Meanwhile, the 10-year OAT-Bund spread experienced slight tightening on Wednesday, but overall, the spread remains at its highest levels since 2012.
We don’t think Le Pen will follow up on her threats to topple the government in the near term, but it does remind markets of the precarious situation the country is in. A no-confidence vote would reset the progress made with the current budget proposal and trigger a new period of political limbo. But given new parliamentary elections cannot be held until mid-2025, the timing for such a move seems presumptuous.
That said, the economic outlook for France in the longer term is bleak and has deteriorated over the past few months. The Services PMI stands at 45.7, indicating a significant contraction, while the Manufacturing PMI is even lower at 43.2, matching the figure for struggling Germany.
But in contrast to France, Germany still has plenty of fiscal headroom if needed. A weakening French economy will make the already seemingly impossible task of fiscal consolidation even more challenging. Therefore, even the survival of the coalition for now does not argue for a significant retightening of spreads in our view.