Publication date: 5 January 2017 | Covering: December 2016
Monthly Briefing
- FRESH: Fed December 13–14 raised federal funds rate to 0.50–0.75% (22 days ago); dot plot signals three hikes in 2017
- Italian constitutional referendum December 4: Renzi defeated 59%-41%; resigns; political uncertainty in eurozone’s third largest economy
- “Trump trade”: equity rally continues into December; 10-year US Treasury yield near 2.60% — highest since 2014
- OPEC Vienna November 30 deal formally signed; production cuts begin January 1; oil rises above US$55/barrel
- US economy: unemployment 4.6%; payrolls solid; GDP tracking near 2%; consumer confidence multi-year highs
- BOJ easing; Jamaica fiscal performance strong; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
Fed Hikes Again; Three More Projected for 2017
The Federal Open Market Committee raised the federal funds rate by 25 basis points to 0.50 to 0.75 per cent at its meeting on 13 to 14 December — the second rate increase in the current tightening cycle and the first anniversary of the historic December 2015 liftoff. The December 2016 hike was delivered in an environment of improved economic confidence and elevated post-election reflation expectations. More significant for the financial market outlook than the hike itself was the update to the FOMC’s Summary of Economic Projections, where the median participant now expected three rate increases in 2017, up from the two increases projected at the September meeting. The upgrade to the rate path reflected both the Committee’s improved growth and inflation outlook and, implicitly, the expected fiscal stimulus from the incoming Trump administration. The median dot for the federal funds rate at end-2017 moved to 1.375 per cent, implying three 25 basis point hikes over the year. The dollar strengthened on the announcement, 10-year Treasury yields pressed to their highest level since 2014 at nearly 2.6 per cent, and global emerging market assets came under renewed pressure. Chair Yellen, at the post-meeting press conference, emphasised that three hikes remained a projection rather than a commitment and that the actual path would be determined by incoming data.
Italian Referendum and Eurozone Political Risk
The Italian constitutional referendum of 4 December produced a decisive defeat for Prime Minister Matteo Renzi’s reform programme, with 59 per cent of voters rejecting the proposed changes to the Senate and regional powers. Renzi had staked his political future on the reform, and announced his resignation immediately after the result. The referendum’s defeat was seen by markets as another expression of the anti-establishment sentiment that had produced the Brexit vote in June and Trump’s election in November. The Italian banking sector — already burdened by a large stock of non-performing loans — came under immediate pressure, with Monte dei Paschi di Siena, Italy’s oldest bank, accelerating its capital-raising plans that it could not complete and ultimately requiring state support. The political uncertainty in the eurozone’s third-largest economy added to a long list of European political risks heading into 2017, which also included elections in France, Germany, and the Netherlands. The euro fell to below US$1.05 in the aftermath of the Italian vote, its lowest level since early 2003.
OPEC Production Cut Deal Takes Effect
The OPEC production cut agreement reached at the Algiers meeting in September and formalised in Vienna on 30 November came into formal effect on 1 January 2017. The deal, under which OPEC members agreed to cut production by 1.2 million barrels per day from October 2016 levels, was the cartel’s first coordinated production reduction in eight years. Several non-OPEC producers, including Russia, agreed to complementary cuts totalling approximately 600,000 barrels per day. Oil prices rose in response: Brent crude, which had been trading in the mid-US$40s per barrel before the Algiers surprise, rose to above US$55 per barrel by December. For Jamaica, which imports virtually all of its petroleum, higher oil prices represented a headwind for the energy import bill. However, the Petrocaribe arrangement with Venezuela continued to provide concessional financing for oil imports, partially mitigating the direct cost impact of higher crude prices.
Jamaica Mortgage Market in December
Jamaica’s mortgage market navigated the December Fed hike without significant disruption. The hike had been expected since the post-election repricing of market expectations, and the broader “Trump trade” in financial markets — while pushing US long-term yields higher — was accompanied by buoyant risk sentiment that partially offset the tightening effect. The Bank of Jamaica’s domestic easing stance continued to support mortgage market conditions locally. The NHT’s December is typically a busy period for loan closings, as contributors attempt to complete transactions before year-end. The J$6.5 million individual ceiling and tiered rates of 0, 2, and 4 per cent remained the framework for affordable housing access. Jamaica’s fiscal performance through the first three quarters of the 2016/17 financial year was tracking ahead of IMF targets, providing a positive backdrop for the external financing environment.
Looking Ahead
The incoming Trump administration’s first weeks in office will dominate market attention globally as executive orders and early legislative priorities become clear. The pace and composition of the promised fiscal stimulus will determine whether the three-hike dot plot for 2017 is validated or revised upward. In Europe, the French and German elections remain the year’s defining political risks. For Jamaica, 2017 opens with a constructive macroeconomic backdrop — the IMF programme on track, inflation moderate, the exchange rate broadly stable, and growth gradually improving — that supports continued careful expansion of the residential mortgage market. The NHT’s new fiscal year schemes and the BOJ’s continuing easing cycle are the primary domestic drivers to monitor.
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 ↗