Monthly Cash Review - GBP State Street GBP Liquidity LVNAV Fund, April 2023
There was no Bank of England (BoE) Monetary Policy Committee (MPC) in April, with the next meeting scheduled for 11th May. The market focus was firmly on economic data and any impact stemming from the recent banking turmoil. Contagion risks across the UK banking sector appear to have been contained, although it is too early to assess whether this resulted in any tightening of credit conditions. During the month, the International Monetary Fund projected that the UK economy would shrink by 0.3% in 2023, the worst among the world's biggest economies.
- March inflation was higher than expected, falling to 10.1% (versus consensus expectations of 9.8%), with core inflation remaining at 6.2% (consensus 6.0%).
- In February unemployment rose marginally from 3.7% to 3.8%, but three-month average earnings growth stayed at 5.9%, above consensus expectations of 5.1%.
- The composite purchasing managers’ index (PMI) was much stronger than expected in April, increasing from 52.2 to 53.9 versus consensus of 52.2. This was entirely driven by an acceleration in the services PMI. Readings above 50 are indicative of growth.
- February GDP growth was reported at 0.0% with January’s outcome being revised up marginally. Some of the weakness in February was due to the various strike actions.
Outlook
The data showed that inflation was higher than expected, labour market conditions remain tight, the composite PMI surprised to the upside on the back of robust services sector activity and GDP remains in positive territory. While headline inflation will fall on the back of energy-related base effects, there are few signs of core inflation falling. The economy is proving to be resilient, and data implies that a recession is likely to have been avoided in the first quarter of 2023. Inflationary pressures are easing more slowly than expected, and the risk of persistence has increased. Market-implied rates moved up on the back of the latest data, as further rate hikes are expected to reduce inflation back to the 2.0% target level. At the end of the month, the market-implied rate for the May MPC meeting was 4.43%, with a 25 basis point (bps) rate hike expected. Peak rate expectations are between 4.75% and 5.00%, with an implied peak of 4.90% for the meeting in September (Figure 1). A potential rate cut in February 2024 is priced in as the implied rate falls to 4.73%.
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
Investments were mainly short in duration, within a seven-day maturity, given market volatility around the future path for interest rates. There was uncertainty around the rate peak, the potential timing of future rate cuts, and whether rates would remain on hold for longer. A small percentage of investments were added with six-month maturities when the opportunity arose. The WAM (weighted average maturity) remained steady around a low 40-day range. Fund liquidity requirements, both overnight and weekly, were well in excess of minimum requirements at all times. Fund liquidity was covered with a combination of government and supranational holdings, gilt repo and bank deposits. The fund credit rating exceeded requirements at all times.