French Consumer Spending Underwhelms: Navigating Retail Risks and Bond Gains Ahead

French consumer spending grew by a modest 0.6% month-over-month in April 2025, falling short of economists' expectations of 0.8% growth. This underperformance, coupled with a sharp dip in consumer confidence to 88 in May—the lowest since December—signals growing vulnerabilities in the retail sector and creates fertile ground for bond market opportunities. Investors must now reassess exposure to discretionary retail stocks while capitalizing on favorable conditions in fixed-income markets.

Retail Sector: Caution Ahead

The April data reveals a bifurcated recovery. While services prices surged—driven by a 10.2% MoM jump in transport costs and a 3.9% YoY rise in airfares—manufactured goods prices fell 0.2% year-over-year. This divergence highlights weakness in non-essential spending, such as clothing and electronics, sectors already grappling with high inventory levels and shifting consumer priorities.

Key Vulnerabilities:
1. Erosion of Discretionary Demand: The May consumer confidence collapse, driven by fears of rising unemployment (now projected at 7.8% in 2025) and stagnant wage growth, suggests households will prioritize essentials over discretionary purchases.
2. Energy Deflation's Double-Edged Sword: While falling energy prices (down 10.4% YoY for petroleum products) ease inflation, they also reflect weaker industrial demand, which could dampen retail sales for energy-linked sectors like automotive.
3. Inventory Overhang: Retailers in sectors like fashion and home goods face risks from unsold stock, particularly as summer sales season approaches.

Bond Market: A Safe Harbor in Uncertain Times

The underwhelming consumer data reinforces the case for French bonds. Three key dynamics favor fixed-income investors:

1. Lower Inflationary Pressures: Core inflation (excluding energy and food) remains stable at 1.3% YoY, below the ECB's 2% target. With energy prices declining sharply, the ECB is unlikely to hike rates aggressively, supporting bond prices.
2. Safe Haven Demand: A slowdown in economic growth (projected at 0.6% for 2025) will push investors toward low-risk assets. French government bonds (OATs) are poised to benefit, with yields on 10-year OATs already hovering near 2.8%—attractive for yield-seeking investors.
3. Corporate Bond Opportunities: Sectors insulated from consumer spending trends, such as healthcare and utilities, offer favorable credit spreads. Look for issuers with strong balance sheets and stable cash flows.

Investment Strategy: Pivot to Bonds, Avoid Retail Risks

• Reduce Exposure to Discretionary Retail: Sell stocks in sectors like apparel, luxury goods, and electronics. Over-leveraged retailers with thin margins are particularly vulnerable to prolonged weakness.
• Increase Fixed-Income Holdings:
• French Government Bonds (OATs): Target 10-year OATs for steady yields and low volatility.
• Corporate Bonds: Focus on investment-grade issues from sectors like healthcare (e.g., Sanofi, L'Oréal) or infrastructure (e.g., Vinci).
• Monitor ECB Policy: A鸽派 shift in ECB rhetoric or a cut to the policy rate (currently at 3.75%) could further boost bond prices.

Conclusion: Prioritize Stability Over Speculation

The April consumer spending miss and May's confidence collapse underscore a fragile economic backdrop for French retail. Meanwhile, bonds offer both safety and yield in an environment of slowing growth and contained inflation. Investors who pivot away from vulnerable retail stocks and toward fixed-income instruments will position themselves to navigate this uncertain landscape—and capitalize on emerging opportunities.

Stay disciplined. Stay diversified. Stay ahead.