Publication date: 5 September 2019 | Covering: August 2019
Monthly Briefing
- Fed July 31 cut 25bps to 2.00–2.25%; first rate cut since December 2008; mid-cycle adjustment language
- US-China August 1: Trump announces 10% tariffs on remaining US$300 billion Chinese goods; trade war escalates sharply
- US Treasury yield curve inverts August 14; two-year yield exceeds ten-year; recession signal watched carefully
- China retaliates August 23; Trump raises existing tariff rates; global markets sell off sharply
- BOJ steady; Jamaica economic indicators stable; tourism season performance encouraging
- NHT individual ceiling J$6.5 million; subsidised rates 0, 2, 4 per cent; domestic demand remains firm
The Federal Reserve’s First Cut Since 2008
The Federal Reserve cut the federal funds rate by 25 basis points on 31 July 2019, reducing the target range to 2.00 to 2.25 per cent. The move was historically significant: it was the first rate reduction since December 2008, ending a ten-year hiking cycle that had lifted rates from near zero to a peak range of 2.25 to 2.50 per cent at December 2018. Chair Powell described the cut as a “mid-cycle adjustment” designed to insure against downside risks from slowing global growth and trade policy uncertainty, rather than the beginning of an extended easing cycle. The FOMC statement cited “muted inflation pressures” and “global developments” as factors in the decision, alongside a desire to sustain the US economic expansion and maintain the strong labour market.
The July cut was not unanimous: two dissenting members preferred to hold rates steady, reflecting a division on the Committee about whether the cut was warranted given underlying US economic strength. The US unemployment rate remained near generational lows at 3.7 per cent, consumer spending was solid, and the broader economy had grown at a respectable pace in the first half of 2019. Against this domestic backdrop, the principal rationale for easing was the trade policy uncertainty and its impact on global supply chains, business investment, and financial conditions. For Jamaican mortgage borrowers and lenders with US dollar exposures or USD-linked obligations, the Fed’s pivot to a cutting cycle was a favourable development, providing context for the direction of the international rate environment.
Trade War Escalation and the Yield Curve Signal
The ink on the July rate cut had barely dried before the trade war escalated dramatically. On 1 August 2019, President Trump announced via social media that the United States would impose a 10 per cent tariff on the remaining approximately US$300 billion of Chinese goods that had not yet been subject to tariffs — effective 1 September. The announcement blindsided financial markets, which had expected ongoing negotiations to precede any further escalation. The S&P 500 fell sharply in response, and Treasury yields declined as investors sought safe-haven assets and priced in further Fed easing.
The consequent pressure on global financial markets contributed, alongside domestic US growth concerns, to a significant development on 14 August: the US two-year Treasury yield briefly exceeded the ten-year yield, an inversion of the yield curve that had historically preceded recessions. The inversion triggered intense market commentary and concern about the US growth outlook. China’s retaliation on 23 August — announcing tariffs on an additional US$75 billion of US goods — prompted President Trump to announce increases in existing tariff rates, deepening the confrontation further. By the end of August, the US-China trade war had reached its most acute point since it began, with tariffs covering the entirety of bilateral trade and no clear pathway to negotiated resolution visible.
Jamaica’s Mortgage Market Through August
Jamaica’s mortgage market remained in positive operating conditions through August, with global turbulence so far contained to equity markets rather than producing direct transmission into local credit conditions. The Bank of Jamaica maintained its accommodative monetary policy stance, and the competitive mortgage market continued to provide accessible finance for qualified borrowers across the commercial banking and building society sectors. The NHT remained the foundation of affordable residential finance, providing J$6.5 million individual loans at rates between 0 and 4 per cent, serving the contributor population seeking to access home ownership. Jamaica’s fiscal consolidation, sustained over several years of IMF programme compliance, had contributed to improved macro-financial stability that provided insulation against external shocks of the kind generated by the August trade war escalation.
The summer tourism season and remittance flows — both closely linked to the US economy — remained important considerations for Jamaica’s external account. Any material US economic slowdown resulting from the trade war would reduce both tourism arrivals and diaspora remittances, creating real economy transmission channels that the global financial market volatility of August had not yet activated. Jamaican policymakers would be watching the US economic data through the fourth quarter with particular attention to these linkages.
Looking Ahead
The 1 September tariffs on US$300 billion of Chinese goods will have taken effect as this edition goes to print, marking the broadest tariff coverage yet in the US-China trade war. The Federal Reserve’s September 17 to 18 meeting is now the dominant near-term event for global markets, with the majority of observers expecting a second 25 basis point cut. Whether the Fed delivers, and how it characterises the outlook, will set the tone for risk sentiment through the remainder of the third quarter. For Jamaica, the September FOMC meeting outcome and the trajectory of US-China trade talks scheduled for October will shape the external environment entering the final quarter of 2019.
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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