Markets expect Fed to hold rates. Japan weighs stimulus options, EU considers the same. Deutsche Bank to release review. Conference explores African energy trends. Colombia may raise interest rates. All in the Weekly Risk Outlook.
Markets Expect Fed to Hold Rates Steady at October Meeting
On Tuesday, the Federal Open Market Committee will begin its two-day meeting to discuss whether to raise the U.S. benchmark interest rate. Most market analysts think the chance of a rise has fallen significantly since the Fed’s decision in September not to raise rates.
Citing an uncertain global economy (and even a call from the IMF to hold off on raising US rates), the Fed chose in September to maintain interest rates at essentially zero. Talk of an October interest rate hike had gained some traction, though now most watchers have posited that the Fed will not raise interest rates in 2015 due both to domestic market concerns as well as international market weakness.
When a decision does finally come through, it will carry with it political implications for the United States.
The closer the interest rate hike is to the 2016 presidential elections, expect it to lead to political tensions among both the Democratic and Republican parties.
The Republican Party, which by-and-large has supported higher interest rates, would likely pressure the Federal Reserve to move more quickly and aggressively in targeting interest rates – though it has also called for an audit of the Federal Reserve, a move supported by some Democrats.
However, if this rate hike leads to an uptick in unemployment or decreased domestic hiring, it remains an open question whether the Democrats under President Obama or the Republicans in both chambers of Congress will suffer the blow-back for any negative consequences of a rate hike.
Given the increasingly polarized political class and the significant fight between the two parties over control of the White House and the U.S. Senate come November, it is virtually guaranteed that the Federal Reserve’s decision will enter the conversation. The closer to November that decision is, the more short-term damage will likely be felt by voters.
Japan Weighs Additional Monetary Stimulus
On Friday, the Bank of Japan will announce its monetary policy for the month of October. The Bank is highly unlikely to alter its interest rate, which has been at 0 % since 2011.
However the Bank may decide to expand Japan’s monetary economic stimulus package. Although this move would likely be met with criticism both within and without, it would likely receive support from Prime Minister Abe.
A senior Abe advisor recently stressed that further stimulus will be necessary to move Japan into higher growth and inflation with another former bank official noting the same. Then again, as one of the “three arrows” of Abenomics, further monetary easing would align with the economic interests of the Prime Minister and the Liberal Democratic Party.
The BoJ will also pay very close attention to recent comments by ECB President Mario Draghi, who indicated last Thursday that the ECB was prepared to expand its own economic stimulus package to respond to the EU’s own low growth figures, if the bank decides such a measure would be appropriate.
Deutsche Bank to Release Strategic Review
On Thursday, Deutsche Bank co-CEO John Cryan will present the Strategic Review of the world’s 12th largest bank (by assets) following 4 months delay and a CEO Transition.
Among the items that may be on Deutsche Bank’s chopping block include exiting or significantly reducing its operations in a number of countries, including Russia, spinning off some retail units – Postbank among others – and reducing its trading and investment activities.
In a preliminary detailing in March regarding the review to its supervisory board, Deutsche Bank noted it planned to reduce its investment banking assets by over $160 billion and reduce its global footprint.
Under Cryan’s (relatively new) co-leadership, the company has taken a series of steps that indicate its turn away from embracing a global model as a banking center in favor of strengthening its position as a regional heavy-hitter.
Whether the NYSE or Frankfurt Stock Exchange (where Deutsche Bank is traded) view this as a positive development or an admission of global weakness given significant (and somewhat strange) higher level turnover is an open question.
Market responses to Thursday’s report will signal to Deutsche Bank leadership whether the wider banking and investment communities (currently divided) think the major European bank is moving in the right direction as the company grapples with more muscular EU and U.S. banking regulatory regimes.
South Africa Oil Conference Explores African Energy Trends
On Monday, executives from major oil extraction companies (including BP, Exxon Mobil, and Tullow Oil) will gather in Cape Town for the 22nd annual “Africa Oil Week.”
Bringing together international companies with significant energy investments in the continent, this event will see the attendance of hydrocarbons and energy ministers from across Africa, as well as a number of Africa’s national oil companies and interested investors.
In contrast to many of the oil-rich areas in North America and the Middle East, many oil reserves in Africa remain undeveloped. It appears likely that newer explorations, for the time, will remain diminished in the region until oil prices regain their footing.
Although labor costs are comparatively far lower and oil easier to access than Canada’s rich oil-sands regions in Alberta, security and infrastructure remain key concerns for many oil-rich African states, and that keeps developments costs high.
In Nigeria, for instance, oil theft was only declined when the price of oil became too low for many to balance the cost of stealing it.
In addition, the low price of oil – as well as corrupt practices in major national oil companies – have affected the budget revenues of several oil-producing African economies, in some cases severely.
In Angola, government revenues fell a reported 25%, leading to drastic budget cuts and a significant drop in the value of its currency, the Kwanza (the Nigerian naira and Ghanaian cedi have also been affected, among other currencies.
As for Nigeria’s state-owned oil company, NNPC, only about half of its revenues were sent to the Nigerian federal government, according to an audit published in June. The NNPC is required to deliver all revenues and the government allocates funding to the NNPC to cover costs.
Colombia Follows Regional Trend by Raising Interest Rates
On Friday, the Colombian Banco de la Republica will make its own interest rate decision. Current projections suggest the Banco will increase interest rates for the second month in a row to 5%.
Similar to its much larger neighbor Brazil (though with comparatively far fewer political risk issues), the Colombian government is looking to staunch a steady rise in inflation.
Traditionally this has been one of the most significant economic bugbears in Latin America with Brazil, Venezuela, Uruguay, and Argentina all either approaching or exceeding 10% inflation in the last two years. Venezuela and Argentina are beyond 10% at present with Brazil hovering around 9.5%.
By raising interest rates on Friday, the Colombian central bank will add to a growing division in international monetary affairs.
The US Federal Reserve has held off on raising rates (possibly for the year) China lowered its own interest rates last week, EU deposit rates are currently negative, and UK interest rates remain flat.
However, the decision will remain largely in line with its regional economic counterparts. Chile raised its interest rates last week to stave off inflation, Peru raised theirs in September, Argentina raised interest rates by 4% in August (then lowered them slightly in September), and Brazil has raised interest rates six times since December.
All are responding the same issues: flagging growth in China is reducing commodities demand, overall commodities prices are falling (both in minerals and agricultural produce), and growth in the region has become increasingly anemic.
Lower oil prices have additionally created severe economic and social pressures in Brazil, Venezuela, and Ecuador, and increasing political instability in the three countries has also taken its toll as investors search for safer bets elsewhere.
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 was produced by GRI analyst Brian Daigle.
