Publication date: 5 July 2014 | Covering: April – June 2014
Quarterly Briefing
- ECB June 5: Cuts deposit rate to −0.10% — first negative deposit rate by a major central bank; main rate to 0.15%; TLTRO announced
- Ukraine: Crimea annexation March 18 backdrop; eastern Ukraine separatist conflict escalating; Malaysia Airlines MH17 not yet (July)
- ISIS rapid advance in Iraq: Mosul falls June 10; caliphate declared June 29 (FRESH, 6 days ago)
- US Q1 GDP revised to −2.9% annualised: worst non-recession quarter since 1960; polar vortex, port strikes, dollar; Q2 rebound expected
- Fed taper continues: QE3 reduced from US$55bn to US$35bn/month by June; on course for October end
- World Cup Brazil opens June 12; Brazil economic performance disappoints despite tournament
- Jamaica IMF EFF continues; BOJ policy rate declining; diaspora remittances supportive
- Thailand military coup May 22; emerging market risk differentiation continues
ECB Goes Negative; Historic Policy Shift
The European Central Bank made history on 5 June by cutting its deposit facility rate to minus 0.10 per cent — the first time a major central bank had introduced a negative rate on commercial bank reserves. The move was intended to discourage banks from parking excess liquidity at the ECB rather than lending it to households and businesses, and was accompanied by a reduction in the main refinancing rate to 0.15 per cent and the announcement of a new series of targeted longer-term refinancing operations (TLTROs) worth up to €400 billion, designed to encourage credit flows to the real economy rather than sovereign bond purchases. ECB President Mario Draghi noted that deflation risks had become a material concern: eurozone inflation had fallen to 0.5 per cent in May, far below the 2 per cent target, and the credit transmission mechanism remained impaired in several countries despite the end of the acute phase of the sovereign debt crisis. The negative deposit rate was a radical departure from conventional central banking and generated significant debate: critics argued it would squeeze bank margins and discourage rather than encourage lending; proponents argued it was a necessary unconventional tool to prevent entrenchment of deflation expectations. For global fixed income markets, the ECB’s action pushed European yields even lower and intensified the ‘search for yield’ dynamic that was compressing spreads on higher-yielding assets including emerging market bonds.
Ukraine Crisis and European Consequences
Russia’s annexation of Crimea on 18 March — the most significant alteration of European borders since the Second World War — had set the tone for geopolitical risk in the second quarter. The conflict in eastern Ukraine escalated through April and June as Russian-backed separatist forces declared independence in the Donetsk and Luhansk regions, and the Ukrainian government launched a military counter-offensive. The United States and European Union imposed successive rounds of sanctions on Russia, targeting individuals close to President Putin, specific companies, and ultimately entire sectors of the Russian economy. The sanctions and Russian counter-sanctions raised concerns about Europe’s growth trajectory: several European countries, particularly Germany, had deep trade and energy ties with Russia, and the uncertainty was an additional headwind at a time when the eurozone recovery was fragile. For Jamaica, the Russia-Ukraine conflict had limited direct economic impact but contributed to global energy price uncertainty that affected the island’s import bill.
US Q1 GDP Collapse; Recovery Intact
The final revision to US first-quarter GDP produced a deeply negative reading of minus 2.9 per cent annualised — the worst quarterly performance outside of a recognised recession since records began. The extreme weakness was attributed to the ‘polar vortex’ that gripped the central and eastern United States in January and February, West Coast port disruptions that impaired trade flows, and a sharp reduction in inventories. The Federal Reserve and most private sector economists characterised the Q1 weakness as entirely transitory, pointing to a rapid improvement in higher-frequency data through April, May, and June as evidence of the underlying recovery’s durability. The Fed continued its QE3 taper through the quarter regardless of the GDP print, reducing monthly purchases from US$55 billion in March to US$45 billion in April, US$35 billion in June, and signalling continued step-downs toward zero. The US labour market, meanwhile, continued to perform strongly: April, May, and June payrolls averaged approximately 230,000, and the unemployment rate fell to 6.1 per cent.
ISIS Advances; Iraq Destabilised
The Islamic State in Iraq and Syria conducted a lightning advance through northern and central Iraq in June, capturing the city of Mosul on 10 June and reaching the outskirts of Baghdad. The speed of the collapse of Iraqi security forces — equipped and trained by the United States at a cost of more than US$25 billion — shocked Western governments and military analysts. On 29 June, ISIS declared a ‘caliphate’ spanning territory in both Iraq and Syria, renaming itself the Islamic State and claiming the title of Caliph for its leader Abu Bakr al-Baghdadi. The declaration — made just six days before this edition publishes — represented an unprecedented act in modern Islamist politics. The advance disrupted Iraqi oil production in the north, though the southern Basra fields that account for the bulk of Iraqi exports remained under government control. Oil prices spiked briefly on the ISIS advance before partially retracing as the supply disruption proved more limited than feared.
Jamaica Mortgage and Housing Market: Q2 2014
Jamaica’s second quarter of 2014 saw continued progress in the broader macroeconomic stabilisation programme, providing an improving backdrop for the mortgage and housing market. The BOJ’s policy rate had been reduced through a series of cuts from the peaks of 2012 to 2013, and domestic interest rates were gradually declining in response. The National Housing Trust’s mortgage programme continued to serve as the primary affordable housing finance vehicle, with its tiered rate structure providing access to home ownership for qualifying NHT contributors. The spring season — traditionally the most active quarter for property transactions in Jamaica — generated solid application volumes, and commercial lenders were competing more actively for quality mortgage business as funding costs declined. Remittance inflows from the diaspora community — a critical support for household income and property purchase down payments — remained broadly stable, underpinned by the improving US and UK labour markets where many Jamaican-born residents are employed.
Looking Ahead to Q3 2014
The third quarter of 2014 will be dominated by the Fed’s continued taper path — with October now firmly in focus as the likely end-date for QE3 — and the evolution of the Ukraine and Iraq geopolitical situations. The ECB’s TLTRO results and the trajectory of eurozone inflation will determine whether additional stimulus is warranted before year-end. For Jamaica, the summer diaspora season provides a seasonal boost to property enquiries and purchases, and the IMF EFF programme’s continued implementation will be the key domestic macroeconomic signpost. The combination of declining domestic interest rates and improving macroeconomic stability positions the mortgage market for gradual strengthening through the second half of 2014.
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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