France Puts the ECB in a Bind
Not easy these days to be an ECB policymaker.
The euro area flash PMIs showed that while the “eurozone economy starts the fourth quarter with businesses reporting further robust growth… consistent with GDP growing at a 0.3% quarterly cadence,” according to S&P, France was a key outlier.
While growth cooled modestly across the region S&P said “French private sector output moved back into contraction in October, following a first rise in 10 months during September,” with business confidence “the lowest since 2012 if the pandemic is excluded.”
Slowing growth only adds fuel to budget concerns in France, putting further pressure on French bonds. Rather than pulling back this week along with other developed-market yields, French yields instead surged the joint-most since March 2025, according to Bloomberg.
Pushing the spread between French 10-year debt and the German equivalent up 32 basis points so far this week, the most in records going back to 1990, according to data compiled by Bloomberg. “The yield gap now stands around 1.7 percentage points, more than double the level from May.”
This puts the ECB in an increasingly tricky spot, weighing turmoil in the French bond market against inflationary pressures that, according to S&P, are far from extinguished:
“Key to the broader slowdown is the further escalation of inflationary pressures seen during the month. Input costs are rising sharply again, the rate of increase surging in manufacturing on the back of higher energy prices, causing firms to push selling prices higher in order to protect margins.”
So policymakers are in an uncomfortable spot heading into next week’s meeting. A hold is widely expected, but markets are still pricing further hikes to fight inflation, just as France’s economy stalls and its bond market comes under strain.
