Monthly Cash Review – EUR State Street EUR Liquidity LVNAV Fund, April 2025
Policy
At the European Central Bank (ECB) Governing Council (GC) meeting on 6 March, the deposit rate was lowered from 2.50% to 2.25%, in line with expectations. The decision was unanimous.
Data
- Headline annual inflation for April remained stable at 2.2%, slightly above consensus expectations of 2.1%. Energy inflation fell sharply, reflecting the recent decline in oil and gas prices, while food, alcohol, and tobacco inflation edged up. Core inflation declined from 2.4% to 2.7% due to an increase in services inflation from 3.5% to 3.9%.
- Q1 2025 GDP was reported at 0.4%, higher than consensus expectations of 0.2%. That was partly due to the 3.2% increase in Ireland, where GDP tends to be very volatile, and the boost from front-running of US tariffs.
- The eurozone composite purchasing managers’ index (PMI) for April fell from 50.9 in March to 50.1 in April, lower than consensus expectations of 50.3. Readings above 50 are indicative of growing activity. The services business activity index fell below 50 for the first time in five months, with firms citing concerns about tariffs as a drag. While the manufacturing output PMI rose, there was likely some front-loading of production in anticipation of tariffs. The eurozone’s new manufacturing export orders index remained below the 50 level.
- The eurozone unemployment rate for March remained steady at 6.2%.
Outlook
The ECB’s monetary policy statement was non-committal in nature. With an emphasis on "readiness" and "agility", the aim appears to be to keep its options open for future meetings. The ECB said it will follow a data-dependent and meeting-by-meeting approach, meaning that the ECB could swiftly adjust monetary policy depending on the circumstances, whether that be stimulative, neutral, or restrictive, to maintain inflation sustainably at 2% in the medium term. The statement acknowledged that "the outlook for growth has deteriorated" due to “rising trade tensions” and that this “is likely to have a tightening impact on financing conditions”. ECB President Christine Lagarde acknowledged that tariffs on EU exports have already increased notably. Global trade disruptions, global energy prices, the appreciation of the euro, a re-routing of exports into the euro area from countries with overcapacity, lower demand for euro area exports owing to higher tariffs, and adverse financial market reactions were all factors listed in the monetary policy statement as applying downward pressure on inflation. Lagarde said that the effect of potential retaliatory measures by the EU has not been assessed.
From an economic data perspective, the disinflation process is well on track, with most measures of underlying inflation and long-term inflation expectations pointing to a sustained return of inflation to 2%. April’s rise in services inflation is unlikely to concern the ECB, as this was most likely driven by Easter timing effects and is expected to fall in the coming months. Overall, US tariffs are expected to be disinflationary for the eurozone. GDP data for Q1 shows that the economy started the year stronger than expected. However, growth is expected to slow as the US tariffs introduced in April hit activity. April’s composite PMI data confirmed that the impact from the US tariffs has been limited so far, although the front-loading of orders means that the manufacturing output PMI may well prove weaker in the short-term. The implication is that eurozone GDP may stagnate in Q2. Data is pointing towards slowing employment growth and easing labour market conditions.
The potential implications of a trade war given the possibility of a retaliation strategy to the recent increase in US tariffs contributed to a decline in measures of economic sentiment in the month. These developments have seen market sentiment move towards more interest rate cuts. The market implied rate for June finished April at 1.92%, indicating a rate cut is fully priced in. The implied rates for September and December were 1.61% and 1.50%, respectively. The market is expecting three interest rate cuts before the end of the year.
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 37 days in April 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. Investments in sovereign, agency, and government-guaranteed holdings were maintained to provide high credit quality and maintain liquidity buffers. Money markets were not immune from the volatility seen in the financial markets following the “Liberation Day” tariff announcements; there was some evidence of credit spread widening but otherwise there has been strong market flows and plentiful liquidity. 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.