Weekly Risk Outlook

Weekly Risk Outlook

India’s central bank considers interest rate cuts. Greece discusses another bailout with the IMF and EU. Bank of Japan governor delivers speech on Japanese monetary policy. Canada releases its May unemployment report. The U.S. releases unemployment figures as candidates announce presidential bids. All in this Weekly Risk Outlook.

Indian Central Bank to Consider Interest Rate Cut

On Tuesday, Reserve Bank of India Governor Raghuram Rajam will review interest rates in India, which stand at 7.5%.

Many expect the Central Bank will lower rates again, having lowered them in January from 8% to 7.75%, and then in March from 7.75% to 7.5%.

A 25 point reduction would not be a surprise, although many market analysts would prefer a steeper cut in response to perceptions that the economy is slowing.

Last Friday, the Indian Central Statistics Office (CSO) released economic data for 2014-2015, indicating the country’s economy grew at a 7.3%, in slight contrast to the 7.4% expectation from economists. In addition, the CSO has begun using a controversial measure in its GDP growth estimates, the Gross Value Added (GVA), that has even confused Central Bank Governor Rajam and made the GDP growth figures appear hazy to markets.

An additional concern for markets and the Indian economy is the ongoing heat wave that has battered the country.

Although India has gone through several hot summers recently, the current one has already killed 1,300 people, and many climatologists project significant dry spells for India in the years ahead.

Greece to Discuss Another Bailout Cliff with the IMF and EU

In what seems to be a never-ending story, the Greek government faces a Friday deadline to fulfill a €305 million debt repayment obligation to the IMF.

As one political risk analyst put it: “traders know deep down that a deal will be reached in the nick of time, but those who don’t have the stomach for it are getting out of the market while they can.”

There are very conflicting perspectives on this particular payment, though; although a survey of German investors lowered their estimations of Grexit from 49% to 41%, Athens indicated the next day that it would not be able to make the payment without new loans from the Eurozone.

Additionally, IMF Director Christine Lagarde indicated 2 days later that a Greek exit from the Eurozone was a “possibility”, and that high-level intervention would be needed from the EU to prevent a Greek default.

The United States has also expressed its concern though Treasury Secretary Jack Lew who noted that the June 5 deadline may not be significant.

Four months of uncertainty and diplomatic brinksmanship have had severe and negative consequences for the Greek economy.

Greece fell into a recession in the first quarter of 2015, and capital deposits to Greek banks have fallen 15% in four months (down to levels not seen since 2004).

Greece has also been confirmed as suffering the worst European recession since the Great Depression.

BOJ Governor to Deliver Speech on Japanese Monetary Policy

On Thursday, Bank of Japan (BOJ) Governor Haruhiko Kuroda will speak at the BOJ conference “Monetary Policy: Its Effects and Implementation” at the Institute for Monetary and Economist Studies in Tokyo.

Kuroda will likely discuss the most recent developments of Japanese economy, which include a dip in inflation close to near-0%, and the BOJ’s expanded balance sheets from ongoing quantitative easing measures (which has boosted BOJ inflows to a 13-year high of over 1 trillion yen ($8.1 billion)).

Also released this week was a report of Japan’s April industrial production trends. The report showed a drop in industrial production in April of 0.10% compared to the same period in the previous year.

Production did increase in comparison to the previous month however, where it had fallen by 0.8%.

Finally, the yen fell to its lowest level since 2002, trading at 123.77 yen to the dollar.

Overall, the developments show a weak transition for Japan into its second quarter, especially with the drop in inflation making further economic stimulus unlikely.

May Report on Canadian Unemployment to be Released

The Canadian government will release its May unemployment rates on Friday, which are predicted to have dropped by 6.6%.

Leader of the National Democratic Party (NDP) Nicole Turmel recently called on the federal government for action to boost job creation by taking back some of the tax cuts to wealthy individuals, and direct the funds towards employment programs.

The New Democratic Party’s (NDP) win in Alberta last week indicates the rise of a potentially new political dynamic, heralding increased enthusiasm with the NDP ahead of this year’s national parliamentary elections.

The unemployment figures will mark the first release of employment data since the recent negative developments for Canada’s quarterly GDP growth rates, which shrunk for the first time in four years, to the furthest point since 2009.

According to the Bank of Canada’s April Monetary Policy Report, the GDP, which in its first quarter fell by 0.6% annualized rate, is expected to grow by 1.9% in 2015.

At the same time, the Canadian dollar weakened 0.4% to 1.2478 Canadian dollars to the U.S. dollar.

U.S. Releases Unemployment Figures Following Disappointing First Quarter as Candidates Announce Presidential Bids

On Thursday, the U.S. Department of Labor will release weekly jobless claims, and on Friday it will release the national unemployment rate for May.

Although market analysts project a fall in both jobless claims and unemployment, last week’s disappointing 0.7% contraction in the first quarter of 2015 suggest that these estimations may be too optimistic.

On this economic backdrop, developments in the Democratic and Republican parties will expand the primary election field of both parties; Republican-turned-Democrat former senator and governor Lincoln Chafee (D-RI) is expected to announce his run for President on Wednesday, as will former Democratic Maryland governor Martin O’Malley.

Both are viewed as significant underdogs in the Democratic primary against Hillary Clinton, but they will likely pressure Clinton to move to the left on issues relating to economic policy (particularly in trade and ties to the business community) as well as foreign policy.

On the Republican side, South Carolina Senator Lindsey Graham is expected to announce his run for President on Monday, and former Texas governor Rick Perry will announce his intentions on Thursday.

This will place the Republican primary ticket at 10 candidates, and will likely expand to include former Florida Governor Jeb Bush, Ohio Governor John Kasich, and possibly New Jersey Governor Chris Christie and Wisconsin Governor Scott Walker.

The preponderance of over a dozen Republican presidential candidates have already caused headaches for media outlets, and would likely place pressure on candidates to find ways to emphasize their conservative credentials to appeal to the Republican primary electorate.

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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