The Loonie Hour #83
On this week's podcast, we discuss Toronto's new zoning regulations, Central Bank Digital Currency, US inflation, and Money Market Funds.
The main data point out of the US this week was the US CPI. Headline Inflation has long since peaked, and year-on-year (YoY) measures are heading lower, but that pace slowed in April as month-on-month (MoM) the consumer price index rose 0.4% (vs exp. 0.4%). Core, which peaked earlier this year, fell slightly to 5.5% YoY but, again, the positive MoM changes remain steady at around 0.4%.
The index for Shelter was by far the largest contributor to the monthly all-items increase, followed by increases in used Cars and Trucks and Gasoline. The increase in Gasoline more than offset declines in other Energy Components, and the Energy index rose 0.6% in April.
The Bank of England (BOE) increased its key interest rate by 50bps (vs 50bps exp) from 4.25% to 4.5%. This marks the highest level since October 2008 and the largest cumulative increase since the late 1980s. The central bank's decision comes alongside more positive forecasts for the U.K. economy. In contrast, the Federal Reserve and the European Central Bank (ECB) recently implemented similar rate hikes but have expressed different views on future rate increases. The Fed hinted at a possible end to its rate hikes, while the ECB emphasized its commitment to combating high inflation.
One of the side effects of central banks, specifically the Federal Reserve, raising short-term interest rates is a large flow into money market funds and away from traditional bank deposits. The significant drawdown of deposits to fund this flow has, in part, helped cause the regional banking crisis as banks were forced to sell bonds at a loss to meet their obligations.
Money market funds are mutual funds that invest in short-term, low-risk debt securities, such as Treasury bills, commercial paper, and certificates of deposit. They aim to provide investors with a stable and relatively low-risk investment option that offers liquidity and a competitive rate of return. Money market funds are useful for both institutions and retail investors for several reasons:
Stability: They invest in high-quality, short-term securities with minimal credit and interest rate risks.
Liquidity: Investors can typically redeem their shares at any time, allowing them to access their funds quickly and easily.
Yield: Money market funds aim to provide competitive yields compared to traditional savings accounts or other low-risk investments.
Cash Management: Institutions, such as corporations, banks, and pension funds, use money market funds as a cash management tool.
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