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

14 September 2023

There was no European Central Bank (ECB) Governing Council meeting in August. The next meeting is scheduled for 14 September.

Data

Headline inflation for August remained unchanged at 5.3% year-on-year, slightly above consensus expectations of 5.1% due to higher oil prices leading to an increase in energy inflation. Core inflation declined from 5.5% to 5.3%, in line with expectations. Services inflation fell from 5.6% to 5.5%.
GDP was confirmed to have grown by 0.3% quarter-on-quarter in Q2 2023.
August’s flash purchasing managers’ index (PMI) readings were worse than expected, with the eurozone Composite PMI falling from a revised 48.6 in July to 47.0 in August, below consensus expectations of 48.5. Readings below 50 suggest the economy is contracting. The drop was almost entirely due to a big fall in the Services PMI from 50.9 to 48.3. The employment PMI also edged down, suggesting weaker employment growth.
The labour market continues to be tight, with the unemployment rate for July remaining at 6.4%.

Markets

Market focus was firmly on economic data in August. The ECB’s assessment of the economic outlook was broadly balanced; there are signs of slowing activity but inflation remains high and that it “will stay above target for an extended period”. The inflation data showed that the headline rate remained stable, but core inflation did fall, with both core goods and services inflation edging lower. Expectations are that inflation will fall further in September given the base effects from last year’s introduction of a cheap public transport ticket in Germany. Labour market conditions remain tight with the region’s unemployment rate still at a record-low level, suggesting that wage inflation remains strong. However, there are some signs that the demand for labour is easing. The business surveys show that firms’ hiring intentions are consistent with slower employment growth. Additional indications that the economy is slowing were evident in the weaker-than-expected August flash composite PMIs, which was driven by the decline in services activity.

TFrom the ECB perspective, there appears to be evidence that monetary policy is dampening demand. Inflation, while still elevated, has fallen from its highs. The ECB’s inflation forecast is due to be updated shortly. ECB Vice President Luis De Guindos said that the September rate decision is still undecided, but stated that the bank is entering the final stretch of rate hikes. Another ECB member, Isabel Schnabel noted that the outlook is uncertain, with weakness ahead amid pockets of resilience. Joachim Nagel, president of Germany’s Bundesbank and member of the ECB’s Governing Council, said that the ECB may need to hold its rate steady at higher rates but declined to give a signal for September. Market expectations for the September meeting showed an implied rate of 3.71%, suggesting a rate hike of 25bps. The year-end implied rate finished the month at 3.82%, suggesting that the peak will be closer to 3.75%.

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 26 days in August and the weighted average life (WAL) averaged 47 days. The focus was on high-quality credit issuers out to three months, with some selective longer-dated investments. 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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