SPD wins largest share of votes in German election

Chris Scicluna
Emily Nicol

SPD wins largest share of votes in yesterday’s German election, but coalition talks may take several months as CDU/CSU slightly beat expectations; far-left and far-right parties fare badly
In Europe, as had been broadly expected, after yesterday’s federal election, the precise nature of Germany’s next government remains unclear and is unlikely to be determined for a number of months. While a repeat of the current grand coalition of CDU/CSU and SPD – albeit with the SPD being the senior partner – is arithmetically possible, it would seem unlikely given the marked change in electoral fortunes of those two establishment parties and the shifts in support for the other parties. So, a three-party coalition government will almost certainly be required, with both SPD and CDU/CSU now having to court the Greens and liberal Free Democrats (FDP) to get the right to lead the next coalition government.

Recent opinion polls proved to be accurate as far as the centre-left SPD was concerned. According to the preliminary official result, it took 25.7%, the largest share of the vote and up more than 5ppts from the previous election in 2017. But the centre-right CDU/CSU outperformed their recent poll ratings, taking 24.1%, still nevertheless a record low and down almost 9ppts from 2017. In contrast, the Greens secured their best ever result. But while their share of 14.8% was almost 6ppts above their result in 2017, it was well down on the share suggested by polls early in the campaign. The FDP won 11.5%, little better than last time around. And the parties at the extremes both saw their support decline, leaving them both effectively consigned to the former East Germany. The far-right Alternative for Germany (AfD) won 10.3% of the vote, down almost 2½ppts from 2017. And the far-left Die Linke won just 4.9%, down more than 4ppts and only securing representation in the next Bundestag by virtue of securing three direct mandates. Indeed, it performed so badly as to render a “red-red-green” coalition of SPD, Die Linke and Greens unviable.

While both of the two establishment parties have said that they want to form the next government, the SPD would appear to hold the upper hand – as well as having the largest share of the vote, it also has by some margin the most popular candidate for Chancellor in the shape of the centrist Olaf Scholz compared to the hapless Armin Laschet of the CDU/CSU. Nevertheless, not least given the unviability of the Red-Red-Green combination, the Greens and FDP now have a strong hand in the imminent coalition negotiations, able to play the two main parties against each other. Given the startling decline in the vote for the CDU/CSU, however, it would seem extraordinary if it managed to scrape back into office this time around via a “Jamaica” alliance. So, on balance, we still see a Traffic-Light coalition of SPD, Greens and FDP as most likely to emerge as the next government, albeit not for a number of months. And while that might appear to represent a significant shift after 16 years of Merkel, given the influence of the FDP we should expect any reforms to emerge from the next government to be incremental rather than radical.

Equities still unperturbed by the lift in bond yields
Despite opening slightly lower, the S&P500 closed with a modest 0.15% gain on Friday, thus achieving a small advance for the week despite a poor start back on Monday. Encouragingly, this advance occurred against the backdrop of a decent rise in bond yields, with the 10Y UST lifting a further 2bps to a near three-month high of 1.45% on Friday, so closing the week 9bps higher. For now at least, equity investors appear content that the uptrend in yields over the past couple of months remains of similar slope to that seen in Q4 last year and that last week’s steeper increase does not herald a repeat of the strong sell-off that took place in February and March this year. Friday’s lift in bond yields further boosted the greenback, while crude oil and a broader array of commodity prices also moved higher.

The positive tone has continued today with US equity futures trading about four tenths higher. However, for the most part, it has been a relatively quiet day in the Asia-Pacific region, where most of the key scheduled data and risk-driving events will not occur until later in the week. In Japan, the TOPIX is marginally weaker, with investors now awaiting Wednesday’s selection of the next LDP leader (who given the LDP’s majority in the Diet, will also be the next Prime Minister). While an updated Nikkei/Tokyo TV poll suggests Taro Kono has the support of 46% of the public – far ahead of nearest rival Fumio Kishida on 17% – the election is likely to go down to the wire. Indeed, as noted below, Kishida is still very much in the race, especially if the vote goes to a run-off second round in which votes of ordinary party members are considerably down-weighted compared to those of LDP MPs.

Looking elsewhere, stocks are firmer in Mainland China, with the PBoC’s provision of additional short-term liquidity continuing to calm investors’ nerves frayed by worries about contagion risks associated with China Evergrande’s struggle to remain viable. Stocks are also marginally higher in South Korea and Taiwan, but have made solid gains in Singapore. In Australia, the ASX200 has gained around ½%, with energy stocks benefiting from the rise in crude oil prices. And with the seven-day average of new virus cases falling below 1,000 for the first time in almost a month, the New South Wales Premier forecast a further rolling back of restrictions from the end of October when 80% of the adult population is forecast to have been vaccinated against the virus.

Japan’s services PPI inflation remains subdued in August
A quiet start to the week for data in Japan brought only the release of the BoJ’s services PPI for August, which continued to contrast with the steep increase in the goods PPI (the latter brought about by rebounding commodity prices and yen weakness). In headline terms, the overall index declined 0.1%M/M. This lowered the annual inflation rate by 0.1ppt to a five-month low of just 1.0%Y/Y, in contrast to the modest uptick in inflation that the consensus forecast had anticipated. Weighing on the index this month was a decline in prices for air passenger transportation and lower prices for advertising services (the latter nonetheless remained up 9.4%Y/Y from previously depressed levels, thus contributing about 40% of the overall annual rise in the PPI). A partial offset came from a further increase in freight transportation charges (ocean freight prices are now up 28.9%Y/Y) and higher prices for hotel stays (now up 8.9%Y/Y).

Wednesday’s election of a new LDP leader is the near-term focus in Japan; later in the week will bring the usual monthly dump of key activity data, as well as the BoJ’s Tankan survey
Inevitably, the key near-term focus in Japan this week will be on the LDP presidential election, which takes place on Wednesday. While our colleagues in Tokyo doubt that the outcome will have significant medium-term implications for Japan’s monetary and fiscal policy or broader economic outlook, the outcome will doubtless have sectoral implications of interest to participants in the equity market. Initially, the party’s elected representatives will add their vote to that obtained from regular party members in order to try to find a new leader. A candidate needs to secure an outright majority of votes in order to win the election at this stage. Of the four candidates, the race appears most likely to come down to either reform minister Taro Kono or former policy chief Fumio Kishida. A recent poll by Nikkei and TV Tokyo indicated that the relatively young and liberal Kono might win almost half of the votes from regular party members, which carry equal weighting with the vote of the party’s elected representatives during the first round. However, this appears unlikely to be sufficient to get Kono across the line, especially given that the older Kishida is viewed by many commentators as likely to be favoured by the conservative party establishment. If Kono does not win in the first round, the vote will go to a second round run-off between the top two candidates. In contrast to the first round, the votes of elected representatives carry much more weight than those of ordinary party members in the second round – indeed almost 90% weight – which could hand victory to Kishida. Whoever wins, given the LDP’s majority, they will subsequently be confirmed in the Diet as the new Prime Minister and will lead the LDP into the next General Election in late November.

On the data front, aside from tomorrow’s release of the BoJ’s underlying inflation measures for August – which should confirm that the trend in underlying inflation is fractionally positive – the remainder of this week’s Japanese data flow falls across the final two days. On Thursday, the market anticipates another modest decline in IP for the month of August, with output likely to have been constrained by the impact of the virus and supply bottlenecks, especially in the auto sector. The arrival of the Delta variant of the virus in Japan is likely to have driven the first decline in retail sales since March, while housing starts and construction orders figures for August will also be released.

A very busy Friday features the release of BoJ’s Tankan Survey for Q3. While new virus numbers have dropped sharply since August, Bloomberg’s survey indicates that analysts expect the Tankan to report that business conditions facing large manufacturers have remained about as favourable as they were three months ago, and that they will remain similarly favourable over the next three months. Conditions are forecast to have remained no better than neutral for large non-manufacturers, but some expectation of improvement over coming months seems likely to be reported as higher vaccination levels permit an increase in activity in the worst affected parts of the service sector. Amongst the large number of things tracked by the Tankan, as always, firms’ forecast for their capex and their views on the inflation outlook will also attract interest. Aside from the Tankan, Friday will also bring the release of the household employment survey for August, the final manufacturing PMI reading for September, and readings on both vehicle sales and consumer confidence for September.

Interest in China to centre on updated PMI readings this week
As far as economic data are concerned, most interest this week will centre on Thursday’s release of both the official manufacturing and non-manufacturing PMIs for September and the Caixin manufacturing PMI for September. Supply bottlenecks contributed to a further easing of the official manufacturing PMI to an 18-month low of 50.1 in August, while the official non-manufacturing PMI slumped 5.8pts to a contractionary 47.5 with activity constrained by restrictions imposed to curb a local virus outbreak. Bloomberg’s survey indicates the analysts expect some improvement to have occurred in September, especially in the non-manufacturing PMI given an easing of restrictions, although neither index is forecast to regain its July level. Ahead of the PMIs, tomorrow will bring news on corporate profits for August.

Euro area flash CPI the highlight on a busy week for top-tier releases; central bankers will meet at the ECB’s annual Sintra monetary policy forum
In a busy week for euro area economic updates, arguably the most noteworthy release will come on Friday with the flash inflation estimate. Having jumped to 3.0%Y/Y in August, we expect headline consumer price inflation to have risen further in September to 3.4%Y/Y, a touch above the bbg consensus and would be the strongest rate for thirteen years. While energy inflation will continue to account for a large share – with the contribution from gas prices likely to have accelerated – non-energy industrial goods and services inflation are also likely to have increased further, principally reflecting the pandemic-associated low base a year ago. As such, we also expect euro area core inflation to have risen to just below 2%Y/Y for the first time since March 2008. Preliminary inflation estimates from the largest member states are also due on Wednesday (Spain) and Thursday (Germany, France and Italy).

Against this backdrop, the Commission’s sentiment survey (due Wednesday) will likely show that price expectations among consumers, retailers and industrial firms remain elevated as the recent surge in wholesale gas prices and persistent supply shortages push costs higher. Supply constraints are likely to have weighed further on the headline business sentiment indices too, with the Economic Sentiment Indicator likely to have fallen for the second successive month (albeit from the series high recorded in July). Meanwhile, euro area unemployment figures (due Thursday) are expected to report a further decline in August to the lowest rate since May 2020 (from 7.6% in July) and in line with the level at the end of 2019 – admittedly flattered by continued government support schemes. Other economic data this week include euro area bank lending data for September (today), French consumer spending and Spanish retail sales for August (Thursday), and German retail sales for August and September new car registrations numbers from France, Italy and Spain (Friday).

Beyond the data, the ECB’s two-day annual Forum on Central Banking is due to get underway tomorrow, with the concluding policy panel on Wednesday including Powell, Lagarde, Kuroda and Bailey likely to be particularly closely watched.

UK bank lending, auto production and revised GDP data scheduled for release this week
After a quiet start to the week for UK economic releases, Wednesday will bring the BoE’s lending data for August. Coinciding with the tapering of the government’s stamp duty holiday, July brought only the second net mortgage repayment in the past decade, while the number of mortgage approvals – an indicator of future borrowing – similarly fell back to the lowest since July 2020. Wednesday will also bring the BRC shop price index for this month, which will be watched for any signs of upwards price pressures on the High Street. On Thursday, the final release of Q2 GDP is expected to confirm solid growth of 4.8%Q/Q in Q2. But perhaps of most interest with this release will be the Blue Book-consistent revisions, including methodological changes that are expected to raise pre-pandemic economic growth rates. Thursday will also bring SMMT car production figures for August. Survey-wise, the final September manufacturing PMIs – out on Friday – are unsurprisingly expected to confirm the messages from Friday’s preliminary release, which suggested that supply-chain issues continue to hit the sector.

In the US attention turns to fiscal policy this week; a busy dataflow includes key August activity indicators, consumer sentiment and the core PCE deflator
Whereas last week was all about monetary policy, a key focus in the US this week will be on fiscal policy. Of most immediate concern is the impending new fiscal year, with Congress required to pass a bill to continue funding the government from 1 October and thus avert at least a temporary partial government shutdown. Assuming that this is done, attention will turn quickly to the need to pass a bill either further suspending or raising the debt ceiling, which is expected to become binding on the US Treasury in the second half of October. At the same time, Congress will also have before it President Biden’s $550bn infrastructure bill – expected to be voted on this week – as well as the much larger budget reconciliation bill, which according to House Speaker Pelosi will now carry a sticker price of less than $3.5trn.

Turning to the economic data flow, this week’s US economic diary kicks off today with advance durable goods orders for August, with Daiwa America’s Mike Moran expecting the upward trend to have continued. Further news on activity will follow tomorrow, with Mike expecting a modest narrowing of the advance goods trade deficit in August although clogging ports and shipping delays could well weigh on both exports and imports. Tomorrow will also bring advance inventory data for August, home price measures for July and the Conference Board’s consumer survey for September. Regarding the latter, in common with the preliminary results of the University of Michigan’s survey, Mike expects sentiment to have been little changed following a steep decline in August. The following two days are relatively quiet, with Wednesday’s pending home sales report for August and Thursday’s Chicago PMI and final GDP report for Q2 being the main releases of note (Mike expects the latter to report a modest 0.2ppt upward revision to GDP growth to 6.8%AR).

On Friday, a busy end to the week will bring news on personal income, spending and the PCE deflator for August and the ISM’s manufacturing survey for September. As far as the former is concerned, Mike expects modest growth in income (0.2%M/M) amidst improvement in the labour market, while strong growth in retail sales will counter virus-driven weakness in some services to drive moderate growth in spending (0.4%M/M). Given the soft CPI reading, Mike looks for only a slight 0.1%M/M lift in the core PCE deflator – the least since February – which should lower annual inflation by about 0.2ppt from last month’s three-decade high of 3.6%Y/Y. Meanwhile, Mike anticipates that robust conditions in the factory sector will leave the ISM’s manufacturing index close to last month’s reading of 59.9. Also released on Friday are construction spending figures for August, September auto sales and the final results of the University of Michigan’s consumer sentiment survey for September.

Finally, with the FOMC meeting out of the way, Fed speakers are out in force this week with a large number of scheduled appearances by regional Presidents and Governors. In addition, Jay Powell will testify alongside Janet Yellen before the Senate Banking Committee tomorrow, and he will take part in an ECB virtual panel discussion (alongside his counterparts from the ECB, BoE and BoJ) on Wednesday.

Lockdowns to weigh on this week’s Australian activity indicators
This week’s Australian data flow will likely continue to have a negative bias due to the ongoing lockdown in New South Wales, and the lockdowns that began in August in Victoria and ACT. So tomorrow’s retail sales report for August is likely to reveal a third consecutive decline in spending, while Thursday’s building approvals report is likely to show a fifth consecutive decline from the historically elevated levels reached in March. On Thursday, lower levels of activity will likely lead to a slowdown in reported credit growth in August and halt the near vertical trend of the ABS’s quarterly job vacancies series. On Friday, the week will conclude with the final reading on the manufacturing PMI for September and the Corelogic house price index for September.

Sentiment and activity data ahead in New Zealand this week
The coming week features only a relatively small number of economic reports, but these will nonetheless be of some interest with the RBNZ’s next review of policy settings now just over a week away, and the market fully priced for a policy tightening. Tomorrow, Statistics New Zealand’s tax-based payrolls indicator for August will provide some indication of the impact of the lockdown that took place during the second half of the month. On Thursday, the ANZ will release the completed Business Outlook Survey for September – the preliminary report held up surprisingly well – followed a day later by results of its consumer survey for September. The only other releases this week pertain to the housing market, with dwelling approvals data for August due on Thursday and Corelogic house price data for September due on Friday.

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