SWAPS: German Swap Spread Long End Outperformance Extends

• UK FINAL APR SERVICES PMI 49.0 (FLASH 48.9, MARCH 52.5)

In a shock result, Friedrich Merz, leader of the centre-right Christian Democratic Union (CDU), has fallen short of the required overall majority in the first round of voting in the Bundestag. He achieved 310 votes in favour, with 307 against, three abstentions and one invalid vote. The CDU, its Bavarian sister party the Christian Social Union, and the centre-left Social Democrats hold 328 seats between them, well above the 316 majority threshold. The first-round result would therefore indicate a sizeable number of SPD lawmakers refusing to back the conservative Merz, despite the approval of their party's leadership for the gov't programme. 

• Under Germany's Basic Law, a second round of voting can take place, once again requiring an absolute majority of 316 in favour. If this threshold cannot be reached then a third round can take place in which only a relative majority of those voting is required.
• The second round must take place within 14 days. It remains to be seen whether Merz seeks an immediate re-vote or takes his time. In this two-week period an unlimited number of candidates are able to seek election as chancellor, but all would require an absolute majority of 316 votes.
• This is the first time in Germany's post-war history that a chancellor has failed to be elected in the first round. In 1949, Konrad Adenauer achieved the exact 202 votes required for an absolute majority, the smallest margin of election until today. The result will be a bitter blow to Merz, and will cast a pall over the start of his chancellery even if he wins in subsequent ballots. 

Goldman Sachs write “our economists expect a 25bp cut at this week’s MPC meeting, with communication likely to turn more dovish, opening the door to consecutive cuts through to November”

• They believe that “the latest inflation and GDP growth projections are likely to support policy easing, given trade risks to growth and the disinflationary effects of low energy prices and GBP appreciation”.
• Goldman suggest that “this combination should be supportive for gilts across the curve, especially in combination with the DMO’s ongoing skew towards shorter maturities. In our view, this skews the risk towards a lower term premium, which has risen in absolute and relative terms over the latest 12 months. This is also consistent with the conclusions of our historical analysis of real yields through policy rate cycles, which suggests the gilt curve - especially the real component of yields - is currently too steep when benchmarked against macro fundamentals”.