Month in Cash: Note to Congress—enough with the cliffhangers!
The biggest macro issue facing the money market world right now is the looming specter of budget battles in Washington over fiscal policy—the automatic spending cuts; the continuing resolution to allow the federal government to continue functioning; and ultimately, the debt-ceiling debate. We’re watching carefully for the potential for some sort of market disruption if the players pass another deadline without compromise. The uncertainty is affecting supply to some degree, and certainly infringing on people’s comfort zones, and we’re seeing more and more questions on how it will play out, without any good answers. The fear is that we’ll go down the same path we did a year and a half ago, and bring the budget battle to the 11th hour, and see, once again, ripple effects across markets.
The second big macro issue continues to be quantitative easing, and the Federal Reserve’s (the Fed) announcement of an open-ended expansion, or QE3+, under which the Fed is committed to purchasing approximately $85 billion per month of longer-term Treasuries and agency mortgage-backed securities (to be continued, of course, until we hit explicit targets for unemployment and inflation). All that buying has finally started to have an impact on repo rates. We’ve seen repo rates average in the high single/low double digits during the month of January, which isn’t too bad, but that represents a drop-off of 10-12 basis points from where they’d been in December 2012, and much of that drop can be attributed to all the supply that’s been removed from the marketplace. Short-term rates have seen some additional pressure with the Dec. 31, 2012, expiration of the FDIC’s Transaction Account Guarantee (TAG) Program of unlimited insurance on non-interest bearing checking accounts beyond the end of the year, which caused additional cash to flow into money market funds. It’s a smaller factor than QE3+, but still, not very helpful.
Latest GDP not as bad as headlines might indicate
From an economic perspective, we’ve just seen the first read of fourth quarter 2012 GDP, which came in at -0.1%, the first contraction in three years. While the headline number was negative, a good portion of that drop was due to defense spending, which experienced some hits in the fourth quarter after some front-loaded defense spending temporarily inflated that category in the third quarter. Other components of the GDP did fairly well—consumers came through and housing continued to perform well, so it was more of a mixed report. The earnings season, at least looking at January 2013 releases, paints a picture of a fairly positive fourth quarter 2012. We did not see a lot of revenue growth, but companies delivered respectable earnings. And certainly from a banking perspective, we’re seeing better credit and less provisioning, and better performance statistics for underlying loan portfolios. We also have to remember that in the fourth quarter of 2012, we went through the aftermath of Hurricane Sandy, and more importantly, we were dogged by uncertainties surrounding the fiscal cliff. If the folks in the nation’s capitol can avoid another scare to the markets, things aren’t looking that bad going forward into 2013.