US Flow of Funds Data – interesting observations
Despite some glaring data accuracy problems, the latest flow of funds data from the USA provided few surprises but did confirm a number of important hypotheses. Firstly, the US corporate sector is now running a significant cash flow deficit that will likely act as a continued headwind to capital spending trends. This would seem to argue for no rate hike from the FOMC and the need for an easier fiscal stance.
However, it is also clear that the boom in corporate financial engineering and credit-financed equity buy-backs has re-accelerated. This will encourage some of the FOMC to want to raise rates sooner rather than later.
The flow of funds data also confirmed that the household sector has begun what we believe is likely to be a permanent shift towards a higher savings rate and even the latest (seemingly stronger) retail sales data would not seem to be sufficient to alter this conclusion.
Elsewhere, we find that the Treasury Department seems to have been remarkably inventive in its funding strategies over recent months – the government apparently over-issued T bonds during the latter stages of the FRB’s QEP and then unusually failed to issue any new bonds outside the public sector during the first quarter of this year. This government strategy may have been of benefit to bond markets (both Treasury & Corporate) over the first quarter but the Treasury Department has now run out of money and may therefore not be able to provide further support to bond prices through this route. If this was an attempted price-stabilizing measure, the Treasury may have fired off its ammunition too early it seems….