In August, France’s services PMI slightly improved to 49.8 from 48.5 in the prior month but remained just below the growth threshold of 50.0. The composite PMI held at 49.8, indicating ongoing stabilisation, with both the services and manufacturing sectors showing slower rates of decline.
French services sector conditions stayed subdued, with ongoing declines in business activity and order volumes. International clientele numbers dropped, but there was a rise in backlogs due to staff shortages and customer delays. August saw the first increase in workforce numbers since November last year, following eight months of cuts.
Price Dynamics And Business Expectations
Price dynamics showed only slight increases in input costs and output prices, pointing to a stable yet stagnant demand environment. Business expectations stayed below the long-term average, possibly affected by impending political uncertainties. With Prime Minister Bayrou planning a confidence vote for an austerity budget, further political instability could influence the fragile economic recovery. Despite these challenges, the data indicates some aspects of stabilisation in the French economy, though caution remains essential given the broader climate of uncertainty.
The latest French economic data shows things are getting less bad, but we are not seeing real growth yet. With the services sector number at 49.8, just under the 50.0 growth mark, the extreme pessimism from earlier in the year may be fading. For us, this suggests that aggressively shorting French markets might be a less profitable strategy now than it was a few months ago.
Looking across Europe, this stabilization in France is notable, especially as other major economies like Germany have shown more persistent weakness throughout 2025. We could consider strategies that favor French assets over German ones, such as going long CAC 40 futures while simultaneously shorting the German DAX. This kind of pair trade would profit if France continues to outperform on a relative basis.
However, the biggest factor right now is the upcoming vote of confidence in the government scheduled for September 8th. This event introduces massive uncertainty, and markets dislike uncertainty more than anything. We should expect volatility to rise, making it a good time to consider buying options to protect our positions or to speculate on a large market move.
Potential Market Reactions
We all remember the market turmoil during the snap election in the summer of 2024, when the gap between French and German bond yields widened dramatically. A similar situation could unfold if the government loses the vote, which would make short positions in French government bond (OAT) futures an attractive hedge. This would essentially be a bet that French borrowing costs will rise due to political instability.
This political risk is also a clear negative for the Euro currency. While the economic data is neutral, the chance of a government crisis in the Eurozone’s second-largest economy is a heavy weight. We should be wary of holding large long positions in the Euro against the US Dollar or Swiss Franc heading into next week’s vote.
The European Central Bank is likely to view this data as a reason to do nothing. With inflation pressures stable and economic activity fragile, they will probably keep interest rates on hold, just as they have for the past several months since their last cut in late 2024. This backdrop of steady ECB policy provides some support for markets, but it won’t be enough to overcome a political crisis.
Given the combination of slightly better data and a huge political risk, strategies that benefit from a sharp price swing are worth looking at. Buying a CAC 40 index straddle using options that expire after the vote would allow us to profit from a big move in either direction. This way, we don’t have to guess the outcome of the political maneuvering, just that it will cause a significant market reaction.
