Monthly Cash Review – EUR State Street EUR Liquidity LVNAV Fund, June 2024
Policy
At the European Central Bank (ECB) Governing Council (GC) meeting on 6 June, the deposit rate was cut by 0.25% from 4.00% to 3.75%, a move in line with expectations.
Data
- Eurozone headline inflation for May increased to 2.6% from 2.4% in April. Core inflation was unchanged at 2.9%.
- Headline inflation for June fell in Spain from 3.8% to 3.5%, edged down in France from 2.6% to 2.5% and ticked up in Italy from 0.8% to 0.9%. Together, the data suggested that the eurozone headline inflation rate could fall from 2.6% in May to around 2.4% in June. The breakdowns from these countries showed that energy and food inflation fell, whereas core price pressures were broadly unchanged. Services CPI remained unchanged in France but fell marginally in Italy.
- The composite purchasing managers’ index (PMI) fell to 50.8 in June from 52.2 in May, lower than consensus expectations for an increase to 52.5. Readings above 50 are indicative of expanding activity. The services PMI continued to be the driver of growth despite falling from 53.2 to 52.6. The manufacturing PMI fell further from 47.3 to 45.6.
- The unemployment rate for May remained stable at 6.4%.
Outlook
Following the ECB meeting, the forecasts for both headline and core inflation were revised up, with both now expected to average 2.2% next year rather than 2.0% and 2.1%, respectively. The GDP growth forecast for this year has been revised up from 0.6% to 0.9%, with only small changes for subsequent years.
The lines from the April statement that “most measures of underlying inflation are easing” and “wage growth is gradually moderating” were replaced with language comparing the inflation rate to where it was last September, when rates were last hiked. The statement said the ECB “will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim” and “is not pre-committing to a particular rate path.” ECB President Christine Lagarde seemed confident that disinflation was broadly on track and downplayed the significance of the increase in negotiated wage inflation. The ECB judged that wage inflation was on a declining path and would fall faster in 2025. President Lagarde said headline inflation was likely to fluctuate “around its current level” for the rest of the year and noted several times that the road would be “bumpy”. She also stressed the need to see more data before the ECB could make its next move.
From an economic data perspective, services inflation continues to be stronger than expected. The sharp drop in the eurozone Composite PMI in June suggests that activity is slowing. While price pressures in the PMIs overall continued to ease, they remained relatively strong in the services sector, which will keep ECB policymakers cautious. The PMI prints remain consistent with some GDP growth in Q2, albeit low. The labour market remains tight and higher wage inflation is still feeding through. The ECB’s revised economic forecasts and policy guidance implies that the future path of rate cuts may be a little slower than previously anticipated. The implied rate for July finished June at 3.63%, but the implied rate for September was 3.47%, when a rate is fully expected. The year-end implied rate stood at 3.22%, suggesting a further rate cut.
The French elections have added political risk to the eurozone. The preliminary results from the first round of voting suggest that Marine Le Pen’s National Rally has come out on top, winning around 34% of the vote. The left-wing New Popular Front coalition has won 28%, and Macron’s Ensemble has secured 20%. The position has been complicated by the “Excessive Deficit Procedures” (EDPs) issued against five eurozone countries: France, Italy, Belgium, Slovakia and Malta. These countries will be given specific targets for reducing their budget deficits over the coming years. As the composition of the French government is not yet known, this means that uncertainty remains about the future fiscal policy.
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 39 days in June and the weighted average life (WAL) averaged 58 days. The majority of investments were made in high-quality credit issuers, out to three months. Additionally to add some duration, some selective investments over six months were made. 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.