FOMC September rate decision (finally) arrives. Brazil’s Finance Minister allays fears. Bank of Japan issues rates as QE program struggles. Canadians debate as the country enters recession. Greece heads to polls. All in the Weekly Risk Outlook.
All Eyes on the FOMC for September Rate Decision
On Wednesday, the U.S. Federal Open Market Committee will meet for its two-day September interest rate discussion.
A Bloomberg survey of economists showed a significant divide over whether the Federal Reserve would raise interest rates for the first time since 2006. U.S. markets appear more certain, with September 10th trading in Federal Funds Futures suggesting a market-assumed 28% probability that the Fed would raise rates this week.
The two major indicators the Federal Reserve uses in making its decision-unemployment and inflation-are sending mixed signals. While the U.S. unemployment level has fallen to its lowest level since April 2008, inflation remains nearly stagnant as a result of falling oil prices.
While Federal Reserve Chair Janet Yellen has indicated repeatedly that her concerns when determining U.S. interest rates rely on U.S. economic metrics, the Federal Reserve should yet pay close attention to global developments.
Many developing countries’ currencies, particularly in Turkey, Malaysia, Brazil and South Africa, have seen their U.S. dollar-denominated debt burdens rise significantly with the strengthening dollar, with increased forecasts that South Africa or Brazil could default on some of their debts, particularly if the dollar continues to strengthen.
A rise in interest rates would not only strengthen the value of the dollar against foreign currencies (bad for U.S. dollar debts), but it would also draw investment away from many emerging economies as investing in U.S. bonds creates safer yields and growth rates continue to stumble across much of the world.
Most trends point against raising rates this week, which seems less likely at this point. Still, that may not stop the FOMC from surprising markets.
Finance Minister Seeks to Allay Fears as Brazil is Rated Junk by S&P
On Monday, Brazilian Finance Minister Joaquim Levy will speak on the first day of the 12th Economics Forum in São Paulo.
At the top of what is likely to be an expansive discussion, Minister Levy is certain to touch on the Standard & Poor’s downgrade last week of Brazil’s credit rating to junk at BB+ with a negative outlook.
Keeping Brazil above water in its credit rating had been a major goal of the Rousseff administration’s second term. Her appointment of Joaquim Levy was designed, in part, to staunch fears from market observers that her administration would not take the necessary macroeconomic steps to protect Brazil’s international investment standing.
Another downgrade by Fitch or Moody’s could show a demonstrable deterioration in the international investment standing for Brazil, just as President Rousseff (and Brazil’s entire political class) enters a period of significant uncertainty.
The economy has firmly entered into recession and inflation is nearing 10%. The real has lost 33% of its value against the dollar in the past 9 months and is coming close to reaching four to one. Should the Fed raise rates this week, Brazil will be in even more trouble.
Bank of Japan to Issue Rate Decision as QE Program Struggles
On Tuesday, the Bank of Japan will conclude its two-day monetary policy discussion and announce its interest rate decision.
It is highly unlikely that the BoJ will choose to raise interest rates from the current 0-0,1% on Tuesday (in fact, interest rates in Japan have been below 1% since the mid-1990s).
Yet, the meeting will likely prompt further questions regarding the continuing viability of the BoJ and Prime Minister Abe-supported quantitative easing program initiated by the bank in 2008 and expanded through 2014-2015.
The program has come under increasing criticism for not effectively picking up inflation or doing much to boost the economy (the United States had three major tranches of QE. Japan has had nineteen), and a few voices are calling for its reduction.
Some argue that the Bank of Japan should be pursuing an entirely different approach to monetary policy (including pushing the interest rate into negative territory), while others suggest that deeper cultural and societal pressures will prevent the program from ever succeeding.
Canadian Political Leaders Debate as Country Officially Enters Recession
On Thursday, Prime Minister and Conservative Party leader Stephen Harper will debate with the leaders of the New Democratic Party, Thomas Mulcair, and the Liberal Party, Justin Trudeau.
The Calgary debate will likely involve very tough questions for Harper on issues ranging from the number of refugees accepted from Syria (as well as any process of acceptance) to Canada’s recent dip into recession.
Polls have consistently placed the NDP ahead of the Liberals and Harper’s Conservatives at around 32%. Support for the Liberals and Conservatives has bounced around, though the Conservatives recently fell into third place at 28%.
Support for the three contenders for the prime minister position is also very close, with a poll from Nanos indicating that 29% support Trudeau (who is also the child of a former Canadian Prime Minister), 29% support Mulcair, and 28% support keeping Prime Minister Harper.
While the Liberals and NDP appear to be gaining momentum, a slip-up by either Mulcair or Trudeau, or a particularly strong performance from Harper on Thursday night could change the game for the October 14 elections.
Greece Heads to the Polls for Snap Elections
On Sunday, Greek voters will vote in snap parliamentary elections called for in August. Although Prime Minister Tsipras viewed these elections as an opportunity to serve as a national vote of confidence for his party in light of the recent bailout terms it accepted, polling has been mixed over whether Syriza will maintain its top position come Sunday.
One recent poll placed Syriza only .5% above the center-right New Democracy party it ousted from office in January.
Even if Syriza is able to secure the most votes, it may not be able to forge a winning coalition. Syriza’s coalition partner Independent Greeks may not surpass the 3% threshold necessary to enter parliament.
Should New Democracy emerge victorious under the leadership of the new leader Evangelos Memarakis, the 9-month Syriza government may be viewed as a Greek political aberration as a center-right party regains its position.
If Syriza emerges victorious – either as a coalition or in majority – it will have solidified its position as a major Greek political party with some staying power, though it will have failed to secure for the Greek voters what it had sought to do in negotiations with European creditors.
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.
