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Monthly Cash Review – EUR State Street EUR Liquidity LVNAV Fund, April 2023

There was no meeting of the European Central Bank’s (ECB) Governing Council in April, with the next meeting scheduled for 4th May. The minutes from the ECB March meeting showed that the turmoil in the banking sector deterred policymakers from signalling further rate hikes. As the risk of bank contagion appears to have been contained, the focus was firmly on economic data in the month. The minutes also acknowledged “that inflation remained far too high and was projected to remain too high for too long” and that the “Governing Council would have further ground to cover in adjusting the monetary policy stance to ensure a timely return of inflation to target.”

  • Headline inflation fell from 8.6% in February to 6.9% in March, due almost entirely to lower energy inflation. However, core inflation increased marginally to 5.7% in March. 
  • National figures showed that headline inflation for Germany fell marginally in April, but there were increases for France and Spain. These suggest the possibility that eurozone inflation may have edged up in April.
  • GDP data showed that the eurozone economy grew by 0.1% in Q1 2023, versus consensus expectations of 0.2%.
  • The eurozone composite purchasing managers’ index (PMI) index increased to 54.4 in April from 53.7 in March, versus consensus expectations of 53.7. The improvement was driven by the services PMI. One additional area of note was that the composite employment index improved as well, rising to 54.7. PMI readings in April in excess of 50 are indicative of growth.  


In line with the minutes from the ECB March meeting, there were various comments from ECB members confirming that further interest rate increases would be required to combat inflation. ECB President Christine Lagarde echoed the minutes, stating that the ECB still had “a lot of ground to cover” to meet the 2% inflation target. The main question for the market has been around the potential size of the rate hike in May, 25bps or 50bps. Data for April revealed that the economy has been more resilient than expected. The stronger composite PMI suggests that the economy has expanded, and that recession fears are fading. Headline inflation is falling as expected, due to base effects and lower energy prices, but the key debate is more around the stubbornly high core inflation. The labour market looks set to remain tight, with the employment PMI pointing to continued increases in employment.

Two key sets of data are due to be published on the 2nd May, two days prior to the ECB meeting: April inflation and the ECB Bank Lending Survey. The ECB policy decision is likely to be driven by these factors. The lending survey will show how much of an impact the tighter monetary conditions are having and whether the recent banking turmoil has had an impact on credit conditions. If inflation surprises to the upside and credit conditions do not materially worsen, some members of the ECB might argue for a 50bps rate hike. At the end of the month, the market implied rate for the May meeting was 3.17%, with expectations settling on a 25bps hike. The implied peak is 3.63% for the September meeting but the implied rate for year-end is lower at 3.52% (Figure 1).

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.


At the fund level, the weighted average maturity (WAM) averaged 19 days and the weighted average life (WAL) averaged 47 days. The daily and weekly liquidity requirements remained comfortably above regulatory requirements, following the banking turmoil in March. The focus was on high-quality credit issuers out to two months, with some selective longer-dated investments taking into consideration the potential for further interest rate hikes. 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 maintained, 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. Liquidity and capital preservation remained the key drivers for the portfolio.

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