Publication date: 5 October 2018 | Covering: September 2018
Monthly Briefing
- Fed September 25–26: Third hike of 2018 to 2.00–2.25%; drops “accommodative”; unanimous; confident economic assessment
- USMCA agreement announced September 30: Canada, US, Mexico replace NAFTA framework
- US-China: 10% tariffs on US$200 billion Chinese goods effective September 24; retaliation follows
- US economy exceptionally strong: unemployment 3.7% (50-year low); Q2 GDP 4.2% annualised
- Emerging markets under pressure through 2018: Argentina, Turkey crises; dollar strength
- BOJ steady; Jamaica IMF programme performing well; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
Third Hike of 2018: Fed Drops “Accommodative”
Nine days before this edition, the Federal Open Market Committee raised the federal funds rate by 25 basis points at its September 25 to 26 meeting, bringing the target range to 2.00 to 2.25 per cent. The hike was unanimous — the first unanimous rate decision in some time — and was accompanied by a meaningfully hawkish change in language: the FOMC removed the characterisation of monetary policy as “accommodative” from the post-meeting statement, signalling that rates were approaching, or had perhaps already reached, the neutral level. The Summary of Economic Projections — the quarterly “dot plot” — continued to project one more hike in 2018 (implying December) and three hikes in 2019, pointing to a total terminal rate in the 3.00 to 3.25 per cent range. Chair Powell’s post-meeting press conference was notably confident in tone, reflecting the broad strength of the US economic data.
The domestic US economic backdrop supporting the September hike was genuinely strong. The US unemployment rate fell to 3.7 per cent in September — its lowest reading since December 1969 — and non-farm payrolls continued to add jobs at a solid pace. US GDP had grown at a 4.2 per cent annualised rate in the second quarter, boosted by strong consumer spending and business investment, with the fiscal stimulus from the December 2017 Tax Cuts and Jobs Act providing meaningful support. Headline and core inflation were running near the Fed’s 2 per cent target. For Jamaica, a strongly growing US economy translated into continued strong performance in remittance inflows and tourism receipts, the two primary external income streams that supported the island’s households and balance of payments.
USMCA and the Expanding US-China Trade Conflict
September ended with the announcement of the United States-Mexico-Canada Agreement — the USMCA — on 30 September, replacing the North American Free Trade Agreement that had governed North American trade since 1994. The USMCA retained the broad architecture of NAFTA while updating provisions on automotive content rules, digital trade, labour standards, and dairy market access. The agreement resolved months of fractious trilateral negotiations and eliminated one significant source of North American trade policy uncertainty that had weighed on business investment decisions in Canada and Mexico.
By contrast, the US-China trade conflict deepened significantly in September. The United States imposed 10 per cent tariffs on approximately US$200 billion of Chinese imports effective 24 September, with the rate scheduled to rise to 25 per cent at the start of 2019. China retaliated with tariffs on US$60 billion of US goods. The September action was the largest tariff imposition of the trade war and signalled that the dispute had moved beyond its initial skirmishes into a sustained structural confrontation. For Jamaica, the escalating US-China trade war was a persistent headwind to global growth, with particular relevance for commodity prices and the external demand environment.
Jamaica’s Mortgage Market Through September
Jamaica’s mortgage market continued to operate in stable domestic conditions through September 2018. The Bank of Jamaica maintained its monetary policy stance, and the NHT’s J$6.5 million individual ceiling with subsidised 0 to 4 per cent rates remained the primary vehicle for affordable home ownership among the contributor population. Commercial bank and building society mortgage activity was sustained by solid Jamaican employment conditions, growing household incomes, and the continuing desire of Jamaicans — both on the island and in the diaspora — to invest in residential property. The summer tourism season had been broadly positive, supporting consumer confidence and the broader economic outlook entering the fourth quarter.
Looking Ahead
The first trading days of October have already shown signs of market pressure, with Chair Powell’s comment that the neutral rate was “a long way” from current levels contributing to a rise in Treasury yields and early equity market weakness. The Federal Reserve’s next scheduled meeting is November 7 to 8, where a hold is expected; the December 18 to 19 meeting remains the anticipated venue for the year’s fourth and final hike. For Jamaica, the combination of a robust US economy and contained domestic conditions provides a constructive near-term outlook, even as the rising US rate environment and trade war uncertainties represent meaningful medium-term risks for the island’s external sector.
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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