Weekly Risk Outlook

Weekly Risk Outlook
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Brazilian leaders meet following protests. US economic data could cast shadow over probable rate hike in September. Greece faces IMF repayment deadline. Southern African leaders meet for summit. Japan releases economic data. All in the Weekly Risk Outlook.

Brazilian Leaders Meet with President Rousseff Following Sunday Protests

This week, Brazilian President Dilma Rousseff is expected to meet with Vice President Michel Temer and the leaders of both houses of the Congress, House Speaker Eduardo Cunha and Senate Leader Renan Calheiros (all of the coalition partner PMDB party).

They meet after Sunday’s protests that, among other things, called for an end to corruption and the impeachment of President Rousseff. Her current approval ratings sit at 8%. However, a number of important events have yet to happen before Vice President Temer can start measuring the drapes at the Palacio do Planalto.

First, mere opposition to the President is no grounds for impeachment, and before Congress moves to remove President Rousseff, it will require some form of malfeasance to merit removal (and the Petrobras scandal has yet to reveal any smoking gun connection to Rousseff).

Moreover, non-coalition parties, including former presidential candidate Aecio Neves’ PSDB, represent a minority and would require significant defections from the largest party, the coalition partner PMDB. With Vice President Temer working to forestall impeachment, along with Senate President Calheiros, it will take a herculean effort to move the PMDB against its own coalition partner the Workers’ Party and President Rousseff.

Finally, calls for impeachment of President Rousseff are numerous, and have failed in part because the protesters have lacked both a cohesive message (beyond broad opposition to corruption) and a clear idea of the successive steps to take following President Rousseff’s possible removal.

US Economic Data Could Cast Shadow Over Rate Hike in September 

As the September Federal Reserve’s Open Market Committee (FOMC) meeting approaches, a series of economic data will be released this week that could cast a pall over the recent positive economic indicators emanating from the U.S.

On Wednesday, the Department of Labor will release its July consumer price index. Despite some signs that inflation may pick up in the medium and long term, Federal Reserve Vice Chairman Stanley Fischer noted last week that current inflation is “very low” as a result of commodity prices.

Housing data will be released on Tuesday, which will likely forecast an increase in housing starts for the second month in a row.

However, the positive benefits of this jump (such as increased consumption of durables like furniture and appliances) have been questioned recently, leading some to suspect that the slowing consumer spending could make a September rate hike more difficult.

Also weighing on the minds of the Federal Reserve members will doubtless be the recent moves by China to devalue the yuan (making Chinese exports more competitive) as well as the falling price of oil.

The Federal Reserve will also release the minutes from its July 28-29 meeting, which could shed some light on its plans ahead of the September 16-17th meeting. As GRI noted last week, a premature U.S. interest rate hike could lead the United States back into recession.

Greece Faces IMF Repayment Deadline 

On Thursday, the Greek government is due to deliver a $3.6 billion payment to the European Central Bank and the IMF.  

Last Friday, the Hellenic Parliament voted 222-64 (with 14 abstentions) in favor of a provisional agreement that would provide about 85 billion euro in exchange for the sale of state-owned property, benefit and pension cuts, and military reductions.

This does not mean Greece is out of the woods yet.

European partners will have to agree to bailout terms, and significant divisions between the IMF and European Commission could spell trouble.

Either way, the negotiations seem to have calmed some of the concerns creditors had that Greece would default on its debts. Greek borrowing rates fell almost one-quarter to 13.73% with news that the European Commission, IMF, and Greece were close to hammering out a deal.

Despite these more calming developments, and the Greek government’s repayment on Thursday adding further stability, two developments could upend the delicate balance.

First, a significant number of the Syriza lawmakers bolted from Prime Minister Tsipras’ bailout proposal, creating the looming possibility of snap elections, and some Greek commentators note that a confidence vote may be held very soon after the IMF repayment deadline.

Second, despite some surprisingly positive growth figures for Greece in Q2, capital controls imposed by Greek banks have created a heavy toll both on ordinary Greek citizens as well as businesses, particularly export and import markets. The effects of these capital controls could be felt long after Greece’s bailout terms are finalized.

Southern African Leaders Meet for Development Summit

On Monday, the leaders of the 15 member states of the Southern African Development Community (SADC) will meet in Gaborone, Botswana to discuss the 35th Summit of Heads of State and Government of the Southern African Development Community.

The theme “Accelerating Industrialization of SADC Economies, Through Transformation of Natural Endowment and Improved Human Capital” points to two major economic developments in sub-Saharan Africa history: the accelerated expansion of the use of natural resources (oil, commodities, minerals, forestry) to boost growth, and the slower (but growing) use of human capital to forge more sustainable development.

However, these two goals can come at cross purposes due to divergent timelines. In Botswana, increased interest in coal mining (Botswana has the largest coal reserves in Africa) has boosted interest in investment, but at the same time carries risk for Botswanans.

In an announcement preceding the summit, Angola announced that it would join the Free Trade Zone of the SADC in 2017. This will expand the group of FTZ members to 13, with only the Democratic Republic of the Congo and Seychelles being part of the SADC but not its free trade zone.  

Other likely topics of discussion will be the enactment and implementation of the recently reauthorized 10-year extension of the U.S. Africa Growth and Opportunity Act, which will be reviewed by the U.S. Trade Representative’s Office and may see South Africa lose its benefits under the act.

Japan Economic Data Likely Show a Significant Contraction

On Monday, Japan’s Statistics Bureau at the Ministry of Internal Affairs will release its most recent quarterly GDP data, with a consensus of economists projecting a 1.8% contraction.

Thankfully, markets have already been expecting relatively weak numbers from Japan, and have adjusted accordingly. 

Japan’s traditionally weak inflation figures have continued to disappoint market watchers, and the beginnings of internal dissent at the Bank of Japan to the aggressive quantitative easing (spearheaded by BOJ Governor Haruhiko Kuroda) could spell trouble for further attempts to boost inflation with the Central Bank.

Governor Kuroda has also noted (or is tempering hopes of higher figures) that lower gas prices will contribute to the reduced inflation Japan is likely to experience in the coming months.

Although market forces may have already priced in what is expected to be poor numbers from Japan’s Statistics Bureau the reported contraction, in addition to weak inflation data, could have longer term consequences to the Bank of Japan’s monetary policy measures, particularly its increasingly criticized QE policy.

The GRI Weekly Risk Outlook (WRO) provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, the WRO presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.

The Weekly Risk Outlook is written by GRI analyst Brian Daigle.

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