The Week Ahead

The Week Ahead

Janet Yellen speaks in Baltimore following rate hike. Bank of Japan meets to discuss interest rates. EU-Ukraine 3rd Association meeting. Russia releases unemployment and wage figures. Electoral College votes to confirm Trump. All in The Week Ahead.

Janet Yellen speaks in Baltimore following rate hike

On Monday, Federal Reserve Chair Janet Yellen will speak at a commencement ceremony at the University of Baltimore. These comments will be some of her first public remarks since the Federal Reserve decided last week to raise interest rates for a second time in 2016 in a widely anticipated 25 basis-point bump to the 0.50-0.75% range. The interest rate decision, the second rate hike in a decade, highlights growing confidence in the underlying fundamentals of the U.S. economy: unemployment remains below 5 percent, GDP growth remains comparatively strong, and consumer confidence is rising.

That being said, the Fed still projects an air of caution, noting in its policy statement following the announcement of its rate hike that it expects three rate hikes over the course of the next three years, in sharp contrast to its December 2015 projections that it would raise interest rates four times in 2016 alone. One of the remaining areas of concern is that inflation continues to remain below its 2 percent threshold, partly due to low energy prices throughout 2016.

Three elements that could alter the Fed’s behavior as a result of the presidential election, and which should be followed closely in the months and years ahead are: 1) the replacement of Janet Yellen with a monetary policy hawk following the conclusion of her term in 2018, 2) the impact of fiscal expansion by a unified Republican government both through tax cuts and infrastructure spending, which depending on the timing could either stave off the damage of a recession or come too early and have little impact, and 3) any other policies or actions that could cause a severe market shock and trigger a wider economic contagion such as threatening to default on or “renegotiate” U.S. debts, war, protectionist tariffs, etc.

Bank of Japan meets to discuss interest rates

On Monday, the Bank of Japan will meet to discuss interest rates and wider macroeconomic policy. Japan has been at a -0.1 percent interest rate since it October meeting and maintained 10-year government bonds at 0 percent. There are no major indications that a further rate cut is forthcoming which might be in part due to the U.S. rate hike, though Japan’s recent announcement of GDP growth in 2016Q3 to 0.3% (from expectations of 0.5%) is unlikely to inspire confidence in short term growth prospects for the country and could lead to action by the Bank. Similar to most other developed countries, Japan also struggles mightily in its wishes to achieve anything near a 2% inflation rate, and that problem is likely to continue into 2017 regardless of the BoJ’s interest rate decision today.

There are some sources of optimism for the Japanese economy, though: the strength of Japanese exports led to some helpful growth in 2016, which led to one of its longest stretches of growth in the past 4 years. However, consumption remains sluggish and is one of the more intractable issues facing the Japanese economy — it doesn’t do much good to lower interest rates if, for example, consumers still choose not to spend their incomes and continue to save.

EU-Ukraine 3rd Association meeting

Beginning on Monday, The EU will hold its third EU-Ukraine Association meeting following two significant developments last week. First, the Dutch agreed to a deal that would allow for the ratification of the EU-Ukraine Association agreement in exchange for a clear stipulation by the European Union that the agreement would not eventually confer Ukraine membership to the European Union or even candidate status for EU membership. The second major development was the EU announcement that it would extend by 6 months sanctions against Russia for failing to fully implement the Minsk Agreement vis a vis its continued presence in eastern Ukraine. The meeting is expected to specifically focus on the sovereignty and territorial integrity of Ukraine.

Brussels has been particularly concerned about Russia’s behavior both in Ukraine as well as in Syria. These sanctions have expanded to include individuals closely connected to the government, arms exporters, and banks, as well as other institutions. While this has, for the time being, placed Ukraine and the EU in agreement, pressure continues to build within the EU to ease sanctions against Russia due to the major economic ramifications these sanctions have had for EU exporters, particularly in agriculture.

Upcoming European elections next year, particularly in France, as well as the Italian government that will emerge following Prime Minister Renzi’s resignation and the UK’s Brexit negotiations and position in the EU, could alter the calculus of both EU-Ukraine and EU-Russia relations. However, it’s fair to say that there will be a few constants that will help guide the discussion among EU member states on its Ukraine and Russia positions: EU exporters and major exporting nations to Russia will push for sanctions reductions or relief, the Baltic states will maintain their intensely critical position towards any major concessions towards Russia, particularly on security, and all EU member states will remain concerned about any policy by the Russian government or any other that has the indirect effect of sending refugees to the EU.

Russia releases unemployment and wage figures

Next Wednesday, Russia will release unemployment and wage figures. Russia’s official unemployment rate has been fairly consistent since May at between 5.2% and 5.6% — though it ticked up in October .2%. However, Russian growth figures have remained fairly weak since early 2015. This may change slightly in the coming months in the event that the production cut deal agreed by OPEC in November remains. Oil prices have been on the rise since the November 30 deal to cut production by 1.2 million barrels and should prices continue to rise, particularly in the winter months, this could provide a boost to Russia’s petroleum-rich economy. The Russian government appears to recognize the potential significance of this deal, as the Russian oil minister announced last week the ministry had set up a 12-person panel to monitor all of Russia’s oil production facilities to ensure they are all compliant with production cuts.

With Russia’ recent parliamentary elections strengthening President Putin’s party, it is unlikely Russia will experience a particularly difficult political environment to engage in policies to expand Russia’s economy. But the Russian Federation’s recent actions in Syria and Ukraine, as well as election tampering in the United States and other places, suggests a more defensive posture as it turns attention away from economics to foreign affairs.

Electoral College votes to confirm Trump

On Monday, the Electoral College delegations for all 50 states will cast their electoral votes for President and Vice President of the United States, where in all likelihood the College will confirm Donald Trump as the winner. This process is usually perfunctory, in part because the popular vote winner usually wins the electoral college vote. This did not occur this time as Hillary Clinton received nearly 3 million more votes than Trump.

There has been significant pressure on the Electoral College to block Donald Trump from being selected, with the idea mostly being that pressuring Republican delegations to vote for someone other than Trump will throw the election to the House of Representatives. However, there is no indication that any more than possibly a handful of Electors will vote for anyone that they aren’t supposed to vote for. As a consequence, Trump would be the first person since George W. Bush to be elected president without having won the popular vote, and attention among the media and political figures, particularly Democrats and liberals, will shift to his Cabinet picks, likely executive actions, and bills likely to be put forward by Congress.

The Week Ahead provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, The Week Ahead presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.

This edition of The Week Ahead was written by GRI Analyst Brian Daigle.

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