Much to celebrate, much to discuss

If cash is king—and we certainly think so—it held court last month in Pittsburgh. The annual Crane Data Money Fund Symposium took place in the conference center attached to our global headquarters, and what a court it was. More than 600 portfolio managers, salespeople and clients came to celebrate the industry’s remarkable growth in assets over its more than five decades of existence and to discuss salient issues in the industry. Topics included the broad health of the liquidity space, the effects that could result from potential Federal Reserve policy decisions, the reinstatement of the debt ceiling in January and, of course, the implementation of the last of the new SEC money market fund rules.

This was not a rah-rah gathering. The panels took a hard look at these and other issues. One topic related to the “reforms” was the impact they are having on prime institutional money funds. As was expected, they have led to many firms either consolidating their prime institutional funds (as we have done), closing them (only a few) or reconfiguring them as government products (the most common decision). We obviously think the category has worth due to its potential to offer higher yields and for its potential to appeal to investors when rates fall, as was the case after the implementation of the 2016 rules.

About that. The timing of the first Federal Reserve rate cut of this cycle is more uncertain than ever. Factors include the range-bound nature of inflation data, mixed bag of economic reports and, of course, the election. By a slight margin, we anticipate two cuts to come in the fourth quarter, meaning after the election. The Federal Open Market Committee’s projection for just one cut by year-end might be suspect as it appears members cast their “dots” before the softer Consumer Price Index data was released. We think the median dot would have shown two cuts had the Committee had time to digest that information. Regardless, the Fed would have to see a plunge in the labor market and inflation to give it reason to move in September and risk looking politically motivated. In any case, the Fed seems biased to ease at a slow pace. That benefits the liquidity industry as it allows time for the front end of the Treasury yield curve to anticipate what will come next.

It’s too early to assess the two other asset flow developments in June. The Fed’s tapering of its tapering, to say it as awkwardly as possible, began in June with a lowered monthly number of Treasuries it is allowing to roll off its balance sheet from $60 billion to $25 billion, while keeping the mortgage-backed securities cap at $35 billion. The other is the U.S. Treasury Department’s buyback program in which it is buying “off-the-run” Treasuries that aren’t as liquid as it would like. This program eventually will include bills. Neither moved markets.

Liquidity at large

The dominoes continued to fall in June as two more central banks lowered interest rates. The Bank of Canada initiated its easing cycle with a 25 basis-point cut, taking its key rate to 4.75%. The European Central Bank followed suit, trimming its main borrowing costs to 3.75% from 4%. That was its first cut in five years. Both communicated that inflation had declined enough to warrant reductions, but that further moves would be dependent on data. That leaves the Fed and the Bank of England still at the top of their staircases, waiting to descend only when accompanied by still stubborn inflation. The former kept its benchmark rate in a range of 5.25-5.50% and the latter held its at 5.25%. The Swiss National Bank cut rates by another quarter point again in June, taking it to 1.25%, while the Bank of Japan held steady at 0.1% (but disappointed the markets by not announcing plans for tapering its bond purchases). The Reserve Bank of Australia cautioned it might hike rates, presently at 4.35%, if inflation doesn’t recede.