A look at the day ahead in European and global markets from

Vidya Ranganathan

France's new government faces a big test today. Prime

Minister Francois Bayrou is expected to lay out in a speech the

contours of a deal to water down pension reforms in return for

support from the left on passing a budget.

Bayrou's government, which was formed last month after the

collapse of his predecessor's administration, has been trying to

win assurances from some opposition parties - and the Socialists

in particular - that they will not vote against its 2025 budget.

Analysts expect he will win the vote. Bayrou's entourage

declined to reveal details of the speech but told Reuters the

content would take into account his talks with party leaders and

unions.

Markets are nonetheless nervous, fearing Bayrou will undo

parts of the pension reform that involve raising the minimum age

for a full pension, which could save billions of euros for the

strapped government.

The risk premium on French debt, measured by the yield gap

between French and German 10-year yields, is

trading near its highest levels in more than 12 years as

investors worry about political instability and a burgeoning

public deficit.

Markets will also be trading with one eye on U.S. producer

prices and items that influence the Fed's PCE deflator metric

due later. That's ahead of the more important consumer price

index on Wednesday, as expectations rage for inflation to pick

up when President-elect Donald Trump unveils policies on

tariffs, migration and taxes, as soon as at his inauguration

next week.

Investor nerves have been running high since Friday's

unambiguously strong U.S. payrolls report sent up yields and

decreased the market odds of Federal Reserve interest rate cuts.

Markets are pricing just 29 basis points of cuts from the Fed

this year.

Ten-year Treasury yields hit 14-month highs,

driving a spike in the dollar and a wave of selling in

technology stocks, which spread to Asia in early trade. Japan's

Nikkei slid after a holiday break and with U.S. inflation data

on investors' minds.

The U.S. dollar index hit its highest in more than two years

on Monday, before retreating a little on a Bloomberg News report

that the incoming Trump administration was discussing a

gradual, rather than sudden, tariff plan.

Key developments that could influence markets on Tuesday:

Data: U.S. PPI

Speakers: ECB's Robert Holzmann, Bank of England Deputy

Governor Sarah Breeden, Riksbank Deputy Governor Aino Bunge,

Kansas City Fed President Jeffrey Schmid

Earnings: Games Workshop Group PLC

Debt auctions: Germany reopening of 5-year, UK 30-year.