2024 is the year of elections. Over 80 countries – more than half of the world’s population – will head to the polls this year. And it kicked off last weekend in France. France held the first round of parliamentary elections yesterday. And as signalled by the opinion polls, the far-right National Rally (RN) are comfortably out in front with over a third of the vote. The leftist bloc is in second place, and current President Emmanuel Macron’s centrist bloc trailing in third place. The second round takes place this Sunday. The final result is still far from certain. But should the RN come out victorious, it will be the first far-right government in France’s post-war period. The election has the potential to reshape France’s economic and fiscal landscape. An absolute majority of the RN will likely see public borrowing swell. The party’s manifesto entails a high-spending economic programme including tax cuts for businesses and households. For financial markets, the risk premium on French debt has become front and centre. Last week, the spread of the 10-year French bond over Germany’s closed over 80bps – the highest since 2012.

Over in the UK, the general election will take place on Thursday. It will be the first time in over 80 years that the UK will hold an election in July. As the opinion polls suggest, the opposition Labour Party will likely come out victorious. The new government will inherit a relatively stable economy where inflation is coming down and interest rates are falling. However, the UK is grappling with poor public finances. Public debt has ballooned to £2.7 trillion - the highest since 1961. A lift in taxes and/or a significant cutback in spending is inevitable for whichever party that wins, regardless of what their manifesto currently entails.

Down under, all eyes were on Aussie’s inflation data last week, which was hotter than expected. In the year to May, prices rose by 4%, up from 3.6%. While the trimmed mean measure also lifted to 4.4% from 4.1%. There were notable increases in housing, up 5.2%, and transport up 4.9%, which remain concerning. However, part of the monthly rise comes from base effects across services inflation, particularly holiday travel and accommodation when prices fell 10% last year. Stripping out the volatile items and holiday travel, the core measure actually fell to 4% from 4.1%. It’s fair to say that last week’s report was sending mixed signals, making it hard to say for certain whether a reacceleration in inflation is underway. Nonetheless, the report was enough to have commentators questioning the direction of Aussie rates.

Here at home, we delved into some confidence surveys. And they detailed weakness in the economy. Businesses and consumers are feeling the impact of a weak economy. It’s not surprising to see further falls across confidence indicators. 2023 was a tough year. And while the outlook for 2024 is better, it’s still soft. Tomorrow’s NZIER Quarterly Survey of Business Opinion will also likely remind us that we’re not out of the woods yet. It’s a white-knuckle ride for many. But, if the economy evolves as we expect, then we see the RBNZ delivering the first rate cut in November. For now, survive ‘til 25 remains the mantra on the ground.

Financial markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, offshore data takes the wheel.

“Last week was shaping up to be a short week and a quiet one in Kiwi rates with a dearth of local data. However, offshore markets more than made up for lack of domestic excitement with Canadian and Aussie CPI both wrongfooting markets. Kiwi rates outperformed Australia with offshore participants seemingly confident in divergence in respective economies. However, the Kiwi front end did eventually buckle with 2-year bouncing up 5bp off the low. The curve steepened with long end more sensitive to global bond yields.

Most relevant for NZ was the Australia monthly CPI print which was well above expectations. The RBA backed themselves into a corner at the last meeting and put the market on notice stating a very limited appetite for upside surprises. Q2 CPI is now all important, with market consensus that anything 1.1% or over will see the RBA increase the cash rate.

ANZ’s business confidence survey would have pleased RBNZ showing pricing intentions continuing to moderate, the QSBO out tomorrow should back this up. Kiwi rates likely to remain range bound with no catalysts until July MPS next week.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, the Kiwi defies textbook teachings.

“Influenced by both month end profit taking across global equity markets and continued easing in domestic business and consumer confidence conditions, the NZ Dollar declined by 0.55% vs the US Dollar across the shortened Matariki holiday week. Stripping out the continued

improving US Core PCE picture, which from a textbook perspective should have seen the Kiwi find a decent bid into the weekend, NZDUSD found itself slipping below interim support levels around the 0.61 level. Interestingly, despite the soft Kiwi performance across the past fortnight or so, Net long speculative positioning in the NZ Dollar has built to levels not seen since 2018 as offshore investors chase the current positive carry vs other major currencies available outside of the US Dollar, whilst pivoting away from the lessor yielding EUR and JPY. As an illustration of this flow, USDJPY traded to a pre-1986 high above 160.00 as Japanese officials continue blow smoke with little fire to monetary settings in Japan. As these multi-year net longs continue to grow, so too does the risk of an unwind should the RBNZ surprise market participants with a dovish tilt. We remain wary of this risk particularly given the soft price action over the past few weeks despite the build-up of positioning. The week ahead sees most focus on offshore risk events including an ECB forum on Tuesday night in which Fed Chair Jerome Powell may potentially provide updated insight to the start of US monetary easing post the PCE update, whilst US Payroll data for June is released on Friday night. Technically, given the break through the 0.6080/0.61 cent region last week, both the 50% (0.6037) and 61.8% (0.5993) retracement levels of the April to June 0.5852 – 0.6222 rally are now squarely in target for the domestically light data week ahead. The broader 0.5920 – 0.6200 narrowing triangle remains the medium term outlook range for now. NZDAUD, driven by the sticky inflation situation which some believe may draw the RBA into further tightening, is once again rolling lower. The 0.9050/0.9060 zone remains the key level to watch in coming weeks to confirm a retest of levels back below 90 cents – and ultimately a move towards the 10-year double bottom at 0.8740/50.” Hamish Wilkinson, Senior Dealer - Financial Markets.