Cunningham: Fed Hikes, Europe Regs
Federated Investors' Global Money Markets CIO Deborah Cunningham, released her latest "Month in Cash" column, entitled, "Economy Continues to Meander." She writes, "The U.S. economy has been taking steps forward and backward since the financial crisis, but May's data might be better described as "sideways". We had a slight rebound from the poor first quarter, but certainly not any affirmation that the second quarter is going to be overly strong.... September is now the most likely policy meeting in which the hike will come. If we have resurgence in economic strength in June, a July meeting could be possible now that the Fed has implemented a conference-call capability. Chair Janet Yellen says that will operate just like the press conference that would come following such a major announcement. That would certainly be a good test of that capability! Yellen, Fed Vice Chair Stanley Fischer and other Fed officials have been repeatedly telling the market to focus more on the movement of rates beyond liftoff. Initially everyone was thinking there would be three hikes before the end of this year, but now many think there will be two at most. The thought is that rates would rise only every other FOMC meeting and pause for a period of time around 1%. That's quite possible, but it is really dependent on the overall economic performance. On the positive side, although U.S. growth isn't rebounding as fast as we thought it could, other parts of the world are, including Europe. Speaking of Europe, cash managers will be keeping an eye on a new regulatory proposal by the European Parliament that would compel off-shore money market funds to float their net asset values (NAV). Sound familiar? It's quite similar to the reforms implemented by the SEC last summer. Like the SEC's rules, the European proposal has several exemptions: government funds that can invest in eurozone government securities; retail funds for consumers versus institutions; and "Low Volatility" funds, which invest in securities of up to 90-day maturities. The latter goes out farther down the curve than the SEC, which only allows up to 60 days. In any case, it is helpful that the regulatory landscape on both sides of the Atlantic is similar so as not to confuse investors. Back in the U.S., our weighted average maturity (WAM) for May didn't change much from April, with a range of 45-55 days for government funds (with most in the lower end of that span). Prime funds are still in the 40-50 day range, but have drifted from the high end to near 40. While this is a significant move, it is not enough of one to technically shift the range. But if you looked at it on a true number basis, it is closer to the bottom than the top."
