The narrow path

Key Points

• Despite one of the best economic performances through the pandemic and swift action against the fallout from the Ukraine war, many French voters still opted for radical solutions. Left-wing voters are key to round 2.
• The ECB hawks are not “reading the room” in their criticism of the fiscal support of income.
• Judging by the current dataflow, the US seems capable to take a “fast and hard” monetary tightening but we think we can see the first cracks.

The polls conducted on the day of the first round suggest the French presidential elections remain tight into the second round on 24 April. None of the two candidates can win without some support from voters who chose left-wing candidates last Sunday.  Marine Le Pen has focused so far on purchasing power issues, and she will probably try to maintain that line. Emmanuel Macron will probably have to invest more in these issues in the coming two weeks, if only to offset his pledge to push retirement age to 65 – a red flag for left-wing voters – with a robust defense of the French welfare state. This will contrast with 2017, when Emmanuel Macron emerged as a “supply-side reformer”.

France has had one of the best GDP performances across member states through the pandemic. The unemployment rate there is lower than before Covid struck. Household income has been powerfully supported by fiscal policy and business failures kept to a minimum. Retail energy prices have risen in France by less than any other large Euro area country thanks to swift government action. Yet, a large proportion of French voters opted for radical solutions. This illustrates the depth of the demand for economic protection from governments, and we suspect this goes beyond France. It’s the ECB which has made this protection possible for the last two years. The central bank is however clearly less and less keen to play that role, while social pressure on public finances continues to be intense. We explore here the last speech by Isabel Schnabel, who developed a “purist” hawkish approach to the European policy-mix.

Meanwhile, in the US, the accumulation of hawkish signals from the Fed is relentless. The Fed’s willingness to normalize “fast and hard” continues to be fueled by a strong dataflow, in particular on the labor market. Powell’s narrative – the US economy is currently growing so much faster than potential that it can easily take a significant monetary tightening – is being strengthened. Still, we think we can see the first signs of what could end up being a quite abrupt slowdown towards the end of this year. The gap between sunny business confidence and consumers’ gloom cannot continue for much longer, and the Fed’s communication and action has started to affect the housing market.