Publication date: 5 October 2012 | Covering: July – September 2012
Quarterly Briefing
- FRESH — Draghi “whatever it takes” July 26; ECB OMT announced September 6; Spanish and Italian bond yields collapse from crisis peaks (FRESH 29 days ago)
- FRESH — Fed QE3: Launched September 13; US$40bn/month agency MBS purchases; open-ended; low rates through mid-2015 (22 days ago)
- Eurozone crisis: Spain 10-year peaks 7.6% in July; Italy above 6%; Draghi speech turns tide; OMT conditional on programme request
- US election season: Obama vs Romney; Republican convention Tampa Aug; Democratic convention Charlotte Sep
- Curiosity rover lands Mars August 6; London Olympics July 27–August 12
- US housing recovery: Case-Shiller +1.2% year-on-year June; housing starts improving; Fed MBS purchases supporting market
- China growth slowing: Q2 GDP 7.6%; PBoC cuts rates June, July; rebalancing concerns
- Jamaica: IMF Stand-By programme period ending; fiscal gaps; high debt burden
Draghi’s ‘Whatever It Takes’ Turns the Crisis
The third quarter of 2012 may be remembered as the quarter in which the existential phase of the eurozone sovereign debt crisis was brought under control, through the force of a single sentence. Speaking at a Global Investment Conference in London on 26 July, European Central Bank President Mario Draghi declared: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” The remark was unscripted and went well beyond anything the ECB had previously committed to, and its impact on financial markets was immediate and dramatic. Spanish 10-year government bond yields, which had risen to 7.6 per cent in late July — widely regarded as unsustainably high and approaching levels that would force a sovereign bailout — fell sharply on the speech and continued declining through August and September. Italian yields followed. The ECB followed the speech on 6 September with the formal announcement of the Outright Monetary Transactions programme — a conditional, unlimited bond-buying backstop for eurozone sovereigns that requested an ESM programme. The OMT has never been activated, but its existence as an unlimited backstop was sufficient to restore confidence in eurozone sovereign debt markets and has remained the ECB’s most powerful crisis-fighting tool ever since.
Fed Launches QE3; Open-Ended MBS Purchases
The Federal Open Market Committee announced at its September 12 to 13 meeting the launch of a third round of quantitative easing, under which the Fed would purchase US$40 billion per month in agency mortgage-backed securities on an open-ended basis — meaning without a pre-specified end date or total amount, continuing until the labour market showed “substantial improvement”. The open-ended structure was a significant departure from QE1 and QE2, both of which had been announced with fixed amounts and end dates. The decision reflected both the Fed’s assessment that the recovery had stalled — US payrolls in June were just 80,000, and the unemployment rate remained stubbornly at 8.1 per cent — and a strategic choice to target mortgage-backed securities specifically in order to drive down mortgage rates and support the housing recovery that the Fed viewed as a critical transmission mechanism for monetary policy. The FOMC also extended its forward guidance for low rates to “at least through mid-2015”. Combined with Operation Twist — which was also extended — the Fed was now injecting approximately US$85 billion per month in total asset purchases by year-end.
US Housing Recovery; Jamaica Context
The US housing market showed genuine signs of recovery through the third quarter of 2012, with the Case-Shiller national index turning positive on a year-on-year basis for the first time since 2010. Housing starts improved, existing home sales volumes picked up, and the inventory of unsold homes declined. The Fed’s direct targeting of the mortgage-backed securities market through QE3 pushed 30-year fixed mortgage rates to then-historic lows of around 3.5 per cent, which — combined with still-depressed house prices — was improving affordability. The US housing recovery was significant for Jamaica primarily through its implications for remittances: as US construction and housing-related employment improved, the employment and income prospects of Jamaican-Americans in construction, landscaping, and property management sectors improved in turn. Jamaica’s domestic mortgage market, meanwhile, continued to operate in a high-rate environment, with the IMF Stand-By programme nearing its end and the fiscal situation requiring a new framework.
Looking Ahead to Q4 2012
The fourth quarter will be dominated by the US presidential election in November and the year-end ‘fiscal cliff’ negotiations that will determine the US budget trajectory for 2013. For the eurozone, the OMT’s effectiveness will be tested by whether Spain and potentially other sovereigns request programme support, which would trigger OMT activation. For Jamaica, the critical domestic agenda item is negotiating a new IMF programme framework as the Stand-By expires. The mortgage market remains constrained by high domestic rates, though the international environment — shaped by unprecedented central bank accommodation in the US and Europe — provides some support to capital flows and remittances.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
Follow Jamaica Homes on Youtube @jamaicahomes and Instagram @jamaica_homes and on Facebook @jamaicahomesnews Send us a message or email us at onlinefeedback@jamaica-homes.com or editor@jamaica-homes.com
Visit our YouTube Community ↗