With the events of the last few days, February seems like a distant memory. More importantly, it was yet another test of the integrity of the Reserve Cash Management strategy, and it performed as designed. As we have espoused, the emphasis of the RCM is broad diversification and an emphasis on liquidity, and that has served our investors well during the crisis. We’ve emphasized that to keep any more than $250,000 in a bank account is to make an unsecured loan to that institution. The RCM is a strategy that holds the securities in the name of the client, in a separately managed account, at a qualified custodian, thereby eliminating counterparty risk.
Investors in February kicked off the with a dour outlook, thinking that the Fed had been too aggressive with their rate hikes and the economy was teetering on the brink of recession, if not already there. The February 1st FOMC echoed that sentiment as Chairman Powell, at the post-meeting press conference, hinted that following their 25-basis point rate hike the Fed was likely to only move in two more increments of 25-basis points each. The Chairman was asked about the debt ceiling twice and both times he answered in a disgusted tone that it was Congress’ job, not that of the Federal Reserve.
Days later, the investment community was stunned by the January employment report.
Economists had been forecasting that the economy would add 188,000 jobs in January and the unemployment rate would tick up to 3.6%. Given the increasing number of layoff announcements since December, we thought the actual release would have been about half of the expectation. Instead, the economy generated a staggering 517,000 new jobs during the month and the unemployment rate ticked down to 3.4%. There was no weakness in any of the subcomponents. Clearly, the Fed didn’t have the employment report at post-FOMC press conference or they would have most likely stuck with the 50 basis points that they did at the December meeting.
Mid-month came another shocker as the January consumer price index came in above expectations. The month-over-month CPI registered 0.5%, and on a year-over-year registered 6.4%, outpacing consensus expectations.
Further proof that the economy was not in danger of tipping into recession, the BLS released a solid retail sales report for January, with a monthly gain of 3.0%, as miserly spending during the holidays was offset by robust post-holiday sales.
The “bad-for-bonds” news continued with the release of the producer price index, the lesser watched inflation measure, registering well above expectation. The month-over-month PPI was 0.7%, which translates to nearly 9% per year when compounded.
Members of the Fed had decidedly turned hawkish with virtually all speakers calling for continued rate hikes prior to the Silicon Valley Bank crisis, but since the crisis, those who speak for the Central Bank have been mum. With the FOMC meeting looming in the coming days investors are left to guess what, if anything, the committee will do with the overnight rate. Our guess is that they’ll leave the rate unchanged, at least until the dust clears from the current mess.
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