Anticipated Effects of the "Revenge Tax" in the Upcoming Months

In the rapidly changing economic landscape, understanding the key trends and forecasts is essential for investors and businesses alike. Here's a round-up of some of the most significant developments that could shape the financial world in the coming months.

The forecasts for sovereign spreads have been released, with estimates of around 70 bps for OATs and 100 bps for BTPs, indicating potential tightening. This comes as President Macron could call a snap election and dissolve the National Assembly, and negotiations for next year's budget could lead to increased volatility in the OAT market.

The expiration of the pause on "liberation day" tariffs is approaching on July 9th, which could significantly impact the economic landscape. Non-resident investors, meanwhile, have been disengaging from U.S. assets and shifting focus towards European assets, specifically government bonds.

The yield curve has displayed a steepening trend, particularly in the 10-30 year segment, with expectations of a more pronounced steepening in longer maturities. The yield on the 10-year Treasury in the U.S. is currently hovering around 4.4%, while the 10-year Bund yield in Europe is at approximately 2.5%. The forecast for the 10-year U.S. Treasury yield is a trend lower by the end of the summer due to expected rate cuts by the Fed.

The slowdown in the labor market has not reached a level that would prompt the Federal Reserve to confidently resume a rate-cutting cycle. The U.S. labor market shows signs of underlying weakness, with a steady three-month average payroll gain of approximately 135,000, aligning with overall population growth. Recent data on inflation in the U.S. has been relatively benign, but it is too soon to declare victory over inflation.

The 10-year BTP spread (Italy's government bond) is currently at its tightest level since 2021, trading at 90 basis points (bps). German bonds have outperformed, but anticipated increases in German bond supply could make them less attractive over time. The European Central Bank (ECB) is expected to make one final rate cut of 25 basis points in September before the current cycle concludes.

The S&P 500 has experienced one of its most rapid rebounds, rallying over 20% since mid-April. However, our economists suggest a cautious short-term outlook due to potential tariffs and geopolitical tensions that could influence market stability. The unemployment rate in the U.S. has edged up slightly to 4.2%.

Discussions are ongoing in the Senate regarding a proposed tax bill, focusing on Section 899, which proposes retaliatory taxes on entities from jurisdictions that impose what are deemed "unfair taxes" on U.S. companies. The target for the Bund yield is projected to be around 2.6% by year-end.

In conclusion, the economic landscape in July is marked by a complex interplay of factors, from potential tariff impacts to labor market trends and sovereign bond spreads. To navigate these challenges, it's crucial to stay informed and maintain a strategic, cautious approach.

This article is written by Ulvi I. AYDIN, with insights from experts such as Cyril Regnat, Christopher Hodge, Emilie Tetard, and Théophile Legrand at CIB, discussing the global economy and its impact on markets.