Your weekly economic update from the team at FXD Capital
Last month I wrote about US banks becoming strategic about whom they accept deposits from. Lucky clients would have the red cordon rope lifted and directed straight to the balance sheet section of the deposit club, on the proviso that such luxury would reciprocate through more lucrative advisory services. Those less fortunate are advised to wait in line to place monies into market funds at the less salubrious asset management arm.
As a trend, the move towards money market funds has led to the market overheating, with demand surging and asset managers struggling to sate it. In the US alone, money market funds of government debt constitute $4 trillion of savings across the personal and corporate spectrum. Assets under management have risen by 300% alone over the past five years, an externality of money printing and changing investment appetites.
For these short term funds, yields have been low for some time now, but the recent surge of cash has resulted in negative yields passing on to savers. Despite rising yields on mid-to-long-term government debt, the short term market remains stubbornly flat and corporate rates are yet to respond significantly to recent changes. The option of last resort for most funds is to use Federal Reserve reverse repo facilities, which pay a flat 0%. Current amounts parked in such accounts hover around the $500 billion mark, levels typically only ever seen around the year-end time when corporates temporarily dress up their balance sheets.
Negative rates in money market funds may not seem like a particularly crazy situation given events of recent years, but if they continue, it could cause problems. Fund managers are under pressure to cut management fees to alleviate some of the pain of clients’ negative yield, which while altruistic, over the longer term, may result in many managers packing up and leaving the sector. If the supply of money market funds falls, short-term cash options may further dissipate.
What is noticeable is how much cash is being kept on call or in short-term products. Despite all the noise about the “reopening trade” and the “roaring 20s”, there seems to be an undercurrent of pessimism. Corporates and investors are forgoing potential returns from investing cash into less liquid instruments and are opting for the deadweight loss of short-term cash. With the omnipresent threat of inflation never far from the senses, short-term lenders are also running the risk of cash losing value in real terms.
Such threats are superfluous versus the losses of a significant market correction and, as such, will be worn by the cautious investor. It all suggests that sentiment in the market is markedly different from that projected in the news and government narratives.
British companies hired permanent staff at the fastest rate for 23 years in May, according to a KPMG sponsored employment index. Numbers on furlough fell by a third between January and the end of April, indicating that the economy is moving back into full pace. Expectations continue to rise for a bumper Q2 GDP reading.
The Federal Reserve is to begin selling the corporate bonds and ETFs it purchases as a stabiliser for the financial system last spring via its Secondary Market Corporate Credit Facility (SMCCF). Usage only got to $14 billion of the $750 billion made available; the divergence shows how unknown everything was last spring. With the benefit of hindsight, we can see how temporary the blip was, but how bad it could have been.
Today’s US Labour report expected to show 650,000 jobs added last month. Comments earlier in the week from St Louis Fed President James Bullard suggested the labour market is tighter than it appears, despite unemployment figures indicating slack remains.
Used car prices are sky high Stateside at the moment and are the second largest contributor to US inflation. Traditionally the US is not a large market for used cars, but the lack of defaults on leased and financed cars has rippled through by reducing supply in the secondhand car markets.
Eurozone inflation rose to 2% in May, the first time it has surpassed the ECB target in more than two years. Price rises were primarily driven by increased energy costs, which across other markets have been assumed to be transitionary. Consumer prices with energy stripped out only rose 0.9%, which suggests that the ECB will be happy to wait it out before making any changes.
All the best for the week ahead,
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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