Markets

Caretaking French PM Lecornu reported back to president Macron that there are still possibilities for a compromise in parliament. He warned though that it would still be a difficult path ahead and immediately added some conditions. The next PM can’t have any presidential ambitions in 2027 elections and a suspension of Macron’s signature pension reform from 2023 (raising minimum retirement age to 64 from 62) must at least be worth reconsidering. Lecornu suggested that 210 or more lawmakers want a “platform of stability” to guide next year’s budget through 577-seat parliament. These numbers are MP’s of the ruling minority government, implying that they still need to lure in opposition lawmakers. The largest opposition blocks, the extreme-right (RN) and extreme-left (LFI), stand with their preference to push for new legislative elections, hoping to build on current polling momentum. Together, they account for 198 MP’s. Mutual distrust between socialists and republicans for the moment rules out any centrist (majority) formations. President Macron will on Friday in a final attempt likely announce a technocrat PM whose only task is to try pass a budget by year-end with a technocrat government to avoid snap elections. Chances that any government will rapidly face no confidence motions and eventually derail remain high. The extremely narrow path ahead helps explain the euro’s lackluster reaction to “positive” news that there’s still a chance. EUR/USD closed at 1.1628 from a start at 1.1657. The French CAC 40 equity index (+1%) slightly outperformed other European indices (0.6%-1%). The 10-yr OAT/swap spread narrowed by 2 bps.

During US dealings, the US Treasury sold $39bn of 10-yr Notes as part of its mid-month refinancing operation. The auction stopped above the pre-sale WI yield with the bid cover also down from the previous auction (2.48 from 2.65). It sets the stage for a difficult $22bn 30-yr bond sale tonight as well. Minutes of the September FOMC meeting confirmed division between Fed members. A few would have supported an unchanged decision before eventually backing the consensus 25 bps rate cut. A majority also emphasized upside risks to the inflation outlook but the overall view was that it most likely appropriate to ease policy more this year. Money markets almost completely discount back-to-back 25 bps rate cuts in October (95%) and December (80%). The auction caused slight intraday underperformance at the long end of the US yield curve while FOMC minutes were rapidly classified. Today’s eco calendar contains ECB Minutes an avalanche of Fed speakers. They (including Fed chair Powell) feature at the Fed’s community bank conference and are unlikely to touch on monetary policy. Israel and Hamas agreeing to the first phase of the US peace plan gets a lot of media coverage and helps supporting risk sentiment this morning.

News & Views

The National Bank of Poland (NBP) yesterday unexpectedly reduced its policy rate by 25 bps to 4.50%. The NBP statement was not that much different from the previous meeting, but the central bank took notice that annual CPI inflation remained unchanged at 2.9% Y/Y in September. It expects that core inflation net of food and energy prices (reported at 0.2% M/M and 3.2% Y/Y for August) remained close to the level of August, amidst still elevated services price growth. The communiqué also assesses that, despite a slight decline, annual wage growth in Q2 2025 remained elevated, but that data from the enterprise sector indicate a gradual slowdown. The central bank concluded that an improved inflation outlook for the coming period justified adjusting the level of the NBP interest rates. It wasn’t explicitly mentioned in the statement, but the improvement in the short-term inflation outlook might be related to the government prolonging the energy price caps during Q4. The market reaction was muted. The Polish 2-y swap yield eased 4 bps. The zloty hardly reacted (EUR/PLN 4.25) suggesting that markets mainly see the rate cut as a timing issue rather than profoundly changing expectations on the NBP rate expected rate path.

China announced measures to have tighter control on the exports of rare earth and on related technologies. With the measures they want to keep control on products and technologies that have already left the country. In this respect, foreign companies will need the approval from the Chinese Ministry of Commerce to export products that even contain small fractions of the minerals. Chinese authorities also want to ban technologies that are related to extraction and recycling of rare earths unless permitted by the ministry. Some rare earth items that will be used in developing Chips will be revied on a case-by-case basis. The action is said to have the intention to protect national security and also is said to target the misuse of rare earth materials in military and other sensitive sectors.