Publication date: 5 June 2018 | Covering: May 2018
Monthly Briefing
- Fed May 1–2: Holds 1.50–1.75%; describes inflation target as “symmetric”; June hike clearly signalled
- Trump withdraws US from Iran nuclear deal May 8; oil prices rise on supply concerns
- Italian political crisis: Lega-Five Star coalition attempts produce acute European market stress
- US employment: April unemployment 3.9%; below 4% for first time since December 2000
- Emerging market pressure: Dollar strengthening; Argentina peso and Turkish lira under strain
- BOJ steady; Jamaica fiscal position improving; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
Fed Holds, Signals June, and Reframes Inflation
The Federal Open Market Committee held the federal funds rate steady at 1.50 to 1.75 per cent at its May 1 to 2 meeting, as universally expected, with the next hike firmly pencilled in for June’s meeting. The May statement introduced a notable new characterisation of the Fed’s inflation framework: the Committee described its 2 per cent inflation objective as “symmetric”, signalling explicitly that it would tolerate a modest temporary overshoot of the target just as it had accepted undershoot in prior years. The “symmetric” language was interpreted as a moderating influence on hawkish market expectations — an implicit message that the FOMC would not react urgently to inflation that moved slightly above 2 per cent and would therefore not be induced to accelerate the pace of tightening. Core PCE inflation, the Fed’s preferred measure, was approaching the 2 per cent level for the first time since the hiking cycle began.
Iran, Italy, and Emerging Market Turbulence
President Trump announced on 8 May that the United States would withdraw from the 2015 Joint Comprehensive Plan of Action — the Iran nuclear deal — and reimpose sanctions on Iran with the aim of reducing Iranian oil exports to zero. The announcement pushed crude oil prices higher, with Brent crude reaching US$80 per barrel, as markets priced in a reduction in Iranian supply. Oil had already recovered substantially from its early 2016 lows, and the Iran decision added a geopolitical premium to an already tightening supply picture. Higher oil prices were a net negative for oil-importing developing economies including Jamaica, which faced higher energy import costs as a result.
Italy provided the most acute financial market shock of May. Protracted negotiations following the March election produced a coalition agreement between the populist Five Star Movement and the right-wing Lega party — a combination that alarmed financial markets given both parties’ history of anti-euro and anti-austerity rhetoric. When initial coalition formation failed and markets briefly feared new elections that could produce an explicitly anti-euro platform, Italian government bond yields spiked sharply, with the two-year yield rising by more than 150 basis points in a single day in late May — the largest single-day move since the 2011 euro crisis. The Italian stress spread to other peripheral European markets and contributed to broader emerging market volatility as investors sought safe-haven assets. For Jamaica, Italian political instability was a reminder that tail risks in developed market political economies could rapidly produce contagion in developing market financing conditions.
Jamaica’s Mortgage Market Through May
Jamaica’s mortgage market operated in stable conditions domestically through May 2018, notwithstanding the global volatility. The Bank of Jamaica’s monetary policy framework provided domestic rate stability, and the NHT’s J$6.5 million individual ceiling with 0 to 4 per cent subsidised rates continued to provide the affordable home financing access that enabled home ownership for working Jamaicans. Commercial banks and building societies maintained their mortgage lending programmes, and Jamaica’s improving employment and fiscal conditions supported the housing sector. The strong US labour market — with unemployment below 4 per cent — was a positive for Jamaican remittance income, even as the broader global market turbulence required vigilance about external financing conditions.
Looking Ahead
The Federal Reserve’s June 12 to 13 meeting is expected to deliver the second hike of 2018, bringing the target range to 1.75 to 2.00 per cent. The updated Summary of Economic Projections will be watched closely for any signal of an accelerated pace — the potential shift from three to four hikes in 2018 being the key question. The Italian political situation will continue to evolve as the Conte-led coalition government settles in, with European market confidence a function of how the new government’s early economic signals are received. For Jamaica, a June Fed hike and the associated global financial conditions changes will form the dominant external parameter entering the second half of 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.
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 ↗