Monthly Cash Review – EUR State Street EUR Liquidity LVNAV Fund, March 2025
Policy
At the European Central Bank (ECB) Governing Council (GC) meeting on 6 March, the deposit rate was cut from 2.75% to 2.50%, in line with expectations.
Data
- Headline inflation fell from 2.3% in February to 2.2% in March, slightly lower than consensus expectations of 2.3%. Food, alcohol, and tobacco inflation increased as expected, from 2.7% to 2.9%, but was more than offset by energy inflation dipping below zero for the first time in four months. Core inflation declined from 2.6% to 2.4%, below the consensus forecast of 2.5%. This was driven by the decline in services inflation from 3.7% in February to 3.4%.
- Q4 GDP growth was revised up to 0.2%. This was largely due to a revision in Ireland where the data can be volatile. Excluding Ireland, eurozone GDP rose by 0.1%.
- The eurozone composite purchasing managers’ index (PMI) for March increased to 50.4 from 50.2 in February, lower than consensus expectations of 50.8. Readings above 50 are indicative of growing activity. The biggest improvement was in the manufacturing sector, where the output index rose to its highest level in nearly three years, while the services sector index fell slightly. The employment index also improved, rising from 49.2 in February to 50.1 in March, the first time it has been above the neutral 50 level in eight months.
- The eurozone unemployment rate for February fell to a new low of 6.1% from 6.2% in January.
Outlook
The ECB has adjusted its messaging to signal that the outlook for monetary policy has become less clear. The press release from the ECB suggested that policymakers are becoming more cautious about further rate cuts, with the wording changed from describing policy as “restrictive” to saying that it is “becoming meaningfully less restrictive”. The ECB also added to its statement, saying “especially in current conditions of rising uncertainty” that it “will follow a data-dependent, meeting-by-meeting approach” to policy decisions. In the post-meeting press conference, ECB President Christine Lagarde stressed that uncertainty is high and turned down the opportunity to repeat language she has used in the past that the direction of travel for interest rates is “clear”. Instead, she noted that the outlook was “not black and white”. She also emphasised that the April interest rate decision could be a cut or a pause, depending on the data. The ECB also published new forecasts, revising its growth forecasts down and left the inflation forecasts broadly unchanged – the headline rate was revised to 2.0% in 2027 (previously 2.1%) with core inflation unchanged at 1.9%.
While both headline and core inflation has continued to fall, arguably more importantly is the decline in services inflation. The expectation is that it will fall further, led by the services component as wage growth declines. The other consideration is that PMI data and activity surveys continue to point to slow growth for the first quarter of the year. However, Germany has decided to change its fiscal rules and ramp up defence spending. The scale and timing of the increase is not yet known but is expected to rise from 2.1% of GDP last year to ~3.0% in 2026, and will be funded by an increase in the fiscal deficit. Other sovereign governments are unlikely to loosen policy much. Higher defence and infrastructure spending will support eurozone GDP growth by an estimated 0.2-0.3% between 2024 and 2026. The boost is relatively small and may take time to feed through, so growth could remain weak in the near term. Another aspect is that the US has imposed 25% sectoral tariffs on European automotive exports, ahead of reciprocal tariffs which will be announced on 2 April. At this time, the breadth and scope of reciprocal tariffs remain highly uncertain.
There has been mixed comments from ECB GC members, with some signalling a potential rate cut while others favoured a pause. One view is that tariffs would have a negative impact on demand, further strengthening the downward trend in inflation. Italian Governor Panetta also claimed that “overall, macroeconomic indicators and projections suggest there is still work to do.” The opposite view is that higher defence spending and tariffs added upside risk to inflation, suggesting that a pause would be more appropriate. The market implied rate for April finished March at 2.23%, indicating a rate cut is fully priced in. The implied rates for June and December were 2.08% and 1.84%, respectively. The market is expecting an additional further 2-3 cuts this year as the economy remains sluggish and core inflation keeps falling.
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 40 days in March and the weighted average life (WAL) averaged 58 days. Investments were made in high-quality credit issuers out to three months, with selective longer-dated investments out to one year, to increase duration. 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.