Monthly Cash Review – EUR State Street EUR Liquidity LVNAV Fund, April 2024
Policy
At the European Central Bank (ECB) Governing Council (GC) meeting on 11 April, the deposit rate was maintained at 4.00% in line with expectations.
Data
- Eurozone headline annual inflation for April was unchanged at 2.4%, in line with consensus expectations. Core inflation (excluding energy, food, alcohol and tobacco) fell from 2.9% to 2.7%, a little above consensus of 2.6%.
- Services inflation fell from 4.0%, where it had been stuck for five successive months, to 3.7%. Core goods inflation continued to ease and there was an uptick in energy inflation as oil prices rose.
- GDP growth for Q1 2024 was reported at 0.3%, topping consensus estimates of 0.1%. Growth in Q4 2023 was marginally revised lower to -0.1%.
- The composite purchasing managers’ index (PMI) improved from 50.3 in March to 51.4 in April, better than consensus expectations of 50.7. Readings above 50 are indicative of expanding activity. This improvement was driven by the services PMI, which increased from 51.5 to 52.9.
Outlook
Guidance from the ECB following the GC meeting was amended with the dropping of the clause stating that interest rates need to stay at current levels “for a sufficiently long duration”. It now says that “interest rates are at levels that are making a substantial contribution” to bringing down inflation. During the press conference, ECB President Christine Lagarde hinted at a cut at the next meeting by repeating the guidance of the previous conference that "we will know a lot more in June." President Lagarde did not dismiss the potential implications of spillovers from the US economy, but clarified that the nature of inflation is different between the eurozone and the US, concluding that the ECB cannot assume that what will happen in the euro area will be the mirror of what is happening in the US. During a recent trip to Washington, DC, Lagarde stated that "subject to no development of additional shock, it will be time to moderate the restrictive monetary policy in a reasonably short order".
The ECB’s decision-making process remains data-dependent and the bank will not pre-commit to a future interest rate path. The ECB has confirmed that their medium-term inflation outlook from March was broadly in line and that wage growth is gradually moderating. Inflation is still expected to return to target by mid-2025. The escalation of the conflict in the Middle East driven an increase in oil prices, which in turn has pushed up inflation slightly. However, the rise in oil prices has not been large and no serious disruption to the supply of oil is expected. GDP data for Q1 2024, shows that the eurozone has come out of a shallow recession, and the composite PMI for April increasing more than expected is consistent with modest GDP expansion. The improvement is being driven mainly by services. Despite these positive signs, economic activity remains weak. The ECB has published its economic bulletin, acknowledging that risks to growth remain tilted to the downside. There were concerns that monetary policy remains too tight, with the risk of undershooting the 2% inflation target. The governors of the Bank of Italy and Portugal suggested that the ECB should ease policy to prevent this and the risk of a further economic downturn. Several members of the GC have commented that if data continues to print in line with ECB expectations, a June rate cut is likely.
Markets are pricing in an interest rate cut for June, with further rate cuts likely but dependent on the evolution of data such as wages, productivity and oil prices, the geopolitical situation and development in the US. The market implied rate for June remained stable, finishing April at 3.69%. The implied rate for September has fallen to 3.46% and year-end implied rate is now 3.29%.
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 35 days in April and the weighted average life (WAL) averaged 56 days. The majority of investments were made in high-quality credit issuers, out to three months. Additionally to add some duration, selective investments over six months were made. 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 increased, 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.