By Jamie McGeever

ORLANDO, Florida (Reuters) – A record-high $7 trillion of cash is currently sitting “on the sidelines” in money market funds (MMFs). Anyone hoping to see a significant chunk of this flooding the wider investment field in the coming months may be disappointed.

    Many strategists assume this massive pile of cash will start to shrink now that the Federal Reserve is cutting interest rates as investors seek a more profitable home for their capital in the face of diminishing cash yields.

    And if the Fed and incoming Trump administration engineer a “soft landing” – or “no landing” – for the U.S. economy, then equities, credit and even long-dated bonds should be a lot more appealing than cash. Right?

    Not so fast.

    The U.S. financial and economic landscape has changed radically – perhaps irrevocably – since the pandemic. Many rules of thumb that have guided investors, businesses, consumers and policymakers for decades no longer seem to apply.

    The Fed pursued the most aggressive rate hiking cycle in 40 years, yet Wall Street has rocketed to record highs and unemployment has barely eclipsed 4%. The yield curve has been inverted for two years, yet there has been no recession. Geopolitical tensions have spiked in the Middle East, yet oil prices have gone down.

    In this topsy-turvy world, MMFs have emerged as a premium destination for investors’ cash.

    They offer significantly higher rates of interest than rival checking accounts and commercial deposits or fixed income assets like Treasuries that would traditionally be the havens of choice for those seeking liquidity and safety.

    In ‘normal’ times, longer-dated bonds carry higher yields than MMFs, because the yield curve usually has a positive slope.

    But times have not returned to ‘normal’, and Treasury yields have been below the fed funds rate for two years. Why buy a two-, five- or ten-year bond and assume duration risk when you can earn more in a plain old money market fund?

Redeployment may not be so rapid. Strategists at Societe Generale (OTC:SCGLY) recommend clients maintain their 10% cash allocation next year.

    Yet expectations for an imminent exit from cash persist.

“The road is lined with people trying to call the impact and timing of cash moving off the sidelines,” says Adam Farstrup, head of multi-asset, Americas, at Schroders (LON:SDR).

NO ZIRP, NO PROBLEM

MMF balances have actually increased by nearly $40 billion since the Fed started cutting rates in September, according to the Investment Company Institute, a global funds industry body.  

    And this shouldn’t have come as a surprise.

    Recent history shows that investors’ initial response to a Fed easing cycle is to increase their cash holdings, as was the case after the Global Financial Crisis and pandemic. When rates are coming down fast, fear rises and investors rush to cash.

Investors only begin to deploy their cash hoard after rates are slashed to zero and it becomes clear that ‘ZIRP’ – zero interest rate policy – is likely to remain in place for years.

It was a different story in 2020, however, as stimulus checks and other fiscal programs quickly resuscitated the economy and the Fed soon started raising rates, ensuring that the ZIRP-driven cash drain was brief and shallow.

    So what’s in store this time around?

    Few people seriously expect a return to ZIRP. Indeed, since the Fed started easing in September, markets have begun pricing in fewer cuts and the implied terminal rate has risen by around a full percentage point, and MMF inflows have accelerated.

    While there are myriad alternatives to MMFs, all come with downsides. Some are already expensive: many equity indices have never been higher, and U.S. corporate bond spreads have never been thinner. Others are cheap, like some emerging markets like China, but they’re cheap for good reason.

    Given the high levels of uncertainty surrounding the year ahead – from geopolitical tensions to questions about President-elect Donald Trump’s unorthodox policy agenda – the environment is likely to remain cash-friendly.

    And perhaps market analysts may have to start rethinking how they understand MMFs altogether. James Camp, managing director of fixed income and strategic income at Eagle Asset Management, argues that much of the $7 trillion in MMFs is now viewed not as dry powder for investment but rather as a “permanent” capital stock used for liquidity management.

“This large cash holding is more a feature of the economy now, not a bug,” he says

    In other words, those expecting a mass exodus from cash may be waiting a long time.  

(The opinions expressed here are those of the author, a columnist for Reuters.)   

(By Jamie McGeever; Editing by Andrea Ricci)

By Michael S. Derby

NEW YORK (Reuters) – New data from the New York Federal Reserve suggests the U.S. central bank isn’t facing any roadblocks to continuing forward with its ongoing effort to shrink the size of its balance sheet.

The regional Fed bank reported on Thursday that its Reserve Demand Elasticity Measure 50th percentile reading stood at -0.15 on Nov. 13, holding steady relative to where it was a month ago. The New York Fed said as part of its report that “reserves remain abundant.” 

The New York Fed index tracks market liquidity conditions. Launched publicly a month ago, it is designed to show how flush or tight bank reserves are. Numbers veering into negative territory can suggest mounting bank reserve tightness, which speaks directly to what the Fed is doing with its ongoing effort to reduce its bond holdings via a process known as quantitative tightening, or QT.

For just over two years the Fed has been shedding its holdings of bonds to normalize the size of its balance sheet. That’s taken its overall balance sheet from about $9 trillion in the summer of 2022 to the current level of about $7 trillion.

The Fed is aiming to take out as much liquidity as it can to allow the federal funds rate, its chief tool for achieving its monetary policy goals, to trade at the desired level and to allow for normal money market volatility. The challenge for the central bank and for private economists is that it is not clear how far it can go with liquidity removal before it runs into turbulence.

The New York Fed measure suggests the process faces no imminent need to stop, which jibes with recent comments from central bank officials and market expectations, which currently eye an end to QT at some point next year.

The New York Fed measure tends to front-run periods of tight reserves by a good margin, which suggests that increasingly negative readings could be a clear sign the Fed needs to shift gears on QT.

The index began to lose ground in October 2017 when the Fed last shrank its holdings and bottomed in October 2019, just after the central bank faced an unexpected liquidity shortfall that forced it to aggressively add liquidity to money markets to regain firm control of the federal funds rate.

WASHINGTON (Reuters) – U.S. mortgage rates increased to a four-month high this week, which together with higher home prices could sideline potential buyers from the housing market in the near term.

The average rate on the popular 30-year fixed-rate mortgage increased to 6.84%, the highest level since July, from 6.785% last week, mortgage finance agency Freddie Mac (OTC:FMCC) said on Thursday. It averaged 7.29% during the same period a year ago.

Though the Federal Reserve has cut interest rates twice since September, U.S. Treasury yields have risen on strong economic data and investor fears that President-elect Donald Trump’s policies, including higher tariffs on imported goods and mass deportations, could reignite inflation.

Mortgage rates track the 10-year Treasury note.

MADRID (Reuters) – Spanish lawmakers approved on Thursday the government’s new tax plans, which include an extension of a temporary levy on banks by three years and ensure that taxes for large companies comply with the EU rules.

The Socialist-led coalition government said it had reached an agreement with far-left Podemos to start working on a permanent windfall tax on energy companies before year-end or at least extending the temporary one by another year.

Investing.com – France is facing a budget crisis. To address this, lawmakers are considering a proposal to make French workers work an extra seven hours without pay.

This would generate additional revenue for the government. While the idea has been approved by the Senate, it could still be rejected in the final budget bill.

The government is also looking to cut spending and increase taxes to balance the budget. However, these measures, particularly the reduction of a tax incentive for low-income workers, have raised concerns among businesses, who fear increased labour costs. Some argue that it would be better to eliminate a public holiday instead.

France’s economic challenges stem from spiralling spending and lower-than-expected tax revenues this year. Despite efforts to shield low-income earners, the idea of unpaid work hours has drawn backlash, particularly as France’s workweek is already longer than in many European countries

Though the government has targeted the bulk of its tax hikes on the wealthy and big companies, its budget bill includes plans to rein in a tax incentive on employers’ social security contributions for low-income workers.

The French workweek is already longer than many other European countries, and this proposal further highlights the economic challenges faced by the nation.

MOSCOW (Reuters) – Russia’s central bank on Thursday said it planned to set a surcharge for banks when issuing new loans to large firms with a high debt burden, as the regulator looks to limit credit risks for Russian companies contending with interest rates at 21%.

A growing number of Russian companies and business leaders have criticised the central bank’s monetary policy. The central bank insists that stark labour shortages are a bigger drag on development than high borrowing costs.

Russian Railways, a key cog in Russia’s industrial machine, is one of several firms planning to reduce investments next year. The state-owned monopoly expects its interest payment costs to hit $7 billion next year, suggesting a rise of around $4 billion, a company document seen by Reuters showed last week.

The central bank said the measures would apply to companies with debt over 100 billion roubles ($987 million), an interest coverage ratio of less than 3% and whose consolidated debt exceeds 2% of the Russian banking sector’s capital.

It did not specify how much the surcharge would be.

“These measures will limit large companies’ debt burden and banks’ credit risks,” the central bank said in a statement.

The bank is under pressure to keep rising inflation in check. It is next due to set interest rates on Dec. 20 and some analysts are warning that an another aggressive rate hike may be on the cards.

($1 = 101.2955 roubles)

(Reuters) – Elon Musk’s Neuralink said on Wednesday it has received approval to launch its first clinical trial in Canada for a device designed to give paralysed individuals the ability to use digital devices simply by thinking.

The brain chip startup said the Canadian study aims to assess the safety and initial functionality of its implant which enables people with quadriplegia, or paralysis of all four limbs, to control external devices with their thoughts.

Canada’s University Health Network hospital said in a separate statement that its Toronto facility had been selected to perform the complex neurosurgical procedure.

Regulator Health Canada did not immediately respond to a request for comment.

In the United States, Neuralink has already implanted the device in two patients. The company says the device is working well in the second trial patient, who has been using it to play video games and learn how to design 3D objects.

Founded in 2016 by Musk and a group of engineers, Neuralink is also building a brain chip interface that can be implanted within the skull, which it says could eventually help disabled patients to move and communicate again, and restore vision.

In September, the startup received the U.S. Food and Drug Administration’s “breakthrough device” designation for its experimental implant aimed at restoring vision.

WASHINGTON (Reuters) – U.S. existing home sales rebounded sharply in October, posting the first annual gain since mid-2021, as buyers rushed into the market to take advantage of a brief decline in mortgage rates.

Home sales jumped 3.4% last month to a seasonally adjusted annual rate of 3.96 million units, the National Association of Realtors said on Thursday. Economists polled by Reuters had forecast home resales rebounding to a rate of 3.93 million units. Sales slumped to a rate of 3.83 million units in September, which was the lowest since October 2010.

Sales increased 2.9% year-on-year, the first annual rise since July 2021.

“The worst of the downturn in home sales could be over, with increasing inventory leading to more transactions,” said Lawrence Yun, the NAR’s chief economist.

October’s homes sales likely reflected contracts signed in August and September, when mortgage rates were declining in anticipation of the Federal Reserve launching its policy easing cycle. The U.S. central bank cut its policy rate by an unusually large half-percentage-point in September, its first reduction in borrowing costs since 2020.

The Fed delivered another 25 basis points reduction this month, which lowered its benchmark overnight interest rate to the 4.50%-4.75% range.

Mortgage rates have erased all the decline since August as U.S. Treasury yields have risen on strong economic data and investor fears that President-elect Donald Trump’s policies, including higher tariffs on imported goods and mass deportations, could reignite inflation.

Mortgage rates track the 10-year Treasury note. The average rate on a 30-year fixed-rate mortgage has jumped to 6.78% last week from 6.08% in late September, data from mortgage finance agency Freddie Mac (OTC:FMCC) showed. The Fed hiked rates by 525 basis points in 2022 and 2023 to tame inflation. 

Housing inventory rose 0.7% to 1.37 million units last month. Supply increased 19.1% from one year ago.

Despite the rise in inventory, the median existing home price rose 4.0% from a year earlier to $407,200 in October. That was the highest for any October. Home prices rose in all four regions.

At September’s sales pace, it would take 4.2 months to exhaust the current inventory of existing homes, up from 3.6 months a year ago. A four-to-seven-month supply is viewed as a healthy balance between supply and demand.

Properties typically stayed on the market for 29 days in October compared to 23 days a year ago. First-time buyers accounted for 27% of sales versus 28% a year ago.

That share remains below the 40% that economists and realtors say is needed for a robust housing market.

All-cash sales made up 27% of transactions, down from 29% a year ago. Distressed sales, including foreclosures, represented only 2% of transactions, virtually unchanged from last year.

By Ahmed Eljechtimi

RABAT (Reuters) -U.S. pharmaceutical giant Viatris Inc (NASDAQ:VTRS). has been fined 7.58 million dirhams ($760,000) by Morocco’s competition regulator for failing to notify it regarding its merger, two official sources said on Thursday.

Viatris was formed by the merger of Mylan, which has a subsidiary in Morocco, and Pfizer (NYSE:PFE)’s Upjohn business in 2020.

The fine, equivalent to 2.5% Viatris’ revenue in Morocco last year, has already been paid to the Moroccan treasury, the sources said, requesting anonymity.

Viatris also declined to appeal the decision, the sources said.

Viatris did not immediately respond to a Reuters emailed request for comment.

The regulator is also planning to look into other mergers in which the companies failed to notify the regulator. These could include a joint venture between the phosphates and fertilizers giant OCP and Fertinagro Biotech and the takeover of Whirlpool (NYSE:WHR) Middle East and North Africa operations by Turkey’s appliances maker Arcelik (IS:ARCLK), one of the two sources said.

OCP and Arcelik did not immediately respond to Reuters’ requests for comment.

By Gleb Bryanski and Darya Korsunskaya

MOSCOW (Reuters) – Leading Russian economists expect inflation in Russia to exceed the central bank’s estimate for this year, increasing the likelihood of another aggressive benchmark interest rate hike next month.

Consumer prices rose by 0.37% in the latest week, according to statistical data, pushing the headline figure since the start of the year to 7.4%, close to the central bank’s full-year inflation estimate of 8.0-8.5%.

“There is a real threat that inflation will exceed the October forecast of the central bank, prompting the regulator to aggressively raise the key rate again in December, this time to 23%,” said Denis Popov from PSB Bank.

Reuters collected the views of 10 economists for this story.

The central bank hiked its benchmark rate to 21% in October, stating that a tight monetary policy was needed to combat inflation. The move prompted a barrage of criticism from business leaders who said it was stifling investment and credit.

The October upward revision of the full-year inflation estimate was the third publicly known this year by the central bank.

Some critics argued that the monetary measures had little or no impact on inflation while dampening growth and leading to stagflation, a phenomenon that combines a high inflation rate with economic stagnation.

Dmitry Polevoy from Astra Asset Manager said that if the central bank’s rate-setting meeting took place tomorrow, a hike to 23% would be certain.

“Given the current macroeconomic inputs, everything looks extremely unfavorable for the central bank,” Polevoy said, predicting full-year inflation to exceed 9%.

Inflation was fueled by rises in prices for potatoes, butter, sunflower oil, dairy products, and imported fruits. Prices for potatoes, a staple food for many Russians, have risen by 74% since last December.

The central bank, in its reports, blamed bad weather, which affected crops, poor logistics, a weakening rouble, and increased costs, such as for raw materials and labor, for high inflation.

The government, on its part, is trying to increase imports of some key food products, like butter, lower export barriers, limit or ban some exports, and help improve logistics to contain price growth. Despite this concerted effort, inflation keeps rising.

“The current growth trajectory is unfolding above the forecast of the Bank of Russia,” said Renaissance Capital analysts.

They added that if inflation is above 9% by mid-December, the regulator will respond by hiking the rate to 23%.ond by hiking the rate to 23%.