Publication date: 5 October 2016 | Covering: September 2016
Monthly Briefing
- FRESH: Fed September 20–21 holds 0.25–0.50% (15 days ago); three dissenters want immediate hike; December strongly signalled
- OPEC Algiers September 28: surprise production cut framework agreed; first coordinated action in eight years; oil rallies
- Deutsche Bank: US Department of Justice seeks US$14 billion fine for pre-crisis mortgage securities; shares at 30-year lows
- North Korea conducts nuclear test September 9: largest yet; UN Security Council emergency session
- Global monetary policy: ECB holds; Bank of Japan overhauls framework to “yield curve control”
- BOJ easing; Jamaica IMF EFF progress; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
Fed Holds with Three Dissenters; December on the Table
The Federal Open Market Committee held the federal funds rate at 0.25 to 0.50 per cent at its 20 to 21 September meeting for the fourth consecutive meeting since the December 2015 liftoff. The decision was not unanimous: three members — Esther George, Loretta Mester, and Eric Rosengren — dissented in favour of an immediate 25 basis point increase, the highest number of hawkish dissents since 2014. The dissents signalled that a significant portion of the Committee believed the conditions for further tightening had already been met. The accompanying Summary of Economic Projections reduced the median number of projected rate increases in 2016 from two to one, making December the only remaining live meeting for a 2016 hike. Chair Yellen, at the post-meeting press conference, struck a broadly hawkish tone, describing the case for a rate increase as having “strengthened” but noting that the Committee had chosen to “wait for further evidence” of continued progress. Market pricing for a December hike rose to approximately 65 per cent after the meeting. The Bank of Japan, at its own September meeting, announced a significant overhaul of its monetary framework, replacing its quantitative easing target with “yield curve control” — a commitment to hold 10-year Japanese government bond yields near zero — in an acknowledgement that the previous approach had run into operational limitations.
OPEC Algiers: A Surprise Production Cut Framework
The most significant commodity market development of September occurred in Algiers on 28 September, when OPEC members meeting on the sidelines of the International Energy Forum reached a surprise informal agreement to limit production to a range of 32.5 to 33.0 million barrels per day. The agreement, if formalised at the November Vienna OPEC meeting, would represent the cartel’s first coordinated production reduction since 2008. Oil prices, which had been trading in the mid-US$40s per barrel through much of the summer, surged on the news: Brent crude rose to above US$50 per barrel within days of the announcement. The agreement remained to be formalised, with the allocation of cuts among members — particularly the Saudi-Iran dynamic, given Riyadh’s expectation that Tehran should freeze output at current levels — requiring further negotiation before the November meeting. For Jamaica, which imports essentially all of its petroleum and had been benefiting from the lower oil price environment of 2015 to 2016, a sustained recovery in oil prices would present a headwind for the energy import bill, partially offset by the concessional financing terms of the Petrocaribe arrangement.
Deutsche Bank and North Korea: September’s Risk Events
Deutsche Bank’s shares fell to their lowest level in more than 30 years in September after the US Department of Justice disclosed it was seeking US$14 billion in penalties from Germany’s largest lender for misconduct in the sale of mortgage-backed securities before the 2008 financial crisis. The scale of the potential fine — the equivalent of Deutsche Bank’s entire market capitalisation at the time of writing — sparked concern among European regulators and investors about the bank’s capital adequacy and whether Germany might need to engineer a state rescue. The episode reopened wider concerns about the health of European banks and their legacy legal liabilities. Separately, North Korea conducted its fifth and largest nuclear test on 9 September, triggering an emergency session of the UN Security Council and renewed calls for tighter sanctions. The test was estimated to have a yield of approximately 10 kilotons. The North Korean nuclear and missile programme remained a persistent geopolitical risk, though financial markets had become somewhat habituated to the tests and the market impact was limited.
Jamaica Mortgage Market in September
Jamaica’s residential mortgage market continued its measured recovery through September 2016. The Bank of Jamaica’s signalling of further monetary easing provided a supportive backdrop for domestic lending conditions, and the IMF Extended Fund Facility programme’s ongoing progress gave external creditors and domestic lenders confidence in the macroeconomic framework. The NHT’s J$6.5 million individual ceiling and tiered mortgage rates of 0, 2, and 4 per cent continued to be the primary vehicle for affordable home ownership for qualifying contributors. Commercial lenders were cautiously competitive in the higher-value residential segment, with lending rate reductions occurring incrementally as the BOJ’s policy rate fell.
Looking Ahead
The US presidential election on 8 November is now the dominant near-term uncertainty for global financial markets. The OPEC Vienna formal meeting on 30 November will determine whether the Algiers framework becomes a binding production cut agreement. The Fed’s November 1 to 2 meeting is expected to hold, with December remaining the most likely venue for the next rate increase. For Jamaica, the fiscal year first-quarter budget performance review and the IMF programme review cycle are the primary near-term policy markers. The mortgage market is expected to remain broadly stable, supported by the NHT’s contribution-based programmes and the BOJ’s continuing accommodation.
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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