Publication date: 5 October 2014 | Covering: July – September 2014
Quarterly Briefing
- Fed taper: QE3 reduced to US$25 billion/month by September; October 28–29 meeting expected to deliver final step-down to zero
- US Q2 GDP revised to 4.6% annualised: robust rebound from Q1’s weather-affected −2.1%; recovery credentials restored
- Scotland independence referendum September 18: NO wins 55.3% to 44.7%; United Kingdom intact; sterling rallies
- MH17: Malaysia Airlines Flight 17 shot down over eastern Ukraine July 17; 298 killed; Western sanctions on Russia escalate August
- ISIS declares caliphate June 29; rapid advance through Iraq; Mosul falls June 10; US airstrikes resume September 22
- Oil: Brent peaks near US$115/barrel in June; begins falling through Q3 toward US$95 by late September
- Alibaba IPO September 19: US$25 billion raised; largest IPO in history; US markets record highs
- Jamaica IMF EFF on track; BOJ easing continues; NHT mortgage support active
Federal Reserve Taper Reaches Final Stretch
The Federal Reserve’s third round of quantitative easing continued its methodical wind-down through the third quarter of 2014, with the monthly purchase pace reduced to US$25 billion by September — comprising US$10 billion in Treasury securities and US$15 billion in agency mortgage-backed securities. The October 28 to 29 Federal Open Market Committee meeting was widely expected to deliver the final reduction to zero, formally ending a programme that had at its peak run at US$85 billion per month. The FOMC continued to signal that the federal funds rate would remain at its 0 to 0.25 per cent floor for a “considerable time” after the end of QE, and multiple Fed officials had framed mid-2015 as the most likely horizon for liftoff contingent on continued progress toward the Committee’s dual mandate goals. US economic data through the quarter was broadly supportive of the taper path: the Q2 GDP revision to 4.6 per cent annualised growth confirmed that the severe Q1 contraction had been driven by extraordinary weather and port disruption rather than fundamental weakness, and the labour market continued to produce consistent monthly payroll gains in the 200,000-plus range. The unemployment rate fell to 6.1 per cent, approaching the Fed’s informal threshold of ‘full employment’.
For Jamaica and other emerging market economies, the Fed’s taper path had been considerably smoother than the ‘taper tantrum’ disruption of mid-2013. Financial markets had largely absorbed the monthly step-downs without significant capital flow reversals or currency crises in major emerging markets, though some individual countries — particularly those with large current account deficits and high external financing needs — remained more vulnerable to a turn in global risk appetite.
Scotland Votes No; UK Unity Preserved
The Scottish independence referendum on 18 September produced a decisive but not overwhelming result: Scotland voted to remain part of the United Kingdom by 55.3 per cent to 44.7 per cent. The outcome had been far from certain in the final weeks of the campaign, with polling in mid-September showing the YES and NO camps nearly tied, prompting an emergency visit to Scotland by the leaders of all three main Westminster parties and a last-minute “vow” of enhanced devolution powers. Markets reacted with visible relief: sterling, which had weakened through the polling uncertainty, rallied sharply on the result, and uncertainty premiums in UK sovereign and financial company debt unwound quickly. The Bank of England’s financial stability concerns, which had focused on the difficulties of currency union dissolution and the treatment of North Sea oil revenues, dissipated with the NO victory. For international investors, the Scottish referendum was nonetheless a reminder of the political fragmentation risks facing several European democracies — a theme that would resonate through Spanish and Belgian politics in subsequent years.
MH17 and Russia-Ukraine; Geopolitical Risk Premium
The quarter’s most jarring geopolitical event was the destruction of Malaysia Airlines Flight MH17 over eastern Ukraine on 17 July, killing all 298 people aboard. Western intelligence assessments and subsequent international investigations attributed the aircraft’s destruction to a surface-to-air missile fired by Russian-backed separatists using a Buk missile system. The tragedy materially escalated the Western response to Russia’s involvement in eastern Ukraine: the European Union and United States imposed substantially more comprehensive sectoral sanctions in August, targeting Russian financial institutions, energy companies, and defence firms. Russia responded with counter-sanctions banning agricultural imports from the EU, United States, Canada, Australia, and Norway. The sanctions and counter-sanctions raised concerns about the pace of European economic recovery — Germany, with its deep economic ties to Russia, was particularly exposed — and contributed to the ECB’s increasingly urgent consideration of further stimulus measures through the remainder of 2014.
ISIS and Iraq; US Re-engagement
The Islamic State organisation had declared a ‘caliphate’ on 29 June spanning territory across Syria and Iraq, having seized the city of Mosul — Iraq’s second largest — on 10 June in a rapid military advance that routed Iraqi government forces. The speed of the ISIS advance and the collapse of the Iraqi army that the United States had spent years training and equipping was a severe embarrassment for US foreign policy. President Obama authorised US airstrikes against ISIS positions in Iraq in August, and on 22 September expanded operations to include strikes in Syria in coalition with several Arab partners. The re-engagement in Iraq represented a significant reversal of the complete US military withdrawal completed in December 2011. For energy markets, the ISIS advance raised concerns about Iraqi oil production — Iraq had become the second-largest OPEC producer and a critical source of supply growth — though the southern oilfields that accounted for the bulk of production remained outside the conflict zone.
Oil Begins Multi-Year Decline
One of the defining macro themes of the second half of 2014 was the beginning of a sustained and ultimately severe decline in global oil prices. Brent crude had traded near US$115 per barrel in June, supported by geopolitical risk premiums from Libya’s production disruptions, Iraq’s insecurity, and Russia-Ukraine tensions. Through Q3, however, the market began to reprice downward as fundamentals reasserted themselves: US shale oil production was surging, OPEC showed no signs of curtailing output, and demand growth — particularly from China and Europe — was decelerating. By late September, Brent had fallen to around US$95 per barrel, a decline of approximately 17 per cent from its June peak. The implications for Jamaica were straightforwardly positive: as a net oil importer that purchased substantially all of its petroleum requirements, lower energy prices reduced the import bill, eased inflationary pressure, and provided some relief to the current account deficit. The BOJ’s ability to maintain its easing bias was enhanced by declining imported inflation.
Alibaba IPO; US Markets at Records
Chinese e-commerce giant Alibaba Group completed its initial public offering on the New York Stock Exchange on 19 September, raising US$25 billion in the largest IPO in market history. The offering valued Alibaba at approximately US$168 billion at the IPO price of US$68, and shares closed the first trading day at US$93.89. The Alibaba IPO was a landmark moment both for US capital markets and for the internationalisation of Chinese technology companies. US equity markets broadly continued to perform well through Q3, with the S&P 500 approaching record highs and the Dow Jones Industrial Average crossing 17,000 for the first time. The sustained equity bull market — now in its sixth year from the March 2009 lows — reflected the combination of accommodative monetary policy, recovering corporate earnings, and the relative attractiveness of equities versus historically low bond yields.
Jamaica Mortgage and Housing Market: Q3 2014
Jamaica’s domestic mortgage market continued its gradual improvement through the third quarter of 2014. The IMF Extended Fund Facility, now in its second year, was providing a credibility anchor for fiscal and monetary policy. The Bank of Jamaica’s policy rate had been reduced from the elevated levels of 2012 to 2013, and domestic lending rates were following the easing trend, albeit with a lag. The NHT continued to be the primary vehicle for affordable housing finance, with its tiered interest rate structure providing significant rate concessions relative to commercial rates for qualifying contributors. Commercial mortgage lenders were reporting improved application quality and a more optimistic outlook as consumer confidence gradually recovered in line with the broader macroeconomic stabilisation. The diaspora property market — driven by North American and UK-based Jamaicans purchasing retirement or investment properties — showed continued interest, supported by the improving economic narrative and the competitive exchange rate for dollar earners.
Looking Ahead to Q4 2014
The fourth quarter opens with the expected end of QE3 at the October FOMC meeting and the global market’s attention turning fully to the timing of the first Fed rate increase since June 2006. The pace of oil’s decline and the November 27 OPEC meeting will be critical near-term signposts for commodity markets and net-importing economies including Jamaica. Domestically, the IMF’s ongoing programme reviews and the Bank of Jamaica’s monetary policy direction will continue to frame the environment for mortgage lending and housing investment. With global conditions broadly stable and Jamaica’s macro fundamentals continuing to improve under the EFF framework, the fourth quarter outlook for the mortgage market is cautiously positive.
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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