inflation.

Moreover, investment growth is still only making a negligible contribution to GDP growth ahead of the British government’s decision to trigger Article 50 on 29th March.

Much of the rise in inflation in recent months is attributable to imported inflation driven by Sterling’s depreciation since November 2015 with little evidence of demand-led inflation.

This situation is reminiscent of 2007-2008 when Sterling’s collapse fuelled imported and in turn headline inflation.

Should Sterling remain broadly unchanged going forward, its year-on-year pace of depreciation, currently around 9%, would slow from June onwards and hit zero towards end-year according to my estimates, in turn dampening imported inflation.

I would expect retailers to stabilise prices to maintain market share in the face of tepid demand and for wage-inflation expectations to remain modest. This was certainly the case in the 12 months to September 2009 with CPI-inflation falling from 5.2% yoy to 1.1% yoy.

The question is whether the BoE is willing to look beyond a potentially temporary rise in UK inflation – as Governor Mark Carney suggested – or whether it tries to short-circuit any self-reinforcing rise in prices.

My base-line scenario is that the BoE will look beyond the current rise in UK inflation, unless at least one of three conditions materialise:

(1)       Nominal wage growth accelerates, comfortably outstripping headline inflation and driving consumption growth;

(2)       Commercial bank lending picks up significantly; and

(3)       Sterling depreciates materially from current levels, exacerbating imported and in turn headline inflation.

I expect that neither (1) or (2) will materialise any time soon and that while risks to Sterling are probably to the downside, Sterling is unlikely to weaken sufficiently to push the BoE into hiking. I would however expect it to keep a possible rate hike firmly on the table.

Read the full article here.

Going Dutch and Fed’s Next Big Data Hurdle

The outcome of the Dutch general elections would tend to support my view that while nationalist and/or populist parties in Europe are in the ascendancy, there has been a tendency to over-estimate their reach and their ability to dismantle the eurozone and/or EU.

It has also reinforced my expectation for the French presidential election that an above-average voter turnout would at the margin help centre-left candidate Emmanuel Macron and that Front National candidate Marine Le Pen will lose in the second round of voting on 7th May whether she faces Macron or, in a more unlikely event, Fillon.

In the US, the Federal Reserve has kept its options open by broadly sticking to a narrative which pencils in three hikes in 2017, in line with my expectations.

With the Fed seemingly comfortable with the path of inflation and employment, the next big data hurdle is likely to be Q1 2017 GDP data for the US due out on 28 April.

Read the full article on my website.

Fed 25 and 500 Godfathers

Baring calamitous February inflation and retail sales data, I expect the Fed to hike rates 25bp on 15th March for the second time in three months, in line with market pricing and my mid-February forecast.

While underlying US inflation has only edged up slowly and payroll growth remains modest, other US data have been reasonably buoyant. The pool of available labour continues to grind lower and regional indicators, national confidence surveys and housing data pushed higher in January-February.

Moreover, normally dovish FOMC members have not made a strong case for a March pause and, along with Chairperson Yellen, have seemingly for now at least not made the Fed hiking cycle conditional on Trump delivering on his promise to loosen fiscal policy.

The big question is what next for the Fed. Its updated forecasts and dot-chart and Yellen’s question-and-answer session will undoubtedly provide some extra colour.

But it may be a little premature for the 17 FOMC members to materially change their forecast for the appropriate pace of hikes for 2017, which stands at 74bps – broadly in line with current market pricing.

The risk to my turn-of-the-year forecast that the Fed may only deliver two hikes this year is probably to the upside. But if the Fed is going to hike once a quarter, it will want to prepare markets conditioned by years of hikes far more modest than predicated by the Fed.

In France, potential presidential candidates have only a week left to meet the Constitutional requirements to become an official candidate in the first round.

My core scenario remains that Fillon will remain in the presidential race, that the first and second rounds due on 23rd April and 7th May will not be pushed back, that Le Pen and Macron will likely make it to the second round run-off and that Le Pen will lose the second round whether she faces Macron or Fillon.

But one should at least entertain the possibility, even if remote, that Jean-Luc Mélenchon, currently fifth in the polls on 12%, will not meet the requirements to be a candidate in the first round – namely the written support of 500 elected sponsors – which could in turn boost support for Socialist candidate Benoit Hamon.

Moreover, it is still conceivable, albeit unlikely, that Fillon will make it to the second round or conversely pull out of the race with Alain Juppé filling his place. Finally, the possibility of this year’s elections being postponed, while extremely slim, merits discussion.

The Ultimate Guide to the 2017 French Elections – Part I

The first round of the French Presidential elections is due to be held in 47 days, with the likely second round two weeks later. There has already been much drama in a presidential campaign that has caught the world’s imagination.

The two-round election for the 577 deputies of the lower house of parliament on 11th and 18th June, which has so far received little attention, will complete the political picture in France.

There are currently eighteen presidential candidates spanning the breadth of the political spectrum, from the far-left to the far-right. Political jostling is in full swing with candidates forming alliances in a bid to capture the 46 million or so votes up for grabs in round one.

The National Front’s Marine Le Pen, currently ahead in the polls for the first round on around 27%, is looking to go one step further than her father Jean-Marie Le Pen and become the first ever French female president. She is currently under investigation for misappropriation of EU funds and publication of violent images.

The centre-left candidate Emmanuel Macron, aged 39, is second in the polls on around 25%. He is vying to become the first centrist president since Valéry Giscard d’Estaing in 1974, the first independent candidate to become France’s head of state and the youngest ever President under the Fifth Republic.

Republican candidate François Fillon, who comfortably won the party primaries, is third in the polls on around 20% despite the probability that he will face formal charges on 15th March of misappropriation of parliamentary funds.

President de Gaulle, in a nod to the heterogeneity of the French electorate, famously asked how it was possible to govern a country where 258 varieties of cheese exist. This granular political landscape makes it that much harder to predict with any certainty the successor to incumbent President François Hollande who has opted not to run for a second term.

This in-depth four-part Election Series will examine all core elements of the upcoming presidential and legislative elections and take both a quantitative and qualitative approach.

The material, organised in easy-to-access questions and answers, will ultimately try to answer the key question of who will be President and Prime Minister and how this will impact France, Europe and financial markets. The British decision to leave the EU and US presidential elections have fuelled the notion that anything is possible.

In Part I, I examine the importance of French presidential and legislative elections, their mechanics and timelines and the implications of a potentially high voter turnout.

Read the full article.

French elections in focus but US data likely to draw attention

February is ending with a whimper rather than a bang. Market pricing for a Fed hike in March continues to flirt with 5-6bp while in the UK the market seems to be waiting for the government to trigger Article 50. Meanwhile the ECB is likely to stay in a holding pattern until it knows what kind of French president it will be facing come 7th May.

US ISM, income, spending, and inflation data out on 1 March could however potentially move the needle on financial markets.

I continue to expect a 25bp Fed hike in March but acknowledge that this is a low conviction forecast at this stage.

In France, the latest headline-grabber is that veteran centrist politician François Bayrou announced on the evening of 22ndFebruary that he had opted not to run for the presidency. He will instead lend his support to Emmanuel Macron, the independent centrist candidate of the En Marche! Movement.

This should have come as little surprise but markets still reacted positively, with in particular French bond yields sliding lower.

The justification for this admittedly modest market reaction is that Bayrou’s electorate will now transfer its votes to Macron, in turn increasing the probability of Macron coming ahead of François Fillon and making it to a second round run-off against Marine Le Pen.

There is some logic to this argument, as recent polls suggest. Moreover, the relatively inexperienced Macron may benefit from Bayrou’s familiarity with the ins-and-outs of campaigning gained over three previous presidential election bids.

But there is also some evidence that Fillon, the Republican candidate, may benefit from Bayrou’s decision and it is simply too early to predict with confidence whether Macron or Fillon will make it to the second round.

The bottom line is that Bayrou’s decision has increased the odds of Macron and to a lesser extent Fillon making it to the second round and further decreased the odds of Le Pen winning in the second round against either Macron or Fillon.

Meanwhile, time is running out for Socialist Party candidate Benoit Hamon to secure a second round place.

Read more.

March Madness

Despite Donald Trump having been inaugurated as the 45th President of the United States only 28 days ago, saying that it has been an event-packed month is the under-statement of the decade.

However, as Randy Bachman sang in his number-one hit in 1974 – incidentally the year President Richard Nixon resigned following the Watergate scandal – “You Ain’t Seen Nothing Yet”.

Indeed while President Trump has already provided markets, the media and policy-makers a lifetime’s worth of material to digest, many of the issues which have pre-occupied financial markets in the past twelve months have somewhat lost some of their bite. Only recently, following Chairperson Yellen’s testimonies to the Senate and Congress (on 14th and 15th February), has the Fed’s likely path of rate hikes re-focussed financial markets’ attention.

Read the full article on my website: March Madness