UNITED STATES
The main event next week will be the Kansas City Fed’s Symposium, but few expect it to be as market-moving as in the recent past: There were rumors that Draghi would use the forum to signal a change in ECB balance sheet policy but this is quite unlikely. Yellen will speak about “financial stability.” She is expected to echo recent Fed views: concerns about low inflation weighed against the view that easy financial conditions imply a stronger case to raise rates. We keep our expectation about the announcement of balance sheet tapering at the September FOMC meeting, followed by a rate hike in December. Over the last week, the market marked down, significantly, the latter. In the event, shadowed by political events, economic data last week showed a robust economy. Strong retail sales and better than expected current activity indicators (NY and Philly Fed) suggest solid real GDP growth. Tracking measures for Q3/17 are up to 2.8%saar.
On the data front, next week the main item is durables goods orders for July; there will also be new data on housing prices and output.
- Friday, August 25: Durable goods orders—July. (Consensus; headline: -6%momsa; ex-transport: +0.4%momsa; core shipments: +0.1%momsa). The decline is the headline is known from the drop in commercial aircraft orders. Moreover, manufacturing production growth was modest in July with a 0.2% gain in ex-auto. This suggests weak core capital goods shipments.
BRAZIL
The main event this week is the vote in the Lower House on a Constitutional Amendment changing the Electoral Law. Electoral institutions are taken for granted. In the US, for example, there is discontent with the Electoral College, gerrymandering, the representativeness of the 2-party system, individual voting rights, and so on. Yet, basically, no one stops to think about how the voting is done.
Not so in Brazil. How to vote; What are the rules for representation; What constitutes a political party; Which organizations have access to public funding and publicly mandated free time in TV and radio, etc.. All these things change periodically—either by law or decrees from the Supreme Court. This week Congress is at it, again, in characteristic self-serving fashion.
The current rule for electing members to the Lower House is “proportional representation.” For each district, each party prepares a list of candidates, as many as they want. Parties may also form coalitions. The “district” is not exactly linked to where you vote. It is the entire State. For example, in the State of São Paulo, 25 million voters elect 70 candidates to the Lower House. Each represents the entire State. In practice, they represent no one except themselves, their party, the best organized interests and lobbies, and, of course, the main donors to the campaign. Voters may vote either for the party list or to their preferred candidate (a so-called “open” list). The total of votes a party/coalition gets is the sum of both. An “electoral quotient” is then used to determine how many slots in the Lower House each party/coalition will have. In the example of Sao Paulo, the quotient is 25m/70 or 357t. It takes 357t votes to elect a Representative; and each successive sum of 357t elects another.
In this system, votes for popular candidates help elect others from the same party/coalition. Conversely, a smaller but well-identified party w/o a well-known candidate may elect a Representative. Minorities tend to be better represented. However, it is complex, cumbersome and costly. For starts, each candidate ideally should campaign over the entire state. For a party, it pays to have as many candidates as possible; any vote will count towards the final tally. And it may be that “branded” candidates have a special advantage, irrespective of party affiliation; for example, “law-and-order,” “evangelical,” etc.
The proposed change is to do away with votes for party/coalitions. Only votes for individual candidates would count. The definition of the district would not change, however. It would not become the voters’ voting zone, as it is, for example, in the US—70 in the case of São Paulo, each with its own geography and distinct set of candidates. This would not change: The district would still be the entire State, hence the name “Distritão.”
Why the change? Mainly because it would favor incumbents. Opinion polls over the years have shown that voting for individuals-only would favor name recognition w/o regard to the actual platform or background of the candidate. Thus, the expectation is that it would favor incumbents, especially those stained by corruption charges in the Lava-Jato probe. They want to be re-elected. Members of the House have immunity from prosecution and may be judged only by the Supreme Court, an unlikely event or, at worse, a long-distant probability.
The other main proposal of the new Electoral Law is to vastly increase public funding for the campaign. In September 2015, the Supreme Court outlawed corporate campaign contributions. Until then they were, by far, the most important—and corrupt—form of campaign financing, as proved by the Lava Jato. It is now vital, for parties and candidates, to access to more public money, notwithstanding the dismal state of the budget. They want to get R$3.6bn in the 2018 budget: R$1.1m for each seat in the Lower House; about twice as much as each received, legally, in corporate donations for the last election. Obviously, this would also favor incumbents. And all the large parties support the proposal: Public moneys would be distributed in proportion to the number of seats held today in the House.
The debate, if there is any at the floor of the House, is about who could be the most cynical defender of insider protection and blatant self-interest vs. external governance, transparency and the public interest. Chances are, the insiders will win.
On economic activity, the key releases for the week will be August’s first reading of CPI inflation (IPCA-15) and data for July on revenues of the central government. Congress may also take up the bill that changes the rate of interest on BNDES loans, a long-due and welcome change to reduce interest rate subsidies, diminish market segmentation, and increase the effectiveness of monetary policy. Last week, as expected, the administration sent to Congress a proposal to change the fiscal targets, not only for 2017 but through 2020. Higher deficits will, to be sure, make it easier for the administration to comply with the spending guidelines. They also raise, anew, the specter of unsustainable debt. The fiscal deficit for 2017 will be just as large as last year’s, 2.5% of GDP; for 2018, the forecast for the primary deficit increased to 2.3% of GDP from 1.8%; for 2019, to 1.8% from 0.5%; for 2020, to 0.6% from a previously expected first surplus in a decade of 0.9% of GDP. Recall that to stabilize the debt trajectory at potential GDP growth and the “neutral” real interest rate, requires a SURPLUS of 2-3% of GDP. Preliminary estimates now point to a steady expansion in the Debt/GDP ratio until 2023, when it should reach near 100% of GDP. It was 51.5% of GDP at end-2013.
- Wednesday, August 23: IPCA-15 CPI inflation – August (consensus 0.40%mom; 2.7%yoy). If true, inflation ytd would be 1.8%, a dramatic fall from the 5.7% recorded in 2016. The dip below 3%pa should prove to be transitory, as the effects of positive shocks dissipate and energy prices increase. Nevertheless, the low readings will continue to underpin the COPOM’s willingness to cut the policy rate further—the market now expects down to 7.5% by yearend. We expect -75bp in September signaling the approaching floor; the market still expects a 100bp cut.
IMPORTANT NOTICES:
This report is a general discussion of certain economic and geopolitical trends and forecasts. It does not constitute investment advice of any kind or constitute a recommendation to buy or sell any security or other financial instrument. Investors may not rely upon any of the conclusions or other statements contained herein.
Certain of the factual information contained herein was obtained from third party sources which the author considers reliable, but the accuracy of such information cannot be guaranteed.
Comments are closed.