Smart Treasury Moves to Manage Liquidity
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The economic outlook remains complicated. On the one hand, the U.S. and Canadian economies have exhibited remarkable resilience. On the other hand, inflation remains stubbornly high despite central banks’ best efforts, and that’s delaying the start of expected interest rate cuts. In such a fluid situation, what are corporate treasury departments to do?
We recently held an event where I moderated a discussion with Jennifer Lee, Senior Economist at BMO, and Peter Moirano, BMO’s Director of Liquidity Solutions. They discussed the current macroeconomic climate and how finance teams can navigate these turbulent waters to maximize liquidity and improve their treasury management efficiency.
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Following is a summary of their conversation.
U.S. and Canada show resilience, but...
BMO forecasts U.S. GDP growth of 2.4% in 2024 before slowing moderately to 1.8% in 2025. Lee noted that a strong job market and robust consumer spending have been keeping the economy humming despite 525 basis points in rate hikes.
“Savings and the labor market have been the biggest reasons behind the strength,” Lee said. “Consumers are definitely forces to be reckoned with.”
One potential warning sign for the U.S. is an upcoming demographic shift. “We’re going to see a record 4.1 million American boomers reach that magic age of 65 this year,” Lee said. “Eventually, we’re going to start seeing a smaller labour force.”
That’s on top of several industries that have already been facing labor shortages, such as trucking, healthcare and education. Then there’s the ripple effects of such shortages. Fewer construction workers, for example, negatively impacts the housing market.
The Canadian economy, Lee said, has been a nice upside surprise. The country has benefited from being the U.S.’ largest trading partner and a population boom. But Canadian consumers are more sensitive to rate hikes than their U.S. counterparts.
We have shorter term mortgages, and when there’s a number of mortgages that are renewing, that’s probably going to hit GDP growth soon
-- Jennifer Lee, Senior Economist, BMO --
Inflation heats up
After key inflation indicators showed improvement in 2023, the U.S. Consumer Price Index has crept upward in the first three months of 2024. That’s complicated the Fed’s efforts to bring inflation down to its 2% target, which has delayed the start of its round of rate cuts. Lee noted that BMO has trimmed its rate cut forecast from three to two this year, with the first cut coming in July and the second after the November presidential election.
Nobody wants to look silly by pulling the trigger too soon. They need to be very confident that inflation is headed back to 2% on a sustained basis. They don’t want to give up all these hard-earned gains of getting inflation down. I believe it’s just a matter of time before all the major central banks start to ease more readily. We just have to be patient.
-- Jennifer Lee, Senior Economist, BMO --
Treasurers: Adjust for the yield opportunities
As Moirano pointed out, we’re operating in one of the most aggressive interest rate cycles in decades. In the US, rates went from near zero to 525 basis points in just 16 months. With interest rates sitting at a 24-year high, this is uncharted territory for many finance teams.
“There’s not a lot of experience with this type of cycle, and our clients have needed to make thoughtful pivots during this event to take advantage of the opportunities that have presented themselves,” Moirano said.
When operating in such a dynamic environment, financial chiefs need to be nimble. In 2022, Moirano said, the message to CFOs was to “float like a butterfly.”
“Post-pandemic, the signals were clear that central banks needed to get back to work and lean into a rate cycle,” Moirano said. “They were clearly signaling when liftoff was going to come.”
Expectations that inflation would be transitory, however, turned out to be unfounded. When the Federal Reserve responded with a round of aggressive rate hikes, the message in 2023 transitioned to “sting like a bee.”
Certain inflection points started to leak into the market and created opportunities for our clients to take advantage of. Between December 2022 and May 2023, there was a significant opportunity to capture yield in the three-month CD market. Between June 2023 and October 2023, there was significant opportunity to capture yield with the six-month CD or the six-month Treasury. The situation has been dynamic. However, companies that were in a position to take advantage of these things did, and fortune favored them during that period.
-- Peter Moirano, Director of Liquidity Solutions, BMO --
Focus on cash flow forecasting, efficiency
The uncertain interest rate environment has left many CFOs trying to determine how to respond. When it comes to offering corporate treasury departments guidance, Moirano quoted Louis Pasteur: “Chance favors only the prepared mind.” That is, the financial chiefs who stick to core cash management fundamentals are the ones who will thrive, not just survive.
“The organizations that have the most confidence in their ability to forecast their cash flows have been the ones thriving throughout this environment,” he said. “Good forecasting on cash flows leads to the ability to plan the segmentation of your capital. If you can thoroughly understand what your core operating cash, your reserve cash, and your strategic cash is, it allows you to create buffers in between those tiers and employ different tactics on top of those buffers to capture additional yield opportunities.”
The problem, Moirano said, is that after nearly a decade of near-zero interest rates, many financial professionals have not had to rely as heavily on those fundamentals. But understanding the cyclicality of your business and how the macroeconomic environment affects the way you operate will allow you to deploy the right tactics when economic conditions change.
“Even when rates are low, the companies that focus on their financial infrastructure are the ones that tend to do well,” Moirano said.
Among the companies that have been prepared, Moirano said they’ve been deploying their liquidity to pay down debt and pursue strategic acquisitions. They’ve also been focused on optimizing their treasury management functions to improve efficiency and enable better forecasting.
We’ve seen a lot of automation on the back end—integrations with their banking providers to get the data that enables treasury departments to become more efficient and feed their cash flows themselves. We’ve seen clients migrate toward technology to support that journey on the treasury side. Reconciliation is one of those elements that technology is enabling to create more efficient back ends.
-- Peter Moirano, Director of Liquidity Solutions, BMO --
We covered so much more in our discussion, including trends in China and Europe, the impact of last year’s regional bank failures, and global currency markets.