The Bank of England (BoE) left policy rates unchanged at the 18 June Monetary Policy Committee meeting. The decision to hold rates at 0.10% was unanimous at 9–0. The committee voted by a majority of 8–1 to increase quantitative easing (QE) by £100 billion to a target level of£745 billion by the end of 2020. The use of negative interest rates did not come up in the policy discussion, although BoE Governor Andrew Bailey was careful not to rule anything out.
The economy showed small signs of recovery from the April low after the easing of some lockdown measures. This trend should continue in July following further easing of restrictions from 4th July, including a reduction in the official social distancing measure from two metres toone metre (plus). Although negative interest rates look unlikely at this time, the current low rate environment could remain in place for some time after Bailey suggested the institution should prioritise shrinking its balance sheet before raising interest rates — this could mean reverseengineeringat least £820 billion in loans and assets, mostly UK government bonds accumulated through QE. Conversations between Boris Johnson and the European Union’s leadership was reported to have injected fresh momentum into the deadlocked negotiations. European officials inferred from Johnson’s contributions that he is willing to soften his position and signalled that they were ready to do the same. Formal discussions will resume on June 29 in a more concentrated format than the previous series of talks every three weeks.
The composite purchasing managers’ index (PMI) rose from 30.0 in May to 47.6 in June suggesting that the further easing in the lockdown has led to a small rebound in economic activity. Reading below 50 are indicative of contracting activity. The manufacturing PMI rose from40.7 to 50.1 and the services index recovered from 29.0 to 47.0, with all readings coming in above consensus estimates. Retail sales rebounded strongly in May, rising 12.0% versus a slide of -18.1%in April. Public sector borrowing rose to £55.2bn in May (versus consensus of £50.0bn) from theApril figure of £48.5bn (revised lower from £62.1 billion). CPI inflation fell from 0.8% in April to afour-year low of 0.5% in May, mainly attributed to the lagged effect of the plunge in oil prices in April. The core inflation measure eased from 1.4% in April to a three-and-a-half-year low of 1.2%in May. In the three months to April, the ILO measure of unemployment remained unchangedat 3.9% (consensus 4.7%). The timelier claimant-count measure of unemployment shot up by527,000 in May to 2.8 million. The cumulative increase since the trough in March now stands at1.6 million, higher than the total 1.1 million rise seen after the 2008/09 financial crisis.
Unemployment figures are expected to increase as the government’s job furlough scheme is wound down from August. The 2.2% quarter-on-quarter drop in GDP in the first quarter of 2020 was the joint-largest fall since 1979 — this sets the stage for an unprecedented fall in the second quarter, despite evidence of a partial rebound in the economy in May and June.
Since the height of the liquidity crunch in March, markets and liquidity conditions continued toimprove through June. Duration of investments increased, with trades of six-month duration common place and 12-month activity building. Some of this activity was driven by investors looking to put excess liquidity to work, and others by issuer supply/demand dynamics. While volumes remained healthy, issuers were diligent and deliberate about managing their needs. Factors ranging from government funding programmes, term capital markets issuance, and theFX basis impacted issuer activity.
GBP Libour yields hit new lows with the 12-month fix falling to 0.46%, six-month fix at 0.29% and three-month fix at 0.14%. Investment yields also moved lower, with typical one-month investments at 0.07%, 3-month at 0.15% and 6-month at 0.25%. Half-year-end was also a driver for the very short end of the market via the normal supply/demand dynamics of dealer balancesheet restriction over these periods. Although the BoE references to negative policy rates diminished, the market remained unsure with expectations for negative money market yields being marginally priced in and out. UK gilt yields remained negative out to the five-year horizon.
At the fund level, the weighted average maturity (WAM) was increased marginally from mid-20-day range to a low 30-day range. The majority of investments placed were within a one-month maturity, with selected high-quality investments made within a three-month maturity. Fund AUM also continued to see a healthy stream of subscriptions over the month. Liquidity was maintainedat high levels at all times with an additional focus on liquidity for half year end positioning Fundliquidity was covered with a combination of government and supranational holdings, gilt repo andbank deposits. The fund always maintained high credit quality.