01 Nov 2019
Irish economy/homebuilders: Steady growth in mortgage drawdowns in Q3
Irish residential mortgage market data for Q319 showed an 11% increase in total mortgage lending in the quarter, a growth rate consistent with that seen in the first two quarters of the year.
The latest data brings total mortgage lending YTD to €6.8bn, also an 11% increase on the same period of last year. The 12-month running total moves to €9.4bn – within reach of our full-year forecast of lending of €9.75bn, although the y/y growth rate will need to increase to 13% in the final quarter to hit €9.75bn. The more forward-looking mortgage approvals data for September, which was released separately this morning, does not show as positive a picture. Total mortgage approval volumes were €3.8bn in September – unchanged y/y. The approvals series is much more volatile however, and the y/y growth rate in Q3 was 9%, in line with the growth YTD. This suggests that there is some downside risk to our forecast of €11.0bn of mortgage lending in 2020 (which implies close to a 13% increase in lending next year).
Looking at the different borrower segments, growth in lending to the first-time buyer (FTB) market continues apace and was +19% y/y in Q3 and +15% YTD. This segment now accounts for 52% of total lending. Lending growth to the mover-purchaser market was more subdued at 6% y/y in Q3 and 5% YTD. The average loan size to FTBs also grew at a faster pace than the overall market in Q3: +3.9% vs. +2.7%. All of which reinforces our view that the FTB market is performing stronger at present than other market segments in terms of activity and price growth.
0.25% cut as expected
The Federal Open Market Committee (FOMC) cut the Federal funds target rate range by 25bps last night, taking it down to 1.50-1.75%. That was in line with most economist forecasts including our own. Correspondingly, the Fed also lowered the Interest on Excess Reserves rate by 25bps to 1.55%.
As expected, the decision to ease was met with two dissentions from Esther George of the Kansas City Fed and Eric Rosengren of the Boston Fed; both had voted against the previous two easing moves. James Bullard of the St Louis Fed fell into line this time. Having dissented on the previous two decisions preferring a bigger 50bp cut, he showed no objection this time with the Federal funds rate now at this lower level.
Indeed, after three successive policy rate cuts, the funds rate is now 75bps below where it stood before the summer. Notably, for those Fed watching in the 90s, the three consecutive cuts have a distinct feel of the adjustment phases enacted then, with Chair Jerome Powell clearly keen to take on board lessons from the past and avoid overcooking any easing and ending up in a subsequent rapid tightening phase.
Trade talks still crucial
In his press conference yesterday, there were two key messages the Fed chief wanted to deliver to markets. The first was that the easing yesterday was still seen in the context of “insurance”. Secondly, the message was that the Fed was now happy to sit back and see the impact of the three consecutive policy cuts. Chair Powell told investors that the easing so far would deliver “meaningful support” to the economy. Importantly, it was considered that the current stance would remain appropriate as long as incoming information was in line with the Fed’s outlook. Here the Fed was betting on the consumer sector remaining resilient, as it has so far in amidst a clearly weaker picture for manufacturing and business investment.
On the risk front, somewhat surprisingly Chair Powell said he saw the risks as having moved in a positive direction over the inter-meeting period. He pointed to the ‘phase 1’ trade agreement with the US and China whilst also noting the risk of a no-deal Brexit looked to have reduced. Given the scope for the ’phase 1’ trade deal to unravel, and given the extent of ground still to be covered here, we suspect the Fed chief is perhaps not quite as reassured as his words yesterday suggested. However, given the immense political pressure he has been under to ease policy, it was no doubt helpful for him to be able to flag these developments in the context of a meeting in which the Fed wished to communicate a policy pause.
Fed to sit tight
Where the Fed goes from here will depend on how the economic backdrop evolves, but it is now clearly reluctant to adjust policy further in the near term. As such we judge that it will take a notable shift on the household sector’s resilience, to persuade the Fed to do anything other than sit tight in the near term.
One other factor which might sway the Fed’s appetite to ease policy might be its policy framework review, which has a number of arms to it, but includes a particular focus on the impact of persistent undershoots of the 2% inflation goal. Chair Powell signalled yesterday that this would not now wrap-up until around the middle of next year. Our forecasts envisaged the Fed enacting a further policy easing at the end of Q1 2020, spurred on by this work. That move could well now happen later, given the timetable for this work. However, for now we are sticking with our current Q1 call as the evolution of household sector data could well persuade the Fed that a further Q1 adjustment is warranted.
For markets, the response to the Fed communications was a mixed one. US stocks rose in the wake of the Fed communications, shrugging off the prospect of a policy pause with the S&P 500 closing 0.3% higher. In bond markets, 10-year US Treasury yields, after an initial rise, fell back from 1.80% to 1.78% currently. At the short end, after an initial spike, 2-year yields ended up little changed on their pre-FOMC position at 1.62%. The dollar actually rose in the aftermath of the policy decision, with the benchmark EUR/USD rate falling to $1.1080 from around $1.1110. The dollar has eased back during the Asian session, with EUR/USD rising to stand up at $1.1160, levels not seen in just over a week.
Nothing of note.