Publication date: 5 March 2018 | Covering: February 2018
Monthly Briefing
- Market correction: S&P 500 falls 10% from January peak; “Volmageddon” February 5 destroys inverse volatility products
- Powell sworn in February 5; first day as Federal Reserve Chair; January FOMC was Yellen’s last meeting
- US ten-year Treasury yield rises to 2.9%; highest since 2014; bond market driving equity concerns
- Strong January payrolls: 200,000 jobs; 2.9% wage growth; higher-than-expected; triggers rate fears
- Tax reform stimulus visible: Corporate earnings strong; buybacks accelerate; US dollar weakens
- BOJ steady; Jamaica improving economic conditions; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
Volmageddon and the First Correction in Two Years
After the extraordinary calm of 2017 — a year in which the S&P 500 did not experience a single daily decline of 2 per cent or more — February delivered a sharp and sudden reminder that markets are not inherently placid. The catalyst was the 2 February release of the January non-farm payrolls report, which showed 200,000 jobs added and, more significantly, wage growth of 2.9 per cent year-on-year — the fastest pace since 2009. The wage data raised concerns that the Federal Reserve might need to tighten more aggressively than its “gradual” guidance implied, pushing the ten-year Treasury yield above 2.9 per cent. The equity market sold off in response, and on 5 February the S&P 500 fell 4.1 per cent — its largest single-day decline since 2011. The volatility spike of that day had an additional and dramatic consequence: the implosion of a family of exchange-traded products that had taken short positions on volatility, betting on the continuation of 2017’s extraordinary calm. Several of these “inverse VIX” products lost essentially all of their value in a single day, a phenomenon quickly labelled “Volmageddon” in market commentary.
The correction continued through February, with the S&P 500 ultimately declining approximately 10 per cent from its January 26 peak before finding support. The correction remained within the bounds of normal cyclical adjustment — the US economy was growing strongly, earnings were rising, and the underlying expansion remained intact — but it ended a period of exceptionally low volatility that had been characterised by some observers as complacency. Jerome Powell was sworn in as Federal Reserve Chair on 5 February — the same day as the largest market decline of his tenure’s opening — and his inheritance of responsibility for managing the world’s most important central bank began immediately with questions about how the FOMC would respond to tightening financial conditions.
Jamaica’s Mortgage Market Through February
Jamaica’s mortgage market maintained its constructive domestic trajectory through February 2018. The Bank of Jamaica’s policy rate remained conducive to mortgage lending, and the NHT’s J$6.5 million individual ceiling and subsidised 0 to 4 per cent rates continued to deliver accessible home ownership financing for the contributor population. The strong US labour market data — which triggered the global equity correction — was itself evidence of economic strength that would support continued robust remittance flows to Jamaica and the consumer income levels that underpin Jamaican household mortgage serviceability. The global equity market correction had not translated into a disruption of Jamaican domestic credit conditions.
Looking Ahead
The Federal Reserve’s March 20 to 21 meeting — Chair Powell’s first FOMC meeting as presiding officer — will deliver the first rate hike of 2018, bringing the target range to 1.50 to 1.75 per cent. Markets will scrutinise Powell’s debut press conference closely for signals about the pace of subsequent tightening and his assessment of the February market correction. For Jamaica, the normative question of whether the US economic expansion can sustain the current pace of tightening without producing a sharper market or economic disruption remains the key external uncertainty for 2018.
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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