Fast-Forwarding

The historical parties of government still retain their majority in the European parliament, despite the gains from the far right, which given their long tradition of cooperation should prevent any radical policy shift in Brussels. Yet of course the decision by the French President to call a snap national election is a source of uncertainty. We see this as hastening a showdown between mainstream parties and Rassemblement National which was in any case going to frame the next presidential elections in 2027.

The European policy agenda has been to a large extent suspended during the campaign. We focus this week on the European Commission’s anti-subsidy investigation on imports of electric-powered vehicles from China. While this seems to align the EU on the US combative approach, we think there are the seeds here of a “median way” towards Beijing, which is fed by concerns over the costs of a trade war – we take the occasion to highlight the estimates by the Peterson Institute of the cost to the US of the tariff hikes advocated by Donald Trump – as well as quite simply by the difficulties within the EU to form a united front on this issue. We note that even in the populist camp, contradictions abound when it comes to protectionism in Europe.

We review the ECB’s press conference last week. As we expected, Christine Lagarde was very cautious on the next steps after cutting by 25 bps. The market is no longer pricing three full rate cuts this year. It is still our baseline. Yet, the ECB’s data dependent mode can be a source of volatility ahead, especially since the Fed is also dealing with a particularly confusing data flow, exemplified again by a contradictory payroll report. The market will focus on the FOMC’s new “dot plot” this week. We expect a shift in the “median forecast” to two cuts for this year, down from three in March. There is a risk it could fall to only one, but we think this would remove far too much optionality, as it would send the message the Fed could not cut before the elections.