Publication date: 5 August 2018 | Covering: July 2018
Monthly Briefing
- US-China trade war: $34bn mutual tariffs exchange July 6; US threatens $200bn further; confrontation widens
- Fed August 1 (four days ago): Holds 1.75–2.00%; “strong” economy; September hike clearly telegraphed
- US Q2 GDP advance estimate 4.1% annualised (July 27); strongest quarter since 2014; tax stimulus visible
- US-EU trade truce July 25: Trump-Juncker agree to negotiate; auto tariff threat paused
- Global equity markets broadly positive in July; US dollar strong; emerging markets mixed
- BOJ steady; Jamaica housing market active; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
US-China Trade War Enters Full Confrontation
The US-China trade war moved from threatened action to implemented tariffs in the first week of July. On 6 July 2018, the United States imposed 25 per cent tariffs on US$34 billion of Chinese goods — primarily industrial and technology products — under Section 301 of the Trade Act, the authority invoked by the Trump administration following an investigation into Chinese intellectual property and technology transfer practices. China immediately retaliated with 25 per cent tariffs on US$34 billion of US exports, targeting agriculture, automobiles, and seafood in a deliberate effort to create political pressure in US states that had supported President Trump. The simultaneous imposition of tariffs on both sides on the same day marked the formal commencement of the trade war that had been threatened for months.
The United States did not stop at the initial US$34 billion. The Trump administration promptly announced an additional tariff list covering US$200 billion of Chinese goods at a 10 per cent rate, with a comment period before implementation. China indicated it would retaliate proportionally. The scope of the threatened escalation was unprecedented: US$200 billion represented roughly 40 per cent of China’s total exports to the United States, and together with the US$34 billion already in effect and a further US$16 billion tranche scheduled, the tariff action covered the majority of US-China bilateral trade. For Jamaica and other small open economies, the trade conflict between the world’s two largest economies was a structural headwind to the global growth and trade environment that underpinned developing country economic performance.
Strong US Growth and a Fed Pause
Four days before this edition, on 1 August, the Federal Open Market Committee held the federal funds rate steady at 1.75 to 2.00 per cent, as expected, following June’s hike. The August statement characterised the economy as “strong” — a notable upgrade from prior language — and maintained the “further gradual increases” guidance. The September hike was widely telegraphed, with federal funds futures pricing near-certainty of a move to 2.00 to 2.25 per cent at the September 25 to 26 meeting. The advance estimate of second-quarter GDP, released on 27 July, showed the US economy growing at a 4.1 per cent annualised rate — the strongest quarterly pace since 2014 and a figure that reflected the combined impact of consumer spending, business investment, and reduced trade deficits. The robust growth data reinforced the FOMC’s confidence in the appropriateness of the gradual tightening path.
In a development that provided some relief from the trade war anxiety, President Trump and European Commission President Juncker agreed on 25 July to a framework for negotiating a broad trade deal, with both sides agreeing to work toward “zero” tariffs, barriers, and subsidies on non-auto industrial goods. The United States also agreed to pause the threatened tariffs on European automobiles while negotiations proceeded. The EU-US trade truce reduced one dimension of the global trade conflict, though the US-China confrontation continued unabated.
Jamaica’s Mortgage Market Through July
Jamaica’s mortgage market continued to function well through the summer of 2018. The NHT’s J$6.5 million individual ceiling and subsidised rate structure — with 0, 2, and 4 per cent rates for eligible contributors — maintained active lending to the employed population seeking home ownership. Commercial bank competition in the mortgage space kept pricing competitive for borrowers whose requirements exceeded NHT parameters. Jamaica’s strong tourism performance through the first half of 2018 had supported employment and consumer income, providing a solid foundation for mortgage serviceability and new housing demand. The strong US economic data, while generating rate normalisation that tightened some external financing conditions, also supported the remittance inflows and tourism demand that underpinned Jamaica’s external accounts.
Looking Ahead
The Jackson Hole Economic Symposium on 23 to 25 August will provide Chair Powell’s next major public statement on the rate outlook, with markets watching for any signal on whether the “gradual” pace of tightening might accelerate given the Q2 GDP strength. The US-China tariff confrontation will continue to evolve, with the fate of the threatened US$200 billion tariff list the dominant trade policy variable. For Jamaica, the summer months provide the opportunity to consolidate the tourism season gains and continue the fiscal consolidation momentum that has anchored the island’s improved credit standing.
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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