Publication date: 5 December 2014 | Covering: November 2014
Monthly Briefing
- Fed October 28–29: Ends QE3; retains “considerable time”; December meeting live for language change; US at 0–0.25%
- US midterms November 4: Republicans sweep Senate and expand House majority; Obama lame-duck; gridlock expected
- FRESH — China: PBoC surprise rate cut November 21; benchmark lending rate to 5.6%; first cut since 2012 (14 days ago)
- Oil: Brent falls sharply toward US$70–75/barrel ahead of November 27 OPEC meeting; shale economics under scrutiny
- Russia-Ukraine: Ceasefire fragile; Western sanctions; ruble under accelerating pressure; capital outflows surging
- Jamaica IMF EFF; BOJ easing; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
Fed Ends QE3; December Language Change Expected
The Federal Open Market Committee brought its third round of quantitative easing to a formal end at its October 28 to 29 meeting, a decision that had been carefully telegraphed over many months and was received without significant market disruption. QE3, launched in September 2012, had at its peak involved monthly purchases of US$85 billion in Treasury and agency mortgage-backed securities. The programme was tapered from December 2013 onward in US$10 billion monthly increments, and the October meeting marked the final step-down to zero. The FOMC statement retained the “considerable time” language regarding how long rates would remain at their zero-to-0.25 per cent level, maintaining the patient tone that markets had come to expect. However, the statement added a balanced-risk assessment and noted that the labour market had shown “substantial improvement since the inception of its current asset purchase program” — a phrase designed to mark the end of QE3 as an achievement rather than a retreat. The December 16 to 17 meeting was now widely anticipated as the date at which the Committee would replace “considerable time” with language more explicitly signalling the approach of liftoff, with a first actual rate increase most likely in mid-2015.
US Midterms: Republican Sweep
The November 4 US midterm elections delivered a decisive result: the Republican Party recaptured control of the Senate with a net gain of nine seats — the largest Senate gain by any party since 1980 — and expanded its already-substantial majority in the House of Representatives. The outcome left President Obama facing a fully Republican Congress for the final two years of his presidency, with significant implications for the legislative agenda: prospects for immigration reform, infrastructure spending, and trade deals faced immediate reassessment. Financial markets reacted positively to the Republican victory, with equity markets rising modestly in the days following the election, in part on expectations that a divided government would produce less regulatory and tax uncertainty. However, the political gridlock that a divided Congress implied was generally expected to mean that fiscal policy would remain a neutral-to-negative drag on growth, placing the burden of supporting the recovery firmly on the Federal Reserve’s monetary policy.
China PBoC Surprise Rate Cut; Oil Falls Toward OPEC Meeting
In a surprise move on 21 November, the People’s Bank of China cut its benchmark one-year lending rate by 40 basis points to 5.6 per cent and the one-year deposit rate by 25 basis points to 2.75 per cent — the first interest rate cut since July 2012. The decision reflected growing concern at the PBoC and State Council about slowing growth: Chinese industrial output had been weakening, property prices were falling in major cities, and export growth was moderating. The PBoC’s cut was an acknowledgment that more targeted instruments — selective reserve requirement reductions, targeted lending facilities — had not been sufficient to arrest the slowdown. Global equity markets rallied sharply on the announcement, with European and US indices adding 1.5 to 2 per cent on the news. Meanwhile, oil markets moved in the other direction: Brent crude continued its descent toward US$70 to US$75 per barrel ahead of the critical OPEC meeting scheduled for 27 November in Vienna, at which the cartel would decide whether to cut production to support prices or maintain output and allow prices to find a lower market-clearing level.
Russia-Ukraine; Ruble Under Pressure
The conflict in eastern Ukraine continued through November, with the Minsk ceasefire agreement of September showing increasing signs of strain. Parliamentary elections in the self-declared Donetsk and Luhansk People’s Republics in early November were condemned by Ukraine and Western governments as illegitimate, and accusations of Russian reinforcement of separatist forces continued. Western sanctions on Russia remained in place and, combined with oil’s decline, were placing the Russian economy under severe and accelerating pressure: the ruble had fallen approximately 30 per cent against the dollar over the course of 2014 by November, and capital outflows for the year were tracking toward US$120 to US$130 billion — the highest since the immediate post-Soviet period. Russia’s foreign exchange reserves were being drawn down to defend the ruble, and the Central Bank of Russia raised its key rate to 9.5 per cent in November in a further attempt to stabilise the currency. The Russian situation was being watched globally as a case study in how rapidly commodity revenues and external conditions could deteriorate under geopolitical pressure.
Jamaica Mortgage Market in November
Jamaica’s mortgage and housing finance market continued its gradual improvement through November 2014. The IMF EFF programme had now been in operation for approximately 18 months, and its disciplinary framework had enabled the BOJ to progressively ease monetary conditions. Domestic interest rates had fallen meaningfully from their 2012 to 2013 peaks, and this was beginning to feed through into improved housing affordability for qualified borrowers. The NHT’s J$6.5 million individual ceiling and tiered interest rates of 0, 2, and 4 per cent — with a two-applicant ceiling of J$13 million — remained the primary state-supported vehicle for affordable home ownership. Lower global oil prices, if sustained, were expected to reduce Jamaica’s energy import bill in 2015 and ease pressure on the current account and inflation, giving the BOJ additional scope to sustain its accommodative policy. December was typically a quieter month for property transactions as the festive season reduced activity, with the spring market in 2015 expected to reflect the improving broader economic environment.
Looking Ahead
The OPEC meeting on 27 November will be the immediate defining event for global commodity markets: whether the cartel cuts, holds, or reduces production will set the oil price trajectory for the coming months and have significant knock-on effects for producer economies and global inflation. The December 16 to 17 Federal Reserve meeting is expected to bring the anticipated language change from “considerable time” toward formulations more consistent with a 2015 liftoff. For Jamaica, the BOJ’s year-end monetary policy assessment and the IMF’s ongoing programme review progress will be the key domestic signposts heading into 2015. The island’s mortgage market enters the new year with the tailwind of gradually lower interest rates and, potentially, a meaningful reduction in the energy import burden if oil prices remain subdued.
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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