Publication date: 5 January 2013 | Covering: October – December 2012
Quarterly Briefing
- FRESH — Fiscal cliff: US$600bn in automatic tax/spending changes begin January 1; last-minute deal still being finalised; markets on edge (5 days ago)
- FRESH — Fed December 12: Launches QE4 — US$45bn/month Treasury purchases replaces Operation Twist; total QE now US$85bn/month; rate guidance tied to 6.5% unemployment / 2.5% inflation (24 days ago)
- Hurricane Sandy: October 29 devastates US East Coast; New York/New Jersey damage; GDP impact; rebuilding costs US$65bn
- Obama re-elected November 6: defeats Romney; Democrats retain Senate; Republicans keep House; second term divided government
- Greece: receives further bailout disbursement; debt buy-back October; IMF/EU programme continues
- ECB OMT: Draghi’s July “whatever it takes” backstop holds; Spanish and Italian spreads contained through Q4
- US Q3 GDP 3.1%; housing recovery accelerating; Case-Shiller +5% year-on-year; consumer confidence improving
- Jamaica: fiscal challenges; IMF Stand-By expired; National Debt Exchange preparation underway
Fed Launches QE4; Introduces Unemployment Threshold Guidance
The Federal Open Market Committee announced two significant policy changes at its December 11 to 12 meeting, twenty-four days before this edition publishes. First, the Committee launched a new programme of Treasury security purchases at US$45 billion per month, replacing the ‘Operation Twist’ programme that had been selling short-term Treasuries and buying long-term ones at a similar pace but had been due to expire at year-end. Combined with the US$40 billion per month in mortgage-backed security purchases announced in September — QE3 — the new programme brought total monthly Fed asset purchases to US$85 billion. Second, and more significantly for the medium-term policy framework, the Committee introduced quantitative thresholds into its forward guidance: the FOMC expected to maintain the exceptional low federal funds rate “at least as long as the unemployment rate remains above 6.5 per cent” and “inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 per cent longer-run goal”. The numerical thresholds replaced the earlier calendar-based guidance of ‘mid-2015’ and represented an attempt to make policy more data-dependent and transparent.
Hurricane Sandy; Obama Re-election
Hurricane Sandy made landfall on the US East Coast on 29 October, causing catastrophic damage across New Jersey, New York City, and surrounding areas. The storm surge inundated lower Manhattan, the New Jersey shore, and parts of Brooklyn and Queens; the New York subway system flooded; and more than 8 million homes lost power. The total economic damage was estimated at US$65 billion, and approximately 150 people were killed. President Obama’s handling of the federal response — working in bipartisan fashion with New Jersey Governor Chris Christie — was widely praised and may have contributed to his comfortable victory over Republican challenger Mitt Romney on 6 November. Obama carried the Electoral College 332 to 206 and won the popular vote by 4 percentage points. With Democrats retaining the Senate and Republicans keeping the House, the second term began with the same divided government that had produced the debt ceiling crises and fiscal cliff negotiations of the first term. For Caribbean economies including Jamaica, the US presidential result had limited immediate policy implications, though continued US economic recovery was important for remittances and tourism.
Fiscal Cliff; Year-End Market Volatility
The ‘fiscal cliff’ — the combination of approximately US$600 billion in automatic tax increases and spending cuts due to take effect on 1 January 2013 unless Congress acted — dominated the final months of 2012. The negotiations between the White House and the Republican-led House of Representatives were acrimonious and unproductive through most of December, with markets oscillating between optimism and pessimism about whether a deal would be reached. As this edition goes to print on 5 January 2013, a last-minute deal passed by the Senate in the early hours of New Year’s Day and subsequently by the House is either being finalised or has recently been enacted, providing a partial resolution that averts the bulk of the automatic tax increases while deferring the spending cut decisions. The episode will have lasting consequences for the US fiscal debate and the relationship between the executive and legislative branches.
Jamaica: Fiscal Challenges; NDX Preparation
Jamaica closed 2012 facing acute fiscal pressures. The IMF Stand-By Arrangement that had supported Jamaica’s economy in 2010 to 2011 had expired, and Jamaica’s public debt — at approximately 140 per cent of GDP — remained one of the highest in the world as a share of output. High domestic interest rates, driven by the need to finance the debt domestically at market rates, constrained private sector credit growth and weighed heavily on housing affordability. The National Debt Exchange, designed to voluntarily restructure domestic debt to lower rates and longer maturities, was in preparation as a precondition for a new IMF programme. For the mortgage market, the high-rate environment meant that commercial mortgage rates were significantly above the NHT’s subsidised tiers, making the NHT the primary affordable housing finance vehicle. The property market in 2012 reflected these constraints, with transaction volumes below the pre-crisis levels of the mid-2000s.
Looking Ahead to Q1 2013
2013 begins with the US fiscal cliff resolution still being digested, the Fed’s QE4 adding further fuel to global risk appetite, and the eurozone’s recovery remaining fragile. For Jamaica, the critical near-term event is the National Debt Exchange and the subsequent IMF programme negotiation — developments that, if successful, could fundamentally improve the macroeconomic environment for the mortgage and housing market over the medium term.
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 ↗