Macron Calls Snap Election Amid Euro Fall - EU Elections Reveal Mixed Results

Key Takeaway

• French President Macron calls a snap election after his party's defeat to Marine Le Pen's National Rally, causing the euro to fall 0.3%.
• European Parliament elections show center-right EPP maintaining dominance, while far-right gains in France and Germany.
• US labor market data remains mixed; non-farm payrolls rise unexpectedly, complicating Federal Reserve rate cut decisions.

Macron Calls Snap Election

French President Emmanuel Macron has called for a snap legislative election following a significant defeat in the European Parliament elections. Macron's centrist party was outperformed by Marine Le Pen's far-right National Rally (RN), which secured about 32% of the vote compared to Macron's Renaissance party's 15%. This move is seen as a high-stakes gamble to prevent Le Pen from gaining further political ground. The election will take place over two rounds starting June 30, marking the first time this century that France’s National Assembly has seen its term cut short.

Yves Bertoncini, an independent consultant in EU affairs, commented on Macron's decision: "It’s not just a gamble, it’s audacious. Usually, players who make a move like this don’t have many cards left." The euro fell as much as 0.3% to $1.0765 in early Asia trading, its weakest in almost a month, while French bond futures slipped, underperforming their German counterparts.

Olivier Blanchard, a former chief economist of the International Monetary Fund, supported Macron's decision, stating, "Either the incoherence of the Rassemblement National program becomes clear during the campaign and it loses the election. Or the RN wins, gets to govern and quickly makes a mess of it. In this case, we get two bad years, compared to five if they won the 2027 elections."

European Election Results

The European Union elections saw the center-right European People’s Party (EPP) maintaining the largest group in the European Parliament. David Roche of Independent Strategy noted, "The EU political center has held. The same pro-European governing coalition [which also includes Social Democrats and liberals] will have the majority in the EU Parliament. Good news for EU assets on balance."

However, the elections revealed significant variances across member states. The populist right suffered setbacks in Poland, Finland, the Netherlands, and Sweden. In contrast, France and Germany saw far-right parties outperforming the incumbent centrist and center-left parties. In Germany, Chancellor Olaf Scholz’s Social Democrats dropped to third place, while the far-right Alternative for Germany (AfD) secured a strong position.

The EU’s three mainstream groups are set to hold a comfortable majority: the EPP with 191 seats, the Socialists & Democrats with 135, and the Liberals with 83. The two far-right groups will have about 128 seats between them.

UK Political Landscape

In the UK, Prime Minister Rishi Sunak faces significant political challenges. The Conservative Party, historically the world’s most successful political party, is under threat from Nigel Farage's newly named Reform Party. Farage, who led the campaign for Brexit, is making a frontal assault on the weakened Conservatives.

The UK’s electoral system, which favors parties with concentrated support, has previously thwarted Farage. However, if Reform’s vote rises as the Conservatives’ fall, there is a possibility of a tipping point. Sunak’s political competence has been questioned, particularly following his decision not to stay in Normandy for the D-Day landings commemoration and his predecessor Liz Truss’s unfunded tax cuts that quickly tanked the gilts market.

Sunak now faces speculation that the Conservatives might attempt to replace him before the next election. A Britain led by someone like Farage would present a very different investment proposition, especially as Brexit has yet to deliver the anticipated economic benefits.

US Employment Data

In the US, the labor market remains unclear, complicating the Federal Reserve's decision-making process. Recent data showed a weakening manufacturing sector, declining job vacancies, and reduced increases in unit labor costs, suggesting that higher interest rates are beginning to impact employment. However, the non-farm payrolls for May revealed an unexpected increase in employment, with the number of people in employment rising more than even the highest estimates.

The rate of increase in average weekly earnings also picked up slightly. The non-farm payroll data is subject to revision, and the contrast with the official unemployment rate, which rose to 4%, highlights the murkiness of the employment situation. The 10-year Treasury yield fluctuated last week, reflecting the data-dependent nature of the market.

Mansoor Mohi-Uddin, chief economist at the Bank of Singapore, commented on the Federal Open Market Committee's (FOMC) upcoming meeting: "If core inflation eased further in May, from its three-year low of 3.6% in April, that would give FOMC more confidence. If that happens, I expect the FOMC will still see rate cuts this year but trim their forecasts from three to two moves, the same as our own view for 2024."

Street Views

• David Roche, Independent Strategy (Cautiously Optimistic on EU assets):

  "The EU political center has held. The same pro-European governing coalition [which also includes Social Democrats and liberals] will have the majority in the EU Parliament. Good news for EU assets on balance."

• Olivier Blanchard, former chief economist of the International Monetary Fund (Neutral on French elections):

  "Either the incoherence of the Rassemblement National program becomes clear during the campaign and it loses the election. Or the RN wins, gets to govern and quickly makes a mess of it. In this case, we get two bad years, compared to five if they won the 2027 elections."

• Mansoor Mohi-Uddin, Bank of Singapore (Cautiously Optimistic on US interest rates):

  "[I expect that] FOMC will still see rate cuts this year but trim their forecasts from three to two moves, the same as our own view for 2024."