Weekly Risk Outlook

Weekly Risk Outlook

Hollande makes case for alliance. Fed close to rate hike. Nigeria sets rates. Brazil makes major energy sale. Americans ready for biggest shopping day of the year. All in the Weekly Risk Outlook.

French President Travels to the U.S. and Russia to Make Case for Broad Anti-ISIS Alliance

On Tuesday, President Hollande will travel to Washington, DC to meet with President Obama to discuss a coordinated strategy to counter the Islamic State in Syria and Iraq, following the recent terrorist attacks in Paris.

He will also likely suggest a joint effort with Russia to eliminate the group in Syria, though such a strategy would be fraught with political complications for the United States. The United States (as well as the European Union) continues to maintain sanctions against Russia due to the country’s activities in Ukraine, and Congressional opposition to working directly with the Russian government, even to counter ISIS, could be strong.

President Hollande will follow his discussions with President Obama with a trip to Moscow to discuss countering terrorism with President Putin.

Both countries have been significantly affected by recent terrorist attacks, given the recent confirmation that the downed plane in Egypt that was headed to St. Petersburg and killed 224 people was the result of a bomb stored on the plane, with ISIS claiming responsibility.

Collaboration between the two countries appears more likely than U.S.-Russian collaboration, though President Obama’s recent half-hour side conversation with President Putin at the G20 summit last week suggests that a possible path forward may be in the works.

Array of U.S. Economic Indicators Will Push Fed Closer to December Rate Hike

On Tuesday, the U.S. Department of Commerce will release its second estimate of GDP growth for the quarter, with projections now indicating that it will upgrade growth from 1.5% to 1.9%.

Later the same day, the S&P/Case-Shiller index on home prices in major U.S. cities is currently expected to show a climb in housing prices, with the potential for downstream positive impacts in the construction and development industries.

A second report will follow on Wednesday with the department’s release of consumer spending trends in October and U.S. purchases for durable goods (both of which are also currently expected to show robust growth).

Finally, the Conference Board will release its figures on U.S. consumer confidence, with current estimates that consumer confidence jumped in November after a poor showing in October.

These figures are all likely to suggest that the U.S. economy has entered much firmer footing than it had been in previous months, and particularly so when compared to other major developed economies (Japan, for example, recently dipped back into recession, and EU growth rates remain anemic).

Practically speaking, these figures in housing, consumer confidence, and spending will likely be the last major tranche of economic data the Fed considers before its December meeting to decide whether to raise interest rates for the first time since 2006.

The Fed has given very strong signals recently that it intends to raise the benchmark rate, currently at around zero, though previous signals that it would raise rates in September were scrapped when international markets experienced significant fluctuations following China’s stock market interventions.

Nigeria Sets Interest Rates as Economy Reels from Oil Price Decline

The Central Bank of Nigeria will decide on Tuesday whether to raise interest rates from its current benchmark 13%. (In 2010 the rate was 6%.)

With the exception of Venezuela (with several politically self-imposed crises) and possibly Russia (which also has other foreign policy concerns with economic implications), no economy has been directly hit as hard by the oil price drop as Nigeria.

Since November 2014, the value of the naira has fallen approximately 20% relative to the U.S. dollar and the currency has remained remarkably stable (if low) over the past year at around 200 naira to the USD, though this may be due to exchange controls.

The fall in prices has dug into Nigeria’s economic growth; the Nigerian Bureau of Statistics noted last week that economic growth had fallen to 2.84% in the 3rd quarter of 2015, a significant drop from the 6.23% growth the economy sustained this time last year.

Now that President Buhari’s cabinet has been installed after a long delay that concerned investors, his administration will need to engage in a deep dive reform effort to ensure investments remain strong in Africa’s largest economy.

The president appears very intent on cracking down on corruption and rebuffing extremism in Nigeria, though market watchers and central bank will be paying close attention to a potential economic reform package that can answer at least some of Nigeria’s current economic constraints.

Should the Central Bank raise interest rates again to staunch inflationary pressures, the subsequent possible loss of investor confidence could make President Buhari’s job that much more difficult.

Brazil Makes Major Energy Sale as the Central Bank Decides Whether to Raise Rates Again

On Wednesday, the Brazilian government will auction 29 hydroelectric dams spread across Sao Paulo, Minas Gerais, Goias, Parana, and Santa Catarina. The dams are expected to eventually reach a capacity of between 1,400 and 3,400 megawatts (or approximately between a 1% and 3% boost in electricity production).

Brazil’s domestic electricity production is dominated by hydroelectric power, which accounts for approximately ¾ of its domestic energy generation and is the largest hydroelectric energy producer in the world.

Moving in line with a more international market friendly approach advanced by Finance Minister Joaquim Levy, the sales will be open to foreign bidders without restriction, and previous rules stating that companies must have had at least 5 years of experience operating hydroelectric dams in Brazil have been scrapped.

The success of such an auction could possibly bring in as much as $2-$4 billion in revenue for the Brazilian government and could be used to bring down the country’s deficit.

However, the fact that the auction was originally scheduled for October, than rescheduled to November 6 and then November 25 suggests that the country may have difficulty securing the bids it desires.

In addition to these concerns, the Brazilian Central Bank will vote later that day (November 25) on whether or not to raise Brazil’s interest rates again to help staunch inflation.

Brazil has raised interest rates frequently over the past year (in November 2014, interest rates were 11.25%. Today they are 14.25%).

In its September decision to maintain rates at 14.25%, the Central Bank noted that the Selic should remain at its current level “for a sufficiently prolonged period” to allow inflation to fall to the outer bound of its 4.5% target (currently around 10%).

A decision this week by the Central Bank to raise interest rates could indicate that the Bank may not feel that inflation is likely to fall, which would raise questions over the economic stability of the country in the short term.

Americans Head to Biggest Shopping Day of the Year

On Friday, following Thanksgiving, both major and minor retailers will open their doors for a likely barrage of shoppers.

Although the term Black Friday has been used for decades to describe the surge in sales the day after Thanksgiving, major retailers like Walmart, Target, and Macy’s didn’t really begin to acknowledge its significance with special deals and early opening times until the mid-2000s.

Since then, special offers from major companies attempting to out-bid one another has led American shoppers to flock to stores for Christmas and personal shopping.

Black Friday sales, and recently, Cyber Monday sales as well, have been used as a rough metric of American consumer activity and confidence in the U.S. economy.

Last year, when only 133.7 million people (roughly 41.8% of the population of the United States) showed up to shop and spent $50.9 billion (slightly more than the GDP of Bulgaria), the day was viewed as a failure because purchases were 11% lower than the previous year.

Many viewed the purchase reduction that year as an indication of reduced consumer confidence in the U.S. economic recovery, which would have ripple effects on nearly every U.S. industry, from electronics to clothing to cars.

Although a very rough approximation of economic activity (particularly given the one-off nature of many of the sales U.S. consumers pursue that day), the figures for Black Friday sales will be used by markets and media as a sign of the health and viability of the U.S. economic recovery as well as a gauge of U.S. consumer behavior in reaction to the recent attacks in Paris.

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.

Categories: Politics, The Week Ahead

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