Weekly Risk Outlook

Weekly Risk Outlook
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Jeremy Corbyn likely new leader of UK Labour Party. Last FOMC member speech before September Fed meeting. Chinese data roils market. Canada makes rate decision. Civilian exchanges to ease tension between Koreas. All this in the Weekly Risk Outlook.

Britain’s Labour Party Concludes Voting on Next Leader

Following Ed Miliband’s resignation as Labour Party leader as a result of Labour’s disastrous showing in the May Parliamentary elections, this Thursday voting by Labour Party members will conclude to select the next Labour Party leader.

Polls and most party observers have reached the consensus that Labour Party backbencher and noted anti-Blairite Jeremy Corbyn is the likeliest candidate to win. The formal announcement will be made on Saturday.

Should Corbyn be selected as party leader, and assuming there will be no immediate rebellion from Labour MPs, his policy preferences could spell a significant shift in the path and ideological spectrum of the UK Labour Party.

Corbyn has taken a number of stances that lie outside the traditional British political spectrum: withdrawing from NATO and abolishing the UK’s nuclear deterrent, reversing the UK government’s austerity measures, and, most notably, significantly expanding immigration to the UK.

His campaign for Labour Party leader of the UK has been compared to two US presidential candidates: Donald Trump (for breaking the mold in the conventional political debate), as well as Bernie Sanders (for breaking the mold of left-wing orthodoxy).

Some suggest that his selection as leader could lead to catastrophe for the Labour Party and make the party fundamentally un-electable in 2020. This argument, often moved by Blairites and former Blairites, has yet to be tested.

However, a pretty good guess can be made by Jeremy Corbyn’s first 100 days if he were selected as leader, though this does require answers to some tough questions.

Will he be able to harness and grow the initial enthusiasm that propelled his platform forward? Will he be able to maintain some semblance of unity among a Labour Party still shell-shocked by crippling losses of support across the UK (particularly in Scotland)?

Finally, and perhaps most importantly, will he be able to find a way to successfully transfer strong hopes into concrete action as the leader of the Labour Party at one of its lowest points since the Thatcher era? Mr. Corbyn’s days as a backbencher are clearly over.

 

FOMC Member Delivers Last Major Speech Before September Fed Meeting

On Tuesday, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota will discuss the outlook for U.S. monetary policy at a gathering in Evanston, Illinois.

Kocherlakota is generally viewed as one of the doves in the Federal Open Market Committee (FOMC), so comments advocating against raising interest rates in September (or later this year) would not be particularly surprising.

However, any comments noting the likelihood of interest rates rising in September (or later in 2015) should be watched very carefully. President Kocherlakota has indicated that market instability and downturns in China and Canada should lead to an extraordinary level of caution on the part of the FOMC, particularly as inflation is not particularly close to the 2% desired target.

Last Friday’s employment numbers saw 175,000 U.S. jobs added and a reduction in unemployment from 5.3% to 5.1%. Unfortunately this was not as strong as interest rate hike proponents would have preferred, nor were the numbers weak enough to completely scare off the Federal Reserve from raising rates in September, creating an uncertain playing field moving forward.

On Friday the University of Michigan Consumer Sentiment Index will likely mirror the sense of unease being felt by market observers and FOMC members; current estimates forecast that consumer sentiment has likely not improved considerably since July, particularly with recent volatility on the New York Stock Exchange.

 

Chinese Export Data Could Roil an Already Unstable Market

On Tuesday, the Chinese government will report export data for the month of August, which will likely indicate a second fall following July’s 8% reduction – a figure that may have contributed to China’s recent devaluation, although that is disputed. Imports are also likely to have fallen.

On Thursday, the Chinese government will report on factory developments and consumer prices, which will indicate an uptick in inflation.

One of the likely developments, as the strong hand of the Chinese state seeks to balance its markets, is increasing pushback from the United States, particularly in currency affairs. Though the U.S. is also concerned with Chinese intervention in its stock market, the ramifications are not viewed to be as significant politically or economically.

The yuan has slowly been allowed to appreciate against world currencies, and until recently a strong yuan had actually been a goal of the Chinese government.

However, the recent downturn could have important policy implications for its chief trading partner, the United States. The Obama Administration has long claimed that moves behind closed doors to prevent China from manipulating its currency were more effective than Congressional action. This argument helped to prevent the enactment of a trade bill amendment that could have ended the Trans-Pacific Partnership negotiations.

As a result, even though China technically did not devalue its currency (it expanded the peg around which the yuan was tethered to the dollar), claims of lost competitiveness by U.S. companies to Chinese businesses or others (particularly Vietnam) will be bolstered significantly by any future action the Chinese government may take in response to falling export figures, and could lead to Congressional action from the U.S.

 

Canada Makes Interest Rate Decision as Country Enters Technical Recession

On Wednesday, the Bank of Canada will determine interest rates for the month of September, and current estimates maintain that the BoC will keep interest rates at 0.5%.

However, a reduction in interest rates is not entirely out of the question for a country with significant oil exports reeling from the current low prices.

Largely as a result of plummeting oil prices that have hit Canada’s oil sand fields hard, Canada recently reported its second quarter of negative growth, making it the only OECD country or G-7 country to post negative grow for the duration of 2015, with the weakest figures since the 2008 crisis began.

The announcement of Canada’s fall into recession drew swift political responses and squabbling as the National Democratic Party and the Liberal Party hammered the current Conservative Government and Prime Minister Stephen Harper, who is trying to hold on to his and his party’s position of power ahead of federal elections on October 19th.

The Conservatives faced a surprising setback in Alberta in early May this year when the Progressive Conservatives (allied with the national Conservatives) lost their 30-year dominance of the traditionally center-right Alberta to the New Democratic Party.

Prime Minister Harper has seen his approval ratings plummet in key regions for the Conservatives. His disapproval rating in British Colombia, for example stand at over 69%, while support is growing for NDP Leader Tom Mulcair (building off the Alberta victory) and he remains less popular than Liberal Leader Justin Trudeau.

Combined with poor and worsening economic data, and the possible implications of a US interest rate hike 4 weeks before the Canadian federal elections, the Harper Government appears to be currently operating on very thin ice.

 

Koreas to Mend Ties with Civilian Exchanges

In an attempt to ease the tensions recently emerged between North and South Korea, the two governments will meet on Monday with the Red Cross to discuss the reunification of families separated by the Korean War.

This move expands on last month’s agreement to improve relations through increased civilian exchanges, and follows another reunion session held in 2014.

While this sign could prove significant in mending ties that have become increasingly strained (following somewhat erratic behavior from North Korean leadership), another potentially more significant event could indicate the commitment from North Korea to reduce tensions.

On Wednesday, the North Korean government will mark the 67th anniversary of its founding, which will serve as a prime opportunity for leader Kim Jong Un to indicate the dedication on the part of his government to follow through on mending ties.

In more directly economic developments, on Friday the Bank of (South) Korea will set interest rates for the month of September.

The central bank has lowered interest rates 4 times over the course of the year, and a further reduction could be indicative of concern that a slowing China will disproportionately affect South Korea’s economic growth, particularly as a result of its de facto currency devaluation.

 

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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