Monthly Cash Review - GBP
State Street GBP Liquidity LVNAV Fund
Although policy rates and quantitative easing measureswere held unchanged in December, UK money market yields turned negative. An escalation in COVID-19 cases saw additional lockdown measures implemented. Meanwhile, a Brexit trade deal between the UK and EU was finally agreed on Christmas Eve.
The Bank of England kept monetary policy unchanged at the 17 December committee meeting with the policy rate remaining at 0.10% and the quantitative easing (QE) target at £895 billion. Both were widely expected and were unanimously voted for by the nine policymakers that make up the Monetary Policy Committee, led by Governor Andrew Bailey. With the meeting coming two weeks before the Brexit transition period was due to end on 31 December, and prior to any trade deal being agreed with the European Union, the Bank reiterated that its economic projections assume the UK moves immediately to a free trade agreement with the EU on 1 January.
Brexit negotiations continued up until Christmas Eve when an agreement was finally achieved, just days before the country was due to leave the bloc’s single market and customs union. However, in the area of financial services regulation, EU officials must rule separately that British financial regulations and oversight are strong enough to create a level playing field. After the positive vaccine developments in November and the UK becoming the first nation to begin a rollout vaccine process in early December, the COVID-19 situation deteriorated in the final part of the month as large areas of the UK were placed under stringent lockdown measures following alarge rise in new cases due to an outbreak of a new strain of the virus — the potential for a nation-wide lockdown in January rose sharply. The near-term economic outlook will be strained given the likelihood that tight restrictions remain in place in many areas of the country for the next few months. The rollout of COVID-19 vaccinations over the next few months should allow social distancing restrictions to be eased, helping GDP to bounce back in the second half of 2021 –despite a strong quarter-on-quarter rebound, GDP in the third quarter was still -8.6% lower than at the end of 2019.
The relatively small drop in retail sales in November suggests that the second COVID-19 lockdown didn’t change households’ spending behaviour as much as during the first. Although November saw a 3.8% month-on-month decline, sales were still 2.7% above their pre-crisis level, and the drop was only a fraction of the 18.1% fall in April, which can be partially attributed to petrol sales “only” falling by 16.6% month-on-month (compared to -51.8% in April, as schools, factories and construction sites stayed open. CPI Inflation fell from 0.7% in October to 0.3% in November, with the core rate falling from 1.5% to 1.1% — both declines were larger than expected,with the fall in clothing inflation the biggest individual factor. The services purchasing managers’ index (PMI) rose slightly from 47.6 in November to 49.9 in December as many of the hospitality and leisure businesses that were forced to close by the lockdown had to remain shut under the restrictive tiering system in place — readings below 50 are indicative of contracting activity. The manufacturing PMI increased from 55.6 in November to 57.3, with this rise largely driven by stock-building ahead of the Brexit deadline on 31st December. The composite PMI index rose from 49.0in November to 50.7 in December. The official unemployment rate for the three months October stood at 4.9%, up from 4.8% in September — while this was below expectations of 5.1%, it still represents the highest rate since 2016, with further upward pressure likely as the government’s furlough scheme unwinds in 2021.
UK money market yields trended even lower in December with the vast majority of money market fund investments now offered in negative territory out to a maturity of six months. The shortest of investments in overnight deposits and reverse repo were almost the only investments still offering a small positive yield for much of the month. LIBOR fixings also felt the pressure moving to all-time lows: three-month at 0.023%; six-month at 0.03%; and 12-month 0.087%. Weekly UK Treasury Bills auctions continued to trade negative across the one, three, six month maturities offered with an average yield across the curve of around -0.10%. Year-end bank balance sheet restrictions had the usual effect on markets with limited availability to place deposits over the last days of the month and GBP reverse repo markets moving into negative yielding territory, trading as low as -0.80% on 31 December.
At the fund level, the weighted average maturity (WAM) remained once again around a high mid-40 day range with many investments kept short duration in positive yielding investments against a now negative yielding longer duration curve. Opportunities were taken when available to add some longer duration investments which still offered positive yields. Liquidity was maintained at high levels at all times, especially in light of the approaching year-end period, and well in excess of minimum requirements. Fund liquidity was covered with a combination of government and supranational holdings, gilt repo and bank deposits. The fund always maintains a high credit quality.
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