There was no Bank of England monetary policy committee meeting in April, with the next meeting scheduled for 7 May. This meant that the policy rate remained at 0.10% after the two pre-meeting emergency cuts in March of 0.50% and 0.15% in response to the escalation of the Covid-19 pandemic across the globe.
The UK remained in lockdown throughout April after the initial three-week period instigated in March was extended. More than 26,000 coronavirus-related deaths have been recorded in the UK, but the fatality rate has started to slow, and the government is now starting to discuss the possible easing of containment measures. Easing measures have already started throughout Europe, but at the end of April these still feel some distance away for the UK as it seeks to rebuild its battered economy. The government says it won’t risk a second wave of infections that could force another economic shutdown. With health officials warning the outbreak may last until a vaccine is found, the threat of a second spike is forcing ministers to move cautiously on lifting lockdown measures. Germany was cited as an example of the potential risks, after new cases of Covid-19 rose after some social-distancing restrictions were relaxed.
Unsurprisingly, the latest economic data was particularly weak, with downward revisions across the board. The 5.1% month-on-month fall in retail sales for March was the largest on record. As the lockdown was only introduced in the middle of March, a further big decline is almost guaranteed for April. The eye-watering declines in April’s flash purchasing managers’ indices (PMI) confirm the lockdown has pushed the economy into a recession of unprecedented speed and depth. The manufacturing PMI sank from 47.8 in March to 32.9 (versus a consensus expectation of 42.0), its lowest level in the survey’s 28-year history. The services PMI was even more alarming, slumping from 34.5 to 12.3 (consensus 29.0), leaving the composite PMI at a new record low of 12.9 in April (consensus 31.4); this is lower than the 13.5 reading of its eurozone counterpart. CPI inflation for March fell to 1.5% from 1.7% in February, mainly attributable to lower oil prices, and a larger decline is expected for April. February’s labour market data showed a solid 172,000 rise in employment (consensus 108,000), with a tiny rise in the ILO unemployment rate from 3.9% to 4.0% (consensus 3.9%). There was a small fall in workers’ earnings growth from 3.1% to 2.8% (consensus 3.0%). The data for March is expected to be much worse, given February data capturing the pre-lockdown period.
The global stimulus provided by central banks in March as part of policies “to do whatever it takes” started to provide the liquidity and confidence to lift global markets from the lows recorded in March. During this period, money markets were effectively locked as liquidity and trading came close to a standstill. Each week in April, however, saw progress towards a more functional market as liquidity and confidence gradually improved. Trading volumes rose, and the duration of trades moved from within one week to within a three month period. Yields had widened to extreme levels to incentivise investors at the height of the crisis, before steadily declining as demand increased over the month to the point where yields within a one-month duration had almost normalised. Longer duration yields remain higher, but well below the March highs. As investment yields moved lower, Libor fixings had been initially slow to follow, even moving higher at some points as they were affected by various technical factors. However, the tide seemed to turn towards the end of the month with a slow and steady decrease in fixings across the curve. As April came to a close, money markets were on a much more solid footing, but remained short of being fully functional.
At the fund level, the weighted average maturity (WAM) moved lower once again, sitting within a mid-20-day range. The lower WAM represented the extremely short-term nature of all investments during this period as liquidity was maintained/increased at high levels to ensure fund liquidity requirements were always exceeded. During April, the fund also saw an increase in AUM as the fund subscriptions exceeded redemptions. Fund liquidity was covered with a combination of government and supranational holdings, gilt repo and bank deposits. The fund always maintained high credit quality.