Publication date: 5 July 2013 | Covering: April – June 2013
Quarterly Briefing
- Taper tantrum: Bernanke May 22 Congressional testimony hints at QE taper; 10-year Treasury surges from 1.63% to 2.60% by quarter end
- Emerging market rout: Indian rupee, Brazilian real, South African rand, Turkish lira all depreciate 10–20%; capital outflows from EM
- BOJ QQE: Governor Kuroda launches ‘quantitative and qualitative easing’ April 4; yen collapses; Nikkei surges then volatile
- Gold crashes: falls from US$1,600 to US$1,180 over April–June; commodity supercycle narrative challenged
- Turkey Gezi Park protests June: urban redevelopment sparks mass protests; Erdogan government faces domestic challenge
- Boston Marathon bombing April 15: two bombs kill 3; suspects identified as Chechen-Americans; security recalibrated
- Jamaica IMF EFF approved May 2013; programme begins; fiscal consolidation framework agreed
- US housing recovery building: Case-Shiller +10% year-on-year; Fed mortgage purchases supporting market
Bernanke’s Taper Hint Triggers Global Market Disruption
The defining market event of the second quarter of 2013 — and arguably one of the defining macro events of the entire post-crisis period — occurred on 22 May when Federal Reserve Chair Ben Bernanke testified before the Joint Economic Committee of Congress and suggested that the FOMC “could” reduce its asset purchases “in the next few meetings” if the economy continued to improve. The comment was relatively measured in context, but markets interpreted it as a significant signal that the period of unlimited, open-ended QE3 had a finite horizon. The repricing was swift and severe: the 10-year US Treasury yield surged from 1.63 per cent on 22 May to 2.60 per cent by the end of June — a 97-basis-point move in just six weeks. The impact was transmitted globally through the re-pricing of risk assets worldwide: equities fell, credit spreads widened, and emerging market currencies and bonds experienced their sharpest sell-off since the 2008 crisis. The ‘taper tantrum’, as it came to be known, was a stark demonstration of the degree to which global financial conditions had been shaped by Fed accommodation and the violent adjustment that could result from even hints of its withdrawal.
BOJ’s Kuroda Shock; Yen Collapses
The Bank of Japan, under new Governor Haruhiko Kuroda appointed by Prime Minister Shinzo Abe as part of the ‘Abenomics’ programme, launched its unprecedented ‘Quantitative and Qualitative Easing’ programme on 4 April. The QQE committed the BOJ to doubling the monetary base within two years, purchasing Japanese government bonds at a pace of ¥50 trillion per year, and targeting a 2 per cent inflation rate within two years after decades of deflation. The scale of the programme — relative to the size of the Japanese economy, substantially larger than the Fed’s QE — sent the yen sharply lower and the Nikkei sharply higher. The yen depreciated from approximately 94 to the dollar at the start of April to 103 by mid-May, before the taper tantrum triggered a partial reversal. The BOJ’s QQE represented the most aggressive monetary experiment by a major central bank in modern history and was being closely watched for its eventual impact on inflation and growth.
Gold Crashes; Commodity Supercycle Under Scrutiny
Gold, which had traded above US$1,600 per troy ounce at the start of April, collapsed to US$1,180 by late June in a dramatic repricing that marked the end of a twelve-year bull market in the precious metal. The catalyst for the decline was the confluence of rising real interest rates — as nominal yields surged on taper expectations while inflation expectations remained anchored — and a reduction in safe-haven demand as the acute phase of the eurozone crisis appeared to have passed. The gold crash raised broader questions about the commodity supercycle narrative that had dominated investment thinking for a decade: if China’s growth was slowing and US monetary accommodation was being withdrawn, the case for sustained commodity price strength was less obvious. Brent crude held more resilient at around US$100 per barrel, supported by continued geopolitical risk in the Middle East and North Africa, but base metals and agricultural commodities also weakened significantly through the quarter.
Jamaica: IMF EFF Approved; Programme Begins
The most significant domestic economic development of the quarter — and the year — for Jamaica was the IMF Executive Board’s approval in May 2013 of a four-year Extended Fund Facility arrangement worth approximately US$932 million. The EFF provided the framework for comprehensive fiscal consolidation, debt restructuring through the National Debt Exchange (NDX), and structural reforms designed to put Jamaica’s public finances on a sustainable path after decades of high debt and slow growth. The NDX, completed earlier in 2013, had reduced domestic debt service costs significantly. For the mortgage market, the EFF’s macroeconomic discipline was expected to create conditions — lower inflation, a more stable exchange rate, and gradually declining interest rates — that would support the recovery of credit markets including housing finance. The NHT continued to provide the primary affordable housing finance mechanism throughout the programme period.
Looking Ahead to Q3 2013
The third quarter will be shaped entirely by the taper question: will the FOMC begin reducing QE3 at its September meeting, and if so by how much? Emerging markets that experienced the sharpest capital outflows in Q2 — particularly those with large current account deficits — remain most vulnerable to further adjustment. For Jamaica, the EFF programme’s first review later in 2013 will be the critical domestic test of whether the fiscal consolidation is on track. The summer diaspora season represents an important seasonal driver of property market activity.
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.
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