Skip to main content
Insights

Monthly Cash Review – EUR State Street EUR Liquidity LVNAV Fund, December 2024

Policy

The European Central Bank (ECB) Governing Council (GC) lowered the deposit rate by 0.25% to 3.00% in line with expectations at its meeting on 12 December.

Data

  • Inflation data for December is not due to be released until 7 January 2025.
  • The euro area composite purchasing managers’ index (PMI) increased from 48.3 in November to 49.5 in December, better than consensus expectations of 48.2 although readings below 50 are indicative of weakening activity. The improvement was driven by a rebound in the services index from 49.5 to 51.4. The manufacturing component continued to contract, falling 0.6 points to 44.5..
  • The region’s unemployment rate for October remained unchanged at 6.3%.

Outlook

Following the decision to lower the deposit rate, communications from the ECB had a dovish tilt. The policy statement moved away from a focus on fighting inflation and more towards supporting activity. The language in the statement was modified compared to the October post-meeting statement, acknowledging that inflation was close to target and removing the sentence that referred to the need for rates to remain “sufficiently restrictive”. The statement merely stated that the policy stance will be “appropriate”. The ECB has reduced its forecasts for GDP growth from 1.3% to 1.1% for 2025, and from 1.5% to 1.4% for 2026 with core inflation at 1.9%.

In the December press conference, ECB President Christine Lagarde stated that policymakers had not discussed the neutral rate, but implied that most policymakers think it is quite a lot lower than 3%. She stated that “conventional wisdom around the table was that [the neutral rate] was probably a little higher than it [used to be], for multiple reasons”. And she referenced staff estimates that it was in a range from 1.75% to 2.5%.

Policymakers are becoming more conscious of downside risks to the economy. The December PMI data points to weak growth at the end of the year and likely stagnating in the fourth quarter. It seems likely that growth will remain sluggish. With wage growth slowing and energy prices likely to fall, inflation may undershoot the 2% target next year. At the national level, growth is likely to remain weak in Germany. France has a new prime minister but there are concerns over the political will to reduce the budget deficit. This means that the discussion on the size of the rate cut will remain live, even though there does not appear to be much appetite for a 50bps rate cuts, this could change if the data remain very weak. The market implied rate for January 2025 finished December at 2.63%. The implied rates for March 2025 and June 2025 were 2.33% and 1.92% respectively, suggesting further rate cuts to come in 2025.

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.

Fund

The weighted average maturity (WAM) averaged 32 days in December and the weighted average life (WAL) averaged 57 days. The focus was on managing liquidity, with the year-end approaching and with much activity across the fund as investors prepared also for the year-end. Investments were made in high-quality credit issuers out to three months, with some selective longer-dated investments out to one year. 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. The year-end was challenging but manageable, with collateral givers and bank cash deposit takers reducing their requirements as balance sheet contractions and regulatory requirements kicked in.

More on Cash