The focus in December was the European Central Bank (ECB) meeting, where the deposit rate was increased by 50bps to 2.0%, in line with market expectations. However, the tone of the bank’s messaging changed, becoming more hawkish. On the economic front, new ECB forecasts project headline and core inflation to fall from 6.3% and 4.2% in 2023 to 2.3% and 2.4% in 2025, respectively, which is still above the 2% target level. Risks remain to the upside, particularly from faster wage growth and fiscal policy. The labour market remains tight and, despite an impending recession, business surveys point to continued increases in employment. Therefore, the ECB has signalled for more rate hikes with President Christine Lagarde stating that “keeping interest rates at restrictive levels will over time reduce inflation”. At the December press conference, Lagarde pointed to at least two more 50bps rate hikes, with the potential for further rate increases beyond the first quarter of 2023. However, she also repeated that decisions will be data-dependent and taken on meeting-by meeting basis.
The ECB forecast negative growth for both Q4 2022 and Q1 2023 and a peak-to-trough contraction of 0.3%. GDP growth has been downgraded to 0.5% in 2023, down from 0.9%, but there is a more positive view for 2024 (1.9%) and 2025 (1.8%). The most recent economic data have shown signs of improvement. Inflation has eased to 10.1% on lower wholesale energy prices and a decline in oil prices. This the first decline in inflation since the energy crisis started but the rate remains significantly above target. Third quarter GDP was revised up from 0.2% to 0.3%, mainly due to resilience in household consumption. The composite purchasing managers’ index (PMI) for December improved from 47.8 to 48.8, a stronger increase than consensus expectations of 47.9. This suggests that the economy may be contracting at a slower pace, with improvements seen in manufacturing output and services. Sentiment in Germany among businesses and households has improved recently — the Ifo Business Climate Index and the ZEW Index have risen for three consecutive months. The German composite PMI saw a strong improvement from 46.3 to 48.9. These are reflective of the fading risk of gas rationing, the drop in the natural gas price from last summer’s peak, and the government finalising plans to cap electricity and gas prices for both households and businesses in the new year.
Among signs of improvement in economic data, the most important aspect remains inflation, which while declining remains high and is forecast to be above targets beyond the ECB’s projected time horizon. The ECB has signalled that there will be more rate hikes to tackle inflation, prompting the market to increase its interest rate expectations. There was little change for the next ECB meeting on 2 February 2023, with an implied rate of 2.4%. However, rate expectations were increased for later meetings (Figure 1). At the start of December, the implied rating for the May meeting was 2.7% and this rose to close the month at 3.2%. The implied peak rate pre-ECB meeting was 2.75%, but this has now increased to 3.5% for the July meeting.
European government bonds yields moved higher in line with a more hawkish ECB, as investors increased their expectations for the bank’s terminal rate. German 10-year Bund yields, and Italian 10-year government yields recorded some of their largest one-day rises in the past decade, closing the month at 2.57% (+64bps) and 4.70% (+64bps), respectively. Excess liquidity deposited with the ECB averaged €4.319 trillion in December, a small decline due to TLTRO (targeted longer-term refinancing operations) repayments. Excess liquidity is expected to reduce in early 2023 as the largest banks look to repay their loans. The euro short-term rate was stable averaging 1.40% pre-ECB rate hike and 1.90% after. Euro cash overnight deposit rates ranged between 1.35% - 1.43% pre-ECB hike, thereafter ranging from 1.85% - 1.93%. Rates moved lower for the year end, trading as low as 1.50%. Core Government repo averaged around 1.20% pre-ECB hike and post-hike around 1.70%, quickly falling to around 1.50% in the lead-up to year-end and into negative territory at year-end, between -1% and -1.7%. Euro bills remain strongly supported, expensive to other money market instruments, with maturities into January trading at a high premium. French three-month yields averaged 1.63% in December, compared to 1.37% in November.
At the fund level, the weighted average maturity (WAM) averaged 25 days in December and the weighted average life (WAL) averaged 46 days. New issuance into January was scarce and levels expensive. The focus is on high-quality credit issuers, selectively trading into the first quarter, with consideration of higher interest rates in the eurozone and year-end liquidity buffers. The allocation to government and supranational holdings was increased to provide credit quality and liquidity with year-end approaching. Some issuers were well funded and chose not to roll maturing trades. Asset-backed paper continued to be in good supply, offering flexible duration and attractive returns. Liquidity and capital preservation remained the key drivers for the portfolio, with yield a distant third.
Information Classification: General Access
For professional client use only.
Belgium: State Street Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels, Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium is a branch office of State Street Global Advisors Europe Limited, registered in Ireland with company number 49934, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2.
Germany: State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global Advisors Germany”). T +49 (0)89 55878 400. State Street Global Advisors Germany is a branch of State Street Global Advisors Europe Limited, registered in Ireland with company number 49934, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2.
Ireland: State Street Global Advisors Europe Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300.
Netherlands: State Street Global Advisors Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101 CN Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global Advisors Netherlands is a branch office of State Street Global Advisors Europe Limited, registered in Ireland with company number 49934, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2.
Switzerland: State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F: +41 (0)44 245 70 16.
United Kingdom: State Street Global Advisors Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350. ssga.com.
Investing involves risk including the risk of loss of principal.
Such activities may not be suitable for everyone.
Past performance is not a reliable indicator of future performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
Diversification does not ensure a profit or guarantee against loss.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The above targets are estimates based on certain assumptions and analysis. There is no guarantee that the estimates will be achieved.
The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor.
This communication is directed at professional clients (this includes eligible counterparties as defined by the appropriate EU regulator or applicable Swiss regulator) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication.
These investments may have difficulty in liquidating an investment position without taking a significant discount from current market value, which can be a significant problem with certain lightly traded securities.
Please refer to the Fund’s latest Key Information Document (KID)/Key Investor Information Document (KIID) and Prospectus before making any final investment decision. The latest English version of the prospectus and the KID/KIID can be found at www.ssga.com. A summary of investor rights can be found here: https://www.ssga.com/library-content/products/fund-docs/summary-of-investor-rights/ssga-investors-rights-summary-template-non-etf-Lux.pdf
Note that the Management Company may decide to terminate the arrangements made for marketing and proceed with de-notification in compliance with Article 93a of Directive 2009/65/EC.
For Investors in UK: The Company has been registered for distribution in the UK pursuant to the UK’s temporary permissions regime under regulation 62 of the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019. The Company is directed at ‘professional clients’ in the UK (within the meaning of the rules of the Financial Services and Markets Act 2000) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Company, and compensation will not be available under the UK Financial Services Compensation Scheme.
For Investors in Switzerland: The collective investment scheme referred to herein is a collective investment scheme under Irish Law. Prospective investors may obtain the current sales prospectus, the articles of incorporation, the simplified prospectuses as well as the latest annual and semi-annual report free of charge from the Swiss Representative and Paying agent, State Street Bank GmbH Munich, Zurich Branch, Beethovenstrasse 19, 8027 Zurich as well as from the main distributor in Switzerland, State Street Global Advisors AG, Beethovenstrasse 19, 8027 Zurich. Before investing please read the prospectus and the KIID, copies of which can be obtained from the Swiss representative, or at ssga.com. Actively managed funds do not seek to replicate the performance of a specified index The State Street EUR Liquidity LVNAV Fund is actively managed and may underperform its benchmarks.
An investment in the Fund is not appropriate for all investors and is not intended to be a complete investment program. Investing in the State Street EUR Liquidity LVNAV Fund involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.
Projected characteristics 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 views expressed in this material are the views of Cash Portfolio Management through the period ended 31 December, 2022 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
This Message may contain confidential information intended only for the use of the addressee named above. If you are not the intended recipient of this message you are hereby notified that any use, dissemination, distribution or reproduction of this message is prohibited. If you are not the intended recipient of this email communication, please notify us immediately by email direct to the sender and then destroy any electronic or paper copy of this message.
All claims/statement made in the document are actual and can be substantiated when required.
© 2023 State Street Corporation.
All Rights Reserved.
Exp. Date: 31/1/2024