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French GDP (3Q P) (7:45GMT; 2:45EST)

                                QoQ        YoY

Actual:                   0.0%       1.8%

Expected:             0.0%       1.9%

Previous:              0.0%       2.6%

How Did the Markets React? 

It became very clear today that trading volumes would likely be light this week ahead of theUS and Japanese holiday on Thursday, as the markets barely budged on French GDP data. While the growth report was only a second reading of previously released figures, the data did not bode well for the Euro-zone economy. Insee confirmed that Q3 GDP in France didn’t expand, while the annualized estimate was revised down to a tepid 1.8% from initial reports of a 2.6% gain. Economic expansion was hurt by a number of factors, including a 0.7% drop in exports, a slowdown of investment to 0.5% from 1.1% in Q2, and weaker household demand of 0.6%. Nevertheless, French Finance Minister Thierry Breton continues to be highly optimistic on his outlook for the fourth quarter, as he was quoted saying yesterday, “there are extremely positive signs and we are quite confident of realizing and seeing a very good fourth quarter…The GDP growth in the fourth quarter would be 0.6, 0.7 or 0.8 percent and that in the full year would be between 2 and 2.5 percent.”  This would be in line with European Central Bank expectations that quarterly GDP reports at the end of 2006 would be volatile. Regardless, fixed income and equity markets were completely non-responsive to the news. However, FX markets did show a meager “correct” response to the tepid report.




French 10-Year Bonds

French government bonds had the most staid session on the day as investors found little value in the French GDP report, deciding instead to move counter to the CAC-40’s gains after jumping to 110.52 at the market open. This move is not completely out of character for the fixed income market, but the overall reaction by French 10-year bonds was muted at best, as prices eventually bounced slightly higher from the 110.37 level. Additionally, traders may have kept French Finance Minister Thierry Breton’s optimistic fourth quarter outlook in mind and opted to stay out of the market all together.  

FX – EUR/USD

The FX markets had the most significant and “correct” reaction to the second release of French Q3 GDP. Insee confirmed that the economy failed to expand in the third quarter on the back of a drop in exports, weaker investment, and slowing household demand. Given the data, euro dropped about 23 points against the dollar over the course of the next few hours. Losses for EUR/USD were capped by more positive outlooks for the fourth quarter by Finance Minister Thierry Breton, who predicts a gain of “0.6, 0.7 or 0.8 percent and that in the full year would be between 2 and 2.5 percent.” Additionally, the ECB has already made note of volatile quarterly GDP reports for the remains of 2006, so large variances in Q3 and Q4 are not wholly unexpected. Furthermore, trading is anticipated to be light this week as markets will be closed in both the US and Japan on Thursday.

Equities – CAC 40 Index

French equity markets opened just after the release of the tepid Q3 GDP report, but traders wholeheartedly ignored the data and instead focused on positive news for two of France’s largest companies. By the Paris mid-day, the CAC 40 Index gained 0.5 percent to 5482.84, increasing for a second day. EADS, the parent of Airbus SAS, gained 1.8 percent to 22.52 euros on rumors that the board of the firm will decide at a meeting on Friday to proceed with a $12 billion project to build the Airbus A350 aircraft. The company also said it had no more canceled orders for its A380 superjumbo since FedEx Corp. cancelled a booking earlier this month. Additionally, Havas, the world's sixth-largest advertiser, added 2.6 percent to 4.28 euros as the company's Euro RSCG C&O unit won a four-year contract to manage the advertising and communications accounts of Electricite de France SA, with an annual budget of about 60 million euros.

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