Author Archives: Olivier Desbarres

2017 French elections – They think it’s all over…it isn’t

Emmanuel Macron, the centrist founder of the En Marche! movement beat National Front candidate Marine Le Pen by two votes to one in the second and final round of the French presidential elections on 7th May, in line with my core scenario.

But for President-elect Macron (and arguably the other main party leaders), the hard work starts now. Macron is expected to appoint next week his Prime Minister and there has been much speculation.

I would expect Macron to pick a head of government and approve cabinet ministers who will not polarise political opinion. The appointment of a “rainbow government” would likely help his party – recently renamed “La République En Marche” – secure the largest number of deputies at the forthcoming legislative elections on 11th and 18th June.

If his party succeeds as opinion polls suggest – no mean feat for a party which is only a year old and currently has no parliamentary deputies – this would in turn help reinforce Macron’s position and his choice of Prime Minister. 

However, polls suggest that La République En Marche may fail to secure a majority of the 577 seats in the National Assembly.

If the party falls well short of that number, it would likely seek a loose coalition with either the Republican Party or less likely with the beleaguered Socialist Party, in my view.

The National Front is likely to cement its position in French politics but it will need to reform itself and I would expect personnel changes and policy tweaks.

Marine Le Pen fell well short of securing the presidency and this should have come as no great surprise as nationalist parties in other EU member states have also come up short.

This is in line with my view that while nationalist/populist parties may have greater influence on the political landscape they will in most cases fail to exercise true power, let alone dismantle the eurozone and/or EU.

Finally, opinion polls which predicted with great accuracy the second and in particular first round of the presidential elections, are back in favour – at least in France.

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US, UK and global GDP growth update – Put the champagne on ice

US GDP data weakest of a disappointing lot

Data released today show that Q1 2017 real GDP growth:

  • In the US slowed to 0.7 quarter-on-quarter (qoq) annualised, from 2.1% qoq in Q4 2016 – the weakest growth rate in three years (see Figure 1);
  • In the UK halved to 0.3% qoq – the weakest growth rate in a year;
  • In France slowed to 0.3% qoq from 0.5% qoq in Q4 2016; and
  • In Spain rose to 0.8% qoq from 0.7% qoq in Q4 2016.

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7 reasons why Macron will become President and market implications

The outcome of the first round of the presidential elections which see Emmanuel Macron and Marine Le Pen through to the second round – as per opinion polls –  and the positive market reaction are in line with my core scenario and expectations.

I am also sticking to my forecast that Macron, who is leading Le Pen by 22 percentage points in the polls, will win the 7th May run-off to become President, which would in turn likely lead to a further albeit modest rally in the euro.

French opinion polls, which have historically been accurate in “predicting” the outcome of the first and second round of presidential elections, have Macron comfortably winning the second round.

Macron has broad cross-party political support, Le Pen does not.

Presidential candidates with a small number of elected-official sponsors, such as Le Pen, have never become president.

Macron has a reasonably high “positive ranking” in popular polls, Le Pen does not.

Le Pen seemingly does not yet enjoy broad political appeal even if she will likely perform better than her father did in the 2002 presidential elections.

The National Front won 27.4% of the popular vote in the second round of the 2015 French regional elections but only 18.7% of the seats as a result of mainstream parties coalescing against the National Front.

Elections in the Netherlands and Austria suggest that voters are not yet ready to elect far-right parties to the highest echelons of power.
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The Ultimate Guide to the 2017 French Elections – Part IV

The outcome of the first round on 23rd April remains a close call and I am once again reminded of President de Gaulle who, in a nod to the French electorate’s heterogeneity, asked how it was possible to govern a country where 258 varieties of cheese exist[1].

This granular political landscape has come into focus in recent weeks. Polls show that in the first round National Front candidate Marine Le Pen and the centre-left independent Emmanuel Macron are still slightly ahead of far-left candidate Jean-Luc Mélenchon and Republican François Fillon but the margins are barely statistically insignificant.

Moreover, a large share of voters – up to 45% of the registered electorate – remain undecided on whether and how they will vote. These voters will likely swing the election.

Nevertheless, I am sticking to my core scenario that Macron will make it to the second round which he would win regardless of whom he faces given his strong cross-party political support and reasonably high popularity amongst voters.

While all the main candidate advocate some kind of reform of the EU and eurozone, Le Pen is campaigning on the premise that France needs to leave the eurozone and has promised to hold a referendum on France’s EU membership if elected.

Implied euro volatility has surged – a trend partly attributed to markets pricing in a higher probability of either Mélenchon or Le Pen being elected president. But actual euro volatility remains subdued and the fall in the euro and 2 and 5-year French government bond prices in recent weeks has been modest.

The consensus forecast, which I share, is that the Euro and French government bonds will rally if Macron or Fillon is elected president while the Euro would weaken sharply and French yields rise significantly should Le Pen or Mélenchon become president.

However, with an almost infinite number of scenarios to consider, any forecast of where European financial markets may end up and how they get there remains tentative at best.

There has been little focus on the elections for the French National Assembly, to be held over two rounds on 11th and 18th June and yet they will decide the composition of one of France’s law-making institutions and dictate from which party hails the Prime Minister.

Unless Fillon becomes President, it is likely that for the next five years the President and Prime Minister will not come from the same party or share the same political agenda – a period of “Cohabitation” which would clip the authority of Le Pen, Mélenchon and to a lesser extent Macron, and is usually associated with political instability. Read more

The Ultimate Guide to the 2017 French Elections – Part III

The first round of the French Presidential elections is due to be held in 17 days (on 23rd April), with the likely second round two weeks later on 7th May. The eleven presidential candidates yesterday took part in the final televised debate before the first round.

Weighing their performances remains fraught with difficulty and the key question remains whether the centre-left candidate Emmanuel Macron and National Front leader Marine Le Pen are still likely to make it to the second round.

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 III, I tackle five questions, looking at past presidential elections where appropriate:

Q1: At this stage can we predict with any accuracy the eventual winner?

The media would suggest that we cannot and there is certainly scope for surprises. At the very least opinion polls could be under or over-estimating candidates’ chances. But if Macron and Le Pen make it to the second round, Macron looks set to be elected President based on opinion polls.

Q2: Are French presidential opinion polls reliable?

They accurately predicted the outcome of the 2012 and 2007 presidential elections and the eventual winner of the 2002 election. But opinion polls under-estimated support for Jean-Marie Le Pen in the first round in 2002.

Q3: What are French opinion polls currently predicting?

Macron and Le Pen are neck and neck in the first round on about 25% but these polls do not account for undecided voters and turnout.

Q4: Do French regional elections tell us anything about candidates’ chances?

The December 2015 regional elections suggest that while Marine Le Pen will do well in the first round, she will struggle in the second round in the face of concerted political opposition.

Q5: What are the odds of a left-wing candidate becoming President?

While Mélenchon is likely to come a credible fourth, based on current opinion polls, neither him nor Socialist Party candidate Hamon are likely to get even close to making it to the second round.
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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.

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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 more

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.

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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.


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