J.P. Morgan's latest "Short-Term Market Outlook and Strategy" features a brief titled, "Corporates are keeping more cash in their portfolios." They write, "Based on balance sheet data from S&P 500 non-financial companies, we estimate corporate cash investment portfolios registered $2.3tn as of 4Q23. This is a year-over-year increase of $125bn, though still below the peak of $2.4-2.5tn observed shortly after the March Covid crisis. Even with lower portfolio balances relative to the Covid-era, it is notable that the amount of cash and cash equivalents held as a percentage of aggregate cash portfolios stood at 57% at YE23, surpassing the prior peak in 2020 when there was a dash for cash.... We are clearly not in any sort of crisis right now, which only underscores corporates' preference for cash in the current interest rate environment. As the $1tn rise in MMF AUMs last year demonstrated, market participants have a strong desire to park cash in MMFs."
The piece says, "Meanwhile, the amount allocated to investment securities declined to ~43%. Interestingly, the split between short-term and long-term securities continues to hover around 50/50, though there was a slight uptick to long-term investments in the latter part of 2023.... In combination with the increase in exposure to cash and cash equivalents, this might suggest corporates are barbelling their cash investment portfolios, as they try to capture high yields at the very short end of the money markets while also trying to lock in yields further out the curve before the Fed cuts."
JPM explains, "As far as where corporates allocate their cash, a more granular look at the cash investment portfolios of five of the largest tech corporations* (representing ~23% of corporate cash) shows that their greatest exposure is to corporate debt securities, followed closely by U.S. government and agency securities, and then MMFs.... However, among these three asset classes, only MMFs showed an increase in balances year-over-year, reinforcing the notion that corporates are shifting towards cash and cash equivalents and away from securities."
A table in JPM's update shows the cash investment portfolios of the 5 largest tech companies -- AAPL, META, AMZN, MSFT and GOOG -- with $80.6 billion in Money market funds, $69.6B in "Cash", $135.9B in U.S. government and agency securities, $17.6B in Non-U.S. government securities, $7.3B in Time deposits and CDs, $5.9B in Commercial paper, $146.9B in Corporate debt securities, $42.4B in Mortgage-backed and asset-backed securities, $1.8B in Other debt securities and $22.6B in Equity investments for a total of $530.1B.
In other news, Federated Hermes published, "Markets heed data, not Fed Speak" in their latest monthly commentary. They write, "Robust GDP and employment figures, sticky wage, consumer and producer inflation, and respectable manufacturing and housing numbers did what the policymakers could not. In late December, futures contracts predicted upward of seven quarter-point cuts in 2024. Following the bump in month-over-month core PCE in January, they have priced in essentially three--in line with Fed projections. That's why we -- and really everyone -- anticipates no rate action at the mid-March or early May policy-setting meetings and expect the first ease to come in June or July."
Federated continues, "[T]he shift in sentiment, along with the pause itself, has benefited cash managers and investors. Across the liquidity industry, elevated yields and extended average maturities have created better relative value in our humble opinion. This means the street can worry about something else, and the Fed's balance sheet and Reverse Repo Facility fit that bill. The latter is actually a good sign. The sharp reduction in its use does not mean the supply of collateral or repo is too low, but that it is coming from traditional dealers instead of the Fed. Once above $2 trillion, the Fed is accepting around $570 billion recently, and we think it will hover even lower than that for the near future."
They comment, "The pace and ramifications of quantitative easing also should not spark concern. It's been so long since it’s been a focus, my guess is more than a few have forgotten the exact numbers ($95 billion in government securities, split between $60 billion in Treasuries and $35 billion in agency mortgage back securities) rolling off each month. The balance sheet had ballooned to $8.9 trillion but sits at around $7.6 trillion now. The point of contention is that it will shrink too far, lowering reserves and reducing market liquidity. In the back of the policymakers' collective mind is to avoid a spike in overnight rates like what occurred in September 2019. This should not happen."
On pending "Money market rules," Federated reminds us, "The next compliance implementation stage of the SEC's 2023 money market regulations arrives on April 2. With this date comes an increase in requirements for liquid assets among other less-monumental changes. Money funds will have to maintain at least 25% in daily liquid assets (previously 10%) and at least 50% in weekly liquid assets (previously 30%). Tax-exempt money funds are not subject to the daily requirement. We, and likely any firm in the liquidity business, have been stress-testing funds to prepare and are quite satisfied with the results that sufficient liquidity will be maintained in even the worst-case scenarios. Of note is that the recent flattening of the short end of the money market yield curves likely means this shift won't be very punitive on prime money fund yields. That's because the difference between yields on weekly securities and those on the longer end of the liquidity yield curve has diminished."
Finally, they state, "It's Monetary March Madness as most of the world's central banks will hold policy-setting meetings in the coming weeks. That includes the Bank of England, Bank of Japan, European Central Bank, Bank of Canada and, of course, the Fed. None have changed rates this year and are unlikely to this month. With the exception of Japan, officials are mimicking the Fed in delighting that inflation has fallen while acknowledging it must decline further before cutting rates. For some, the bigger news is the announcement the U.K. will issue banknotes featuring the image of King Charles III in June."
