Final U.S. data before Fed meeting. Oil reports project low prices in 2016. Argentine President-elect takes office. US Congress votes on spending bill. Koreas to improve relations. All in the Weekly Risk Outlook.
Last Tranche of U.S. Economic Data Before December Fed Meeting
This week, the U.S. Departments of Labor and Commerce, as well as the University of Michigan, will release some of the final economic indicators before the Federal Reserve Bank’s December 16th FOMC meeting.
Today (Monday), the Department of Labor will release labor market condition data for the month of November, followed by a Tuesday report on U.S. job openings and a labor turnover survey for the month of October. Also released on Tuesday is a report on small business optimism by the National Federation of Independent Business.
The week will conclude with a Friday report by the Department of Commerce on U.S. retail sales following Black Friday and a University of Michigan report on U.S. consumer sentiment, which is projected to have risen to a 4-month high.
Last Friday’s positive employment figures (the U.S. added 211,000 jobs in November, and September and October employment gains were adjusted upward) make a December rate hike a near-certainty.
However, this week’s reports on consumer sentiment and retail sales could foreshadow an issue for the Federal Reserve: how does a central bank adjust interest rates for an improving economy if consumers do not actually think so and are not spending enough, thus limiting inflation?
While it is possible that consumer sentiment may pick up in the months to come, as many have argued it will, the American public has persistently viewed the improvement of the U.S. economy in bleaker terms than the data suggests they should.
Low Oil Prices Projected in 2016 Following Fruitless OPEC Meeting
On Monday, the U.S. Energy Information Administration will releases its Drilling Productivity Report for U.S. producers of oil and gas in the shale formations across the United States.
U.S. oil producers are facing an increasingly strong glut in oil supply as oil prices remain low and exporters hold back on releasing oil to the market in hopes of elevated prices in the near future.
This report will be followed on Tuesday with the U.S. Energy Information Administration monthly Short-Term Energy Outlook forecasting supply and demand.
On Thursday, OPEC will publish its own Monthly Oil Market Report, highlighting production figures for Saudi Arabia and other major oil producers in the group. Finally, Friday will see the International Energy Agency issue its Oil Market Report with forecasts for 2016.
All of these reports, while they may vary on exact figures, are likely to forecast a continuing low price for oil well into 2016 and possibly beyond.
In its moves to squeeze market share from the United States, OPEC (and Saudi Arabia in particular) has focused on pumping out more oil even as it hampers domestic economic issues such as Saudi Arabia’s falling foreign reserves.
Although some had forecast OPEC would reduce production to support struggling oil economies like Nigeria, Ecuador, and Venezuela, the Saudi government has shown little interest in reducing production for fear this will provide breathing room for U.S. shale producers or that it would help rivals like Iran and Russia.
Moreover, the reintegration of Indonesia to OPEC as well as the lifting of Iranian sanctions are both likely to actually lead to an increase, rather than a decrease, of production.
OPEC’s internal differences do not look small enough to cut production any time soon. The only agreement emerging from the organisation’s meeting last week was to meet again next year.
Argentine President-Elect Mauricio Macri Takes Office
On Thursday, former Buenos Aires mayor and PRO candidate Mauricio Macri will take office as President of Argentina following the 12-year rule of the Peronist Kirchners.
Macri has already met with Brazilian President Dilma Rousseff and Chilean President Michelle Bachelet to discuss improving economic relations. Macri has suggested and will likely push for greater economic engagement both with Mercosur as well as the more market-friendly Pacific Alliance.
His task moving forward is up hill and the first few weeks could spell out the likelihood of success in his term.
Moving the official currency rate in line with the unofficial, “blue dollar” rate could entail a significant devaluation of citizens’ incomes for those who make purchases that operate on the official exchange rate.
Reaching a deal with the holdout creditors in the United States could open the PRO and coalition partners like the UCR and CC to criticism from the FpV that it has conceded to the “vultures”. The reduction of export taxes – while beneficial in that they are likely to bring in dollars to bolster Central Bank reserves – could also reduce government revenue streams in the short term.
With a strong FpV majority in the Senate and a near-majority in the Chamber of Deputies, the PRO and President Macri will be limited in the economic reforms they seek to enact that require Congressional approval.
Moreover, as the ratification of international treaties, such as a Mercosur-EU free trade agreement, requires a supermajority in the Senate, many major international initiatives will require at the very least the acquiescence, if not outright support, of a significant chunk of the FpV.
At this stage, it is unclear what the FpV will want in exchange for its support for PRO-backed initiatives. Former President Cristina Fernandez de Kirchner, who still maintains significant influence in the FpV and whose son is now an FpV Chamber Deputy, has stayed relatively mum on what concessions she or her party will demand moving forward.
Much will rest on Mr. Macri’s ability to persuade the old guard of his new ideas.
U.S. Congress Must Pass Trillion Dollar Spending Bill to Avoid Shutdown
On Friday the U.S. Congress must pass its $1.1 trillion federal spending bill to prevent a government shutdown.
Parties in both houses appear cautiously optimistic that a deal is in the offing, following a string of recent legislative successes that will likely continue up to the December recess and a series of meetings of the Big Four (the chair and ranking members of the House and Senate Appropriations Committees) to move the process along and hammer out compromises.
Last week, Congress passed a $305 billion infrastructure bill with wide majorities in both houses, which also reauthorized the Export-Import Bank of the United States. The Senate recently passed a bill to repeal most of the Affordable Care Act – which President Obama will with certainty veto and will not be overridden – while the House passed an education overhaul that is likely to get Senate consideration this week.
A tax bill that may cost as much as $800 billion is also likely to receive some attention before the December recess.
One item of note that may find its way into the federal spending bill is the potential lifting of the U.S. ban on crude oil exports.
Although Republicans have generally supported lifting the ban, Democrats (including the president) have been more reticent in offering their support. Negotiations are currently underway for Democrats to at least tacitly support lifting the ban in exchange for a few Democratic priorities which include reauthorizing tax credits for renewables production, renewing child and earned income tax credits, and reauthorizing the Land and Water Conservation Fund.
This bill will be very important to watch, as amendments to the bill could touch a number of other policy areas, including: revising the U.S. visa waiver program, possibly rolling back provisions of the Dodd-Frank financial reform bill, Planned Parenthood funding, and potentially a few other surprises.
Officials from North and South Korea Move to Improve Relations
On Friday, government officials from North Korea and South Korea will meet in the North Korean town of Gaeseong to discuss the improvement of relations between the two neighbours.
Tensions flared between the two countries when three landmines exploded in early August, crippling two South Korean soldiers in an act the South Korean government accused its North Korean counterpart of committing.
In response, the South Korean government resumed broadcasting anti-Pyongyang propaganda from the South Korean side of the demilitarized zone, inflaming tensions further.
An August 25 agreement between the two countries led to the North Korean government expressing “regret” at the incident and South Korea stopping its broadcasts.
A brief family reunion between South and North Koreans in October also served as an example of the continuing, albeit tenuous, ties between the two countries.
It is unclear if the Gaeseong meeting will lead to any concrete developments beyond maintaining open channels of communication.
South Korean President Park Geun-Hye has had to walk a political tightrope of trying to assure South Korean citizens of their safety without inflaming tensions with North Korea.
President Park has kept a door open for a meeting with the Kim Jong Un, though the preconditions of such a meeting (North Korea taking steps to denuclearization) make it unlikely it will occur in her presidency.
Recent moves by the Park administration to introduce government-produced textbooks for high and middle school students – widely unpopular among swathes of the South Korean population given the potential for a politicization of history – have also significantly reduced her political breathing room to engage in diplomatic overtures close to home.
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.
