Publication date: 5 June 2016 | Covering: May 2016
Monthly Briefing
- FRESH: Puerto Rico misses US$422 million debt payment June 2 (3 days ago); sovereign debt crisis deepens
- Fed April 26–27: Holds 0.25–0.50%; notes “slowing” in growth; June and September remain live but conditional
- Brexit campaign enters final weeks: polls tight; financial firms warn of consequences; Bank of England issues risk warnings
- Oil recovers toward US$50/barrel from January lows below US$27; energy sector relief; Venezuela still in crisis
- US Q1 GDP 0.8% annualised — weak; Fed cites “transitory” factors; labour market solid
- BOJ easing; Jamaica NHT J$6.5 million ceiling; rates 0, 2, 4 per cent; tourism record season
Fed Holds; Brexit and Weak Q1 GDP Create Caution
The Federal Open Market Committee held the federal funds rate at 0.25 to 0.50 per cent at its April 26 to 27 meeting, citing a mixed economic picture. US first-quarter GDP growth came in at an annualised 0.8 per cent — the weakest quarter since the first quarter of 2015 and a significant deceleration from the second half of 2016. The Committee characterised the weakness as partly reflecting temporary factors including inventory adjustment and weak business fixed investment, and maintained its assessment that the labour market was continuing to strengthen. Chair Yellen, at the press conference, noted that June was a live meeting for a rate increase, though markets placed the probability of a June hike at no more than 30 to 35 per cent. The approaching UK EU referendum on 23 June was explicitly identified as an international uncertainty that the Committee was monitoring. With the referendum just weeks before the June meeting date, a pre-Brexit rate hike appeared increasingly unlikely unless the economic data were exceptionally strong. The May payrolls report — to be released 3 June, two days before this edition publishes — will be a critical data point for the June meeting decision.
Brexit Campaign: Warnings Mount
The UK’s campaign ahead of the 23 June EU membership referendum intensified through May, with the economics and finance community broadly aligned on the Remain side. The Bank of England published its own analysis in May warning that a Brexit vote could tip the UK economy into recession. The Treasury published a separate report projecting that a LEAVE vote would reduce household incomes by £4,300 per year by 2030. Major international organisations including the IMF and the OECD published analyses broadly consistent with this view. The Leave campaign, led by former London Mayor Boris Johnson and Justice Secretary Michael Gove, characterised these warnings as “Project Fear” and argued that the economic risks were overstated and that Britain’s ability to negotiate independent trade deals post-Brexit would deliver long-term economic benefits. Opinion polls through May showed the campaigns broadly level, with the outcome genuinely uncertain. For the Caribbean and Jamaica, which maintain significant Commonwealth, diaspora, and trade ties to the UK, the prospect of Brexit introduced a medium-term uncertainty about the trade and development relationship that was being watched carefully.
Oil Recovery and Puerto Rico’s Debt Crisis
Oil prices recovered toward US$50 per barrel through May, a significant rebound from the January lows when Brent crude briefly touched below US$27 per barrel. The recovery reflected a combination of factors: supply disruptions in Nigeria and Canada, continued growth in global demand, and the expectation that the US shale industry’s natural decline at low prices would gradually rebalance the market. For Jamaica and other petroleum-importing Caribbean nations, the recovery in oil prices — while still well below the US$100-plus levels of 2011 to 2014 — was a modest headwind for the energy import bill after the large savings of 2015 and early 2016. The Petrocaribe arrangement provided some insulation. Puerto Rico’s sovereign debt crisis reached a new stage just three days before this edition’s publication, when the US commonwealth missed a US$422 million debt payment on 2 June, its largest default to date. The island’s total debt burden exceeded US$70 billion, and negotiations with creditors over restructuring had failed to reach agreement. The US Congress was debating legislation to provide an oversight framework for the restructuring, though legislation had not yet passed. The Puerto Rico situation was a sobering reminder of the fiscal vulnerability of small Caribbean economies and the long-term consequences of debt accumulation.
Jamaica Mortgage Market in May
Jamaica’s mortgage market saw continued steady activity through May 2016. The tourism sector was performing at record levels for the 2015/16 season, with stopover arrivals and cruise passengers both strong, providing a positive income backdrop for the economy. The Bank of Jamaica’s easing monetary policy continued to provide a supportive domestic lending environment. The NHT’s J$6.5 million individual ceiling and tiered rates of 0, 2, and 4 per cent remained the primary mechanism for affordable home ownership, and commercial lenders were gradually adjusting product pricing as the BOJ’s rate reductions fed through. The spring property market season was generating healthy enquiry levels in the Kingston metropolitan area and resort communities.
Looking Ahead
The UK’s EU referendum on 23 June is now the single most important near-term external event for global financial markets and for the Caribbean’s trade and development relationships. The Fed’s June 14 to 15 meeting will also be watched for signals about the 2016 rate path. The May payrolls report has just been released as this edition publishes, and the data will heavily influence Fed expectations for June. For Jamaica, the approaching hurricane season (officially beginning 1 June) and the continued IMF programme performance review are the principal near-term domestic factors. The NHT’s mid-year scheme openings are expected to generate continued mortgage application activity through the quarter.
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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