Monthly Cash Review – EUR State Street EUR Liquidity LVNAV Fund, February 2025
Policy
There was no European Central Bank (ECB) Governing Council (GC) meeting in February, with the next meeting scheduled for 6 March.
Data
- Headline inflation fell from 2.5% in January to 2.4% in February, slightly above consensus expectations of 2.3%. Food, alcohol and tobacco inflation rose by more than expected, from 2.3% to 2.7%. Core inflation declined from 2.7% to 2.6%, also slightly below consensus expectations of 2.5%. Services inflation fell from 3.9% to a 10-month low of 3.7%.
- Eurozone GDP for the fourth quarter was revised up to 0.1%, still below the ECB projection of 0.2%. Activity was supported by positive contributions from both public and private consumption.
- The eurozone composite purchasing managers’ index (PMI) for February remained flat at 50.2, slightly below consensus expectations of 50.5. Readings above 50 are indicative of growing activity. The large improvement recorded in manufacturing output to 48.7 (+1.6) was offset by a deterioration in the services index, which fell to 50.7 (-0.6).
- The eurozone unemployment rate for January remained unchanged at its record low of 6.2%.
- Negotiated wage growth slowed in Q4 2024 to 4.1% from 5.4% in Q3 2024.
Outlook
As there was no ECB meeting in the month, the focus was on economic data and market developments. US President Trump has announced increases in steel and aluminium tariffs, with the threat of further increases in tariffs on European cars and other goods potentially being subject to a 25% rate. Moreover, President Trump’s push for an early peace agreement in Ukraine raised the prospect of higher defence spending in Europe, while increasing the chance of a fall in European natural gas prices. Last year, European Commission President Ursula von der Leyen suggested that Europe needed an extra EUR50bn or 0.3% of GDP in defence “investments” per year over the next decade.
Economic data has seen inflation slightly above expectations; however, policymakers will take note of the drop in services inflation, which should see core inflation fall over the year. Headline inflation is expected to remain close to its current level in the near term, as both energy and food inflation edges up. While the low unemployment rate suggests that the labour market remains tight, the February employment PMI point to loosening labour market conditions which is also reflected in falling job vacancies and survey indicators that hiring intentions are declining. Negotiated wage growth declined in Q4 2024 and will fall further because tax-free one-off wage payments which lifted German wages during 2024 will not be repeated. The ECB’s forward-looking wage tracker, based on agreements already signed, suggests that wage growth will come down to only 1.3% by December this year. The expectation is that slower wage growth will see underlying inflation fall.
February PMIs continue to point to weak economic momentum, being consistent with the economy flatlining. The ECB is likely to maintain its consumption-led recovery narrative. However, a further escalation of the trade war between the US and the eurozone is likely to have a negative impact on economic activity. Looking ahead, there are expectations that the ECB will emphasise that the risks to growth are on the downside. The ECB has indicated that financing conditions remain largely restrictive, with credit standards for the corporate sector showing signs of renewed tightening while being supportive in households’ demand for mortgages.
Market considerations have moved to the neutral policy rate. On 7 February, the ECB staff published its updated estimates of the neutral rate at 1.75-2.25%, in line with ECB President Christine Lagarde’s comments at the World Economic Forum in Davos. The market implied rate for March finished February at 2.41%, with a rate cut fully priced in. The implied rates for June and December were 2.05% and 1.81% respectively.
Forecast are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate. The above targets are estimates based on certain assumptions and analysis made by SSGA. There is no guarantee that the estimates will be achieved.
Fund
The weighted average maturity (WAM) averaged 34 days in February and the weighted average life (WAL) averaged 54 days. Investments were made in high-quality credit issuers out to three months, with selective longer-dated investments. Investments in sovereign, agency, and government-guaranteed holdings were maintained to provide high credit quality and maintain liquidity buffers. Investments in bank floating money market securities, linked to the €STR overnight index, were increased, offering attractive spreads and diversification. Asset-backed commercial paper continued to be in good supply, offering flexible duration and attractive returns compared to vanilla paper.