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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
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Good morning. Unhedged hadn’t noticed that the Senate’s confirmation of Stephen Miran to the Federal Reserve board, back on Monday, was a close-run thing. The appointment is likely temporary; but even so, a 48-47 vote does not leave much room for comfort. Five senators sat out the vote, including fiscal conservative Mike Lee of Utah and progressive Bernie Sanders of Vermont. One Republican, Lisa Murkowski of Alaska, voted against. Central bank independence, and what Miran’s nomination signals about it, is not a clean-cut party line issue. Email us: unhedged@ft.com.
The scariest parts of the job market
In our “What the Fed Should Do” piece yesterday, we quoted the economist Adam Posen, who agrees with Unhedged’s line that weakening job creation does not reflect a collapse in underlying demand. Labour supply — demographics and immigration — explains a lot of the decline in new jobs. That labour market demand remains firm is reflected, for example, in a historically high prime-age participation rate.
But Posen also noted two trends in the jobs market that do worry him: rising unemployment rates among young people and African-Americans.
While the youth unemployment numbers are very seasonal, you can see that the recent summer highs among 20- 24-year-olds, with or without university degrees, are higher than those of the past several years. Posen’s guess is that this is a structural issue rather than a function of a weaker economy. Perhaps AI is taking entry level jobs, or there is a mismatch between young peoples’ qualifications and employers’ needs, or changes to the student loan system have made a difference. But sectors that classically employ the young, such as restaurants and retailers, are not suddenly shedding jobs. “I don’t think any of us knows yet” what the cause is, Posen says.
African-American unemployment, by contrast, has historically been a leading indicator in the jobs market. “It’s not a perfect indicator and not an absolute role, but statistically [it has] power because, for economic reasons and for nasty reasons, when firms cut back it tends to be African-American employees who are the first ones out.”
Unhedged will be keeping a close eye on both trends.
France (and the US)
French markets have had an eventful couple of weeks. The prime minister, François Bayrou, lost a vote of confidence last week, after his proposed budget, which would have made a dent in France’s rising deficits, was met with outrage. He’s the second premier of President Emmanuel Macron’s shaky coalition to be ousted after trying to clean up the country’s finances in the past year.
Macron replaced Bayrou with Sébastien Lecornu, a loyalist with a better reputation for compromise. But markets have got the picture. France is in political deadlock and unable to reduce its soaring deficits. Yields on French 10-year bonds rose over the summer, and jumped at the start of this month. They fell when Bayrou was ousted, but they have been rising since:
“Core” France’s bond yields are now in line with or higher than “peripheral” European issuers such as Italy, Greece and Spain, which many observers see as a fundamental shift:
But this is a two-sided story. France is facing new challenges, but the finances of Italy, Greece, Spain and Portugal have improved. Their politics have stabilised and their growth outlook is better, too. France’s fiscal outlook has not become worse suddenly; it has been bad for some time. Its debt-to-GDP ratio has been rising steadily to meet “periphery” countries’ for more than a decade:
What has changed recently is the erosion of France’s “exorbitant privilege”, says Davide Oneglia of TS Lombard:
France enjoyed an exorbitant privilege in the EU, as a very important member state, and as half of the Franco-German duo, which is credited with moving European growth and policy forward. Because of this, France got away with a lot of ‘fiscal murder’ over the years . . . Despite the continuous deterioration in its fiscal figures and its ever widening deficit, no one enforced any fiscal restraint measure on to France like they did with peripheral countries.
The key causes, Oneglia says, have been last year’s snap election and the country’s inability to contemplate fiscal reform ever since. As Thierry Wizman at Macquarie Group put it to Unhedged, it is not France’s debt levels but its “governability” — the ability to reach sensible compromises and decisions — that has come into question.
Talk of “exorbitant privilege” — a term coined by a French minister to describe the benefits of US dollar dominance — gets Unhedged thinking about the US’s own fiscal/political tangle. The two countries are in very different positions. The French debt picture is worse, its governing coalition more fragile, and the European Central Bank appears to be at the end of its cutting cycle. The US has political stability (if that’s what you want to call it) until the midterms in November 2026, while its economy is weakening and the Fed is poised to cut rates further.
But there are similarities. US debt and deficits are getting worse, and neither political party shows any interest in fiscal discipline. The political divide is rancorous, and the Republican majorities in Congress are small. Yet the US’s “exorbitant privilege” in bond markets is intact. Despite some steepening of the yield curve, US Treasury yields weathered the Lisa Cook mess fairly well. Long-term Treasury yields reversed course and fell last week. Recent Treasury auctions have been fine. And the stock market (unlike France’s) marches ahead.
Will this last? The US has a unique status in global markets as the biggest, most open and most dynamic economy. But France shows that privileges can be lost when governability comes into doubt. Legal battles over the power of the presidency, deepening partisan division and the shadow of violence make it conceivable that the US might not have such a special status forever. Politics matters to markets, eventually.
(Reiter)
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