Weekly Risk Outlook

Weekly Risk Outlook

Brazilian minister delivers remarks. FOMC board member to give speech calling for interest hike. Putin meets Xi Jinping. U.S. releases trade figures. G-20 ministers and central bankers meet. All in the Weekly Risk Outlook.

Brazilian Finance Minister to Calm Fears of Departure

On Monday, Brazilian Finance Minister Joaquim Levy will deliver remarks on economic policy in São Paulo.

The speech is likely in part designed to tamp down speculation that Minister Levy’s departure from the Rousseff Administration is imminent (similar rumors have circulated around the finance minister in the past).

Vice President Michel Temer is also expected to attend the event, and may deliver his own remarks. Both Temer and Levy have been involved in a recent shake-up of the President Rousseff’s cabinet. Last week, Ms. Rousseff announced a reduction of cabinet ministers from 39 to 29 to highlight her administration’s commitment to further belt-tightening

The minister cut probably did not do Ms. Rousseff any favors with coalition partner PMDB, or with House Speaker Eduardo Cunha, just indicted for a bribe he was accused of taking over the Petrobras scandal.

Whether or not these shifts can contribute to the stability of the Rousseff administration is an open question. Tendencias, an economic consultancy, currently estimates that there is a 20% chance that Rousseff will not serve out her term due to her unpopularity and political woes, and this likelihood could rise with time.

The current interest rate, at 14.25%, is at its highest level since 2006 and has been raised for the past 7 consecutive months.

Inflation continues to be the bugbear of the Brazilian economy and thus the main foundation for the Central Bank’s interest rate decision, with August inflation year on year clocking in at 9.6%.


FOMC Board Member Calls for Raising Interest Rates

On Friday, Federal Reserve Bank of Richmond President and FOMC voting member Jeffrey Lacker will deliver a speech entitled, “The Case Against Further Delay” during a reception with the Retail Merchants Association in Virginia, calling for the Federal Reserve to raise interest rates.

Lacker was the sole dissenting vote in a string of meetings in 2006 to not raise interest rates, and again dissented in 2012 when the FOMC decided to support a QE program through the purchase of mortgage-backed securities.

Although traditionally viewed as one of the most hawkish members of the Federal Reserve, his speech could highlight the arguments likely to be used by the wider FOMC if it decides to raise the federal funds rate in its September 16-17 meeting or its December meeting.

The speech will follow both the Tuesday report of U.S. car sales for the month of August by Chrysler, Ford, and General Motors – which are expected to have expanded, further strengthening a sector of the U.S. economy once in dire straits – as well as the Thursday announcement from the Department of Commerce on the expanding US service industry.

Positive developments in car sales and the service industry could bolster claims that the U.S. economy is continuing to recover, particularly following last week’s announcement that the U.S. economy expanded 3.7% last quarter, revised upward from an initial estimation of 2.3%.


Russian President Putin to Meet Chinese Counterpart Xi Jinping

On Wednesday, President Putin will meet with President Xi to celebrate the 70th anniversary of the end of World War II, an event which will also be attended by South Korean President Park Geun-hye.

Japanese Prime Minister Shinzo Abe and North Korean Leader Kim Jong Un have both declined the invitation, the latter revealing strained ties between China and the DPRK.

Along with the commemoration, President Putin is expected to sign at least 20 bilateral agreements with President Xi, in an effort to strengthen ties.

Russia has been pummelled diplomatically and economically by the situation in Ukraine, and has increasingly looked to China to support its ailing economy, with common initiatives like the BRICS Bank and the China-led Asian Infrastructure and Investment Bank (AIIB) working to unseat US influence in international institutions.

However, China’s recent economic turmoil could spell trouble for those hopes, and the further fall in oil prices will only exacerbate pressure on Russia’s economy.


U.S. Releases Trade Figures, Sign of a Strengthening Dollar

On Thursday, the U.S. Department of Commerce will release the U.S. trade balance. Current projections show that the announcement will reveal an increase to a $44.5 billion deficit.

Some reports have indicated that the increasingly strong dollar may force the Federal Reserve’s hand in staving off a rise in interest rates, which have traditionally strengthened the dollar against other currencies.

But a strengthening dollar has divergent effects for industries and countries. While a strong dollar makes other countries’ exports more competitive in the U.S. market, it reduces U.S. export capabilities by driving up costs.

Despite this potential advantage to developing economies’ export markets, most countries have become increasingly concerned with the strong dollar as it becomes increasingly profitable to invest in the more stable U.S. market.

Additionally, any debts denominated in the U.S. dollar will immediately become more expensive to repay, making a strong dollar unfortunate both for developing country governments’ balance sheets as well as U.S. exporters.


G-20 Finance Ministers and Central Bank Presidents to Meet in Turkey

On Friday, the chief economic leaders of the 20 largest economies in the world will meet in Ankara for a two-day session to discuss global economic affairs.

Confirmed attendees include U.S. Secretary of Treasury Jack Lew as well as German Finance Minister Wolfgang Schäuble.

Fears of a U.S. rate hike have been expressed across Europe and Asia and the strengthening dollar is making debts increasingly unsustainable.

The ongoing metrics of the Greek bailout, and the outcome of the snap elections Greece is scheduled to hold in September, will also likely be discussed.

But the broader discussion of U.S. interest normalization will likely consume most of the conversation. The September 16th-17th discussion could have a significant impact on countries and regions that are struggling to handle growth concerns, including Brazil, Russia, the European Union, China, and Japan with significant challenges in inflation and deflation, and severely reduced revenues from falls in commodities and energy prices facing many of these countries.

Given the number and severity of the challenges faced by the major economies outside the United States, the G-20 ministers will ultimately place heavy pressure on the U.S. delegation not to undo some of the slow progress being made with a premature interest rate hike.


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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