07/01/2024

Bill Clinton advisor James Carville famously coined a phrase during the successful 1992 presidential campaign: "It's the economy, stupid." Carville was referring to the fact that the performance of the economy influences the mood of the voter, for better or worse.

However, a generation later, this saying no longer seems true. If economic variables such as growth and employment mattered most to voters, the current US president would have a comfortable lead in the polls. Similarly, all-time-low unemployment in Europe should keep European voters from straying too far away from the political center.

The predominance of the economy as a decisive factor in elections seems to have given way to the opposite. Now, with the growing sense among many voters that politicians are ignoring their real problems, it's the elections that affect the economy, not the other way around.

After the first round of the French elections, the results reflected the polls and Le Pen's National Rally party was the clear winner. However, the markets reacted favorably to the results, since they make an absolute majority less likely for parties either on the right or left. At this time, the most likely scenario is for a parliament with no absolute majority, a weak government and perhaps even without the option to create a government.

On the other side of the English Channel, the United Kingdom's general election will take place on Thursday. Unlike France, the result seems much more certain. Polls and seat projections suggest that Labour will gain a comfortable majority and be able to form a government. Labour's policy agenda will focus on fiscal prudence and greater alignment with the European Union.

In the United States, the crucial first televised presidential debate between Biden and Trump rekindled concerns about the president's age and his ability to hold office. Biden's poor performance in the debate intensified doubts as to whether he will end up being the Democratic nominee in the November 5 election. Some leaders of the blue party have already asked Biden to withdraw from the race, so the markets will be very mindful of any developments in coming weeks.

Back in the Old Continent, the effects of political uncertainty are already being felt in the confidence polls. Following the significant drop in the eurozone's preliminary PMI, the European Commission's economic confidence indicator also fell slightly last week. Similarly, Germany's important IFO business climate survey followed the same path, dragged down by the manufacturing sector and the expectations component.

Elsewhere, the macroeconomic indicators published in the United States were consistent with an economy that is losing steam, although without showing signs of an alarming deceleration. Personal consumption in the first quarter was revised downwards, while business investment deteriorated in May and the total number of jobless claims reached levels not seen since 2021. Personal spending was also below expectations, feeding the expectation of increased consumer caution.

We end with the inflation readings published on Friday on both sides of the Atlantic. As expected, the private consumer deflator for May in the United States showed modest growth. The underlying indicator had a monthly gain of just 0.08%, after the 0.26% of April. With this information, the Federal Reserve is likely confident now that inflation is heading towards its 2% target, which opens the door to the first rate reduction in September.

In Europe, preliminary inflation data for June published for France, Spain and Italy was in line with consensus expectations. Based on these publications and the forecasts for German inflation, the CPI for the eurozone as a whole is likely to resume its downward trend in June.