Weekly Risk Outlook

Weekly Risk Outlook
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Argentina holds runoff election. U.S. releases inflation figures. Brazil votes on Rousseff vetoes. Abe and Obama attend ASEAN summit. U.S. Congress approaches funding deadline. All in this Weekly Risk Outlook.

Argentina Holds Runoff Election to Select Kirchner Successor

On Sunday, Argentina will head to the polls to determine who will succeed Cristina Fernandez de Kirchner as President.

Despite some indications that Frente para la Victoria (FpV) candidate Governor Daniel Scioli would be able to secure the presidency in the first round with 45% of the vote and/or a 10% advantage over his main rival, center-right Buenos Aires mayor Mauricio Macri (Cambiemos), he failed in both measures by securing only 36% of the vote and virtually tying with Macri.

The results surprised many and heading into the Sunday vote, most election observers contend that momentum is with Macri. Whoever is chosen on Sunday will face an economy with significant headwinds and a Congress that may be difficult to control.

Inflation, which is difficult to calculate in Argentina given occasionally hazy statistics, may be hovering around 20% or more and the official exchange rate will need to be adjusted to fall into line with the black market rate.

Neither coalition fully controls both houses of Congress (the FpV controls the Senate but represents less than half of the Chamber of Deputies), and either Macri or Scioli would need to resolve the long-simmering bond holdout dispute that has dragged on in New York federal courts for years and has frozen Argentina out of some international investment.

Both candidates have claimed the other would lead the country into economic ruin, though both will likely have significant political hamstrings limiting a free hand in guiding economic policy anyway.

 

U.S. Releases Inflation Figures Ahead of Potential December Rate Hike

On Tuesday, the U.S. Department of Labor will release its monthly report on consumer prices.

Although it is likely that consumer prices have risen in October (in contrast to the decline in September and August), the increase in prices will likely be hampered by the continuing low oil price as well as a strengthening dollar relative to other major currencies.

This raises a central question for the U.S. Federal Reserve bankers that is difficult to answer: with unemployment so low and growth strengthening, why has there been so little pressure on prices?

Some economists and financial figures (including Federal Reserve Chair Janet Yellen) contend that current near-zero inflation figures are a consequence of exogenous factors like the strengthening dollar and low energy costs, and thus represent an anomaly soon corrected.

This view (that inflation is just around the horizon) may be fundamental in the Federal Reserve’s December decision on whether or not to raise interest rates.

If unemployment is the only factor considered, the Fed is uniquely primed for an interest rate hike and strong October employment numbers bolster this positionMany to expect the Federal Reserve to raise rates in its December meeting.

However, without a strong report on inflation figures this Tuesday, markets will remain apprehensive of an interest rate hike that may turn out to be premature and dampen U.S. growth.

The IMF has taken this position, asking the Fed to hold off until inflation figures are stronger. Markets around the world will watch carefully to see how the Fed reacts to Tuesday’s inflation numbers.

 

Brazil’s Congress to Vote on Overturning Rousseff Vetoes

On Tuesday, Brazil’s Congress is scheduled to vote on overriding a series of vetoes issued by President Dilma Rousseff in her effort to rein in spending as Brazil’s economy has receded.

Among the bills subject to a possible veto override is a measure that would raise salaries for judicial employees by more than half.

A similar wave of veto override votes in September failed to pass, leaving Rousseff’s vetoes in place. That is likely to happen again this week.

The Brazilian Congress (President Rousseff’s Worker Party in particular, and lately former President Lula da Silva) has increasingly turned on her finance minister Joaquim Levy, who has been forced to bat off rumors for months that he would be fired from his position or retire from office.

This division of the Worker’s Party, as well as the likely progression of charges against the coalition partner House Speaker Eduardo Cunha (of the PMDB) has created a remarkable degree of uncertainty as both major parties struggle to forge a unified front.

Finance Minister Levy has offered no indication that he intends to change course to accommodate an increasingly fractious ruling coalition, even noting in a speech last week that “it is evident to me that we can only reach this through a combination of actions on the spending side and…a short term guarantee we have the revenues necessary to balance the budget.”

The divisions within both major parties that oppose austerity measures suggest that President Rousseff’s vetoes will not be overridden this week, though increased attention on Joaquim Levy could create both short- and medium-term issues for President Rousseff’s strategy to lift Brazil from its economic slump.

 

Japanese PM Abe and U.S. President Obama Meet at ASEAN Summit

On Saturday, the leaders of Japan and the United States will meet in Kuala Lumpur, Malaysia to attend the 27th ASEAN Summit.

The summit is likely to revolve around two key issues that have gained prominence in the region lately: trade and security.

The TPP remains a hotly contested issue in Southeast Asia as several ASEAN members (Brunei, Malaysia, Singapore, and Vietnam) are founding TPP members while several others (Philippines, Indonesia, Thailand) are not but have expressed some degree of interest in joining the agreement.

The ASEAN summit will follow an APEC Summit in Manila (which is also likely to focus heavily on the TPP), with many of the region’s leaders attending both summits.

Also to be discussed are military moves by China and the United States in the South China Sea.

A number of countries in ASEAN have expressed concerns over China’s island building in the area with Vietnam President Truong Tan Sang asserting in September that such moves violate international law.

ASEAN has also voiced opposition to what it perceives as increasingly aggressive overtures in the region.

 

US Congress Approaches Highway Funding Deadline

On Friday, the U.S. Congress will reach its deadline to reconcile two bills that extend funding for U.S. transportation infrastructure and transit. The two bills, each exceeding $320 billion in expenditure, has been hailed by transportation advocates for extending beyond previous stopgap measures.

Both bills are set to last for six years, but only include funding for the first three, though they have called for increased funding beyond the current appropriation projections.

The infrastructure bills have touched on a number of other policy fields as the Republican and Democratic bill sponsors pursued increasingly complex strategies to fund the measure.

One part of the Senate bill would sell off a significant supply of the Strategic Petroleum Reserve (designed in the 1970s in the event of fuels crises), a move strongly opposed by the Senate Energy Committee Chair as well as the Ranking Member.

Most political observers have noted that the two bills are fairly similar, with Senate Public Works Chair James Inhofe noting that “the many similarities…will allow for a very short conference period.”

In addition to the energy shift, another likely contested element will be the reauthorization of the Export-Import Bank, which was opposed by many prominent House Republicans, including Financial Services Chairman Jeb Hensarling.

The Ex-Im Bank will likely be included in the conferenced bill and could serve as a notable point of contention for conservatives in both houses of Congress making the bill’s passage more difficult.

 

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.

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