France looks increasingly like it is slipping into recession.  It is the poorest performing core country – an increasingly inapt label.  Highlighting this are the latest PMI numbers.  The services PMI, already woefully depressed, slipped lower last month, to 41.9, lower even than Spain’s.  The manufacturing PMI was barely much better, falling to 43.9.

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We have argued that France as a “core” country is a misnomer, and in many of its characteristics it is more periphery-like.  France may have a lower debt to GDP ratio than Italy’s, which sits at 125%.  However, Italy has managed to return its primary budget balance to surplus, while France is struggling to get there.  We contend it is much easier to clear up the flood once the hose has been turned off.

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We are negative French sovereign bonds.  The spread to Germany remains low; and the high correlation of French and German yields shows the market has not yet discounted France’s patent retreat from the European core.