NETHERLANDS: Centrists Lead, Grand Coalition Needed But Tough Talks Ahead
The third election in five years is likely to result in a change in the parties in the governing coalition. The initial NOS exit poll is showing that the hard-right PVV, who won the most seats in 2023 and brought down the coalition resulting in elections, is likely to lose around 12 seats and come second to the centrist D66. Compromise is normal in Dutch politics and it looks like there will need to be a grand coalition of centre-left and centre-right, especially as most parties have ruled out working with the PVV.
- D66 are the big winners of this election likely gaining 18 seats to 27 in the 150 seat parliament. NOS predicts it will be followed by the PVV of Geert Wilders with 25 (-12), then centre-right liberal VVD of former PM Rutte on 23 (-1), centre-left PvdA-GL 20 (-5), centrist Christian democrats 19 (+14), farmers BBB 4 (-4), right-wing parties JA21 9 (+8) and FVD 6 (+3). The minor parties have generally held around the same.
- NOS says the poll has an error of 1-2 seats and so who has won the election remains “too close to call”.
- A coalition of D66/VVD/PvdA-GL/CDA would have 89 seats according to the exit poll but if one of those parties doesn’t join then it will be difficult to reach the required 76. Numerous smaller parties would be needed, most of which are reluctant to be in government.
- It is not unusual in the Netherlands for coalition negotiations to take months.
- The politics of Wilders PVV have been difficult for other parties to accept and thus form coalitions but on the two occasions it has been involved in government, it has brought it down prematurely and been problematic to work with.
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US: VP Vance: Think We're Headed To A Government Shutdown
The Democratic congressional leadership's meeting with the White House has concluded, some headlines that suggest only limited if any progress has been made toward avoiding a federal government shutdown on Oct 1. Limited financial market reaction (equity futures dip slightly) but prediction markets' implied probabilities of a shutdown are beginning to pick up (Polymarket back over 80%). Some selected Bloomberg headlines:
- "*SCHUMER: WE MET WITH TRUMP, WE HAVE LARGE DIFFERENCES"
- "*VANCE: I THINK WE'RE HEADED TO A GOVERNMENT SHUTDOWN"
- "*JOHNSON: IF DEMOCRATS DECIDE TO SHUT DOWN GOV, IMPACT'S ON THEM"
FED: Deputy SOMA Manager Eyes Signals Of Reserve Regime Shift
Deputy SOMA Manager Remache of the NY Fed commented today at an annual meeting with primary dealers that system reserves appear to be "still abundant".
- "Our indicators currently suggest that reserves are still abundant. But we have observed some firming of repo rates recently, in part due to the increase in bill supply after the debt ceiling resolution, and continued pressures are likely over time given ongoing Fed balance sheet reduction. We have also started to see some movement in the distribution of federal funds transactions in response to higher repo rates—which is a healthy sign of market linkages, and exactly what we would expect. Most recently, this has translated to a one-basis-point increase in the EFFR relative to IORB."
- The Standing Repo Facility has been effective so far: "The SRF has been much less extensively used than the ON RRP to date, since reserves have been abundant over recent years. But as reserve levels fall this is shifting somewhat, with the SRF used at the recent June quarter end and at the mid-September tax date. On those occasions it worked consistent with its design, providing funds into the market when market rates rose above the SRF minimum bid rate. By doing so, the SRF can stem incipient rate pressure that, if left unaddressed, could threaten rate control."
- However: "Observing a more substantial shift in the EFFR relative to IORB, and changes in our set of reserve ampleness indicators, would be consistent with transitioning from abundant toward a more ample level of reserves. The Committee has indicated that it will consider stopping balance sheet runoff when we reach that point...When market conditions suggest reserves are ample, we will provide those liabilities by beginning to grow our balance sheet once again. At that point, the Committee would direct the Desk to resume purchases of Treasuries for the SOMA portfolio to maintain an ample level of reserves."
- The NY Fed's latest Reserve Demand Elasticity (RDE) indicator only goes through September 19 but suggests limited pressure through that period (the September update: "The elasticity of the federal funds rate to reserve changes is very small and statistically indistinguishable from zero. The estimate suggests that reserves remain abundant."
