Monthly Cash Review - GBP State Street GBP Liquidity LVNAV Fund, April 2024
There was no Bank of England (BoE) Monetary Policy Committee (MPC) meeting in April. The next meeting is scheduled for 9 May 2024.
Economic Data
- Headline annual inflation fell from 3.4% in February to 3.2% in March, slightly above consensus expectations of 3.1%. Similarly, core inflation declined from 4.5% to 4.2%, which was also above consensus expectations of 4.1%. Core goods inflation continued to ease but services inflation only declined from 6.1% to 6.0%. Fuel inflation has increased, driven by the rise in oil prices.
- GDP increased 0.1% in February, an outcome in line with expectations, with January GDP growth revised up from 0.2% to 0.3%.
- The composite purchasing managers’ index (PMI) increased from 52.8 in March to 54.0 in April, versus consensus expectations of 52.6. Readings above 50 are indicative of economic growth. This improvement was driven by an increase in the services activity balance from 53.1 to 54.9. However, the manufacturing sector PMI has fallen further to 48.7.
- The unemployment rate increased from 3.9% in January to 4.2% in February. Average earnings growth remained stable at 5.6% and private sector wage growth fell marginally from 6.1% to 6.0%.
Outlook
With no BoE meeting in April, market focus was on economic data. After two months of downside surprises, headline inflation for March eased less than expected with concerns remaining around the stickiness in services inflation. The recent increase in oil prices may exert some upward pressure on inflation in April but this is likely to be offset by the 12.3% fall in regulated utility prices. One concern emerging is that the inflation may resemble the experience in the US, where the pace of disinflation has slowed after an initially rapid decline. Labour market conditions appear to have eased slightly with the February increase in the unemployment rate, but private sector wage growth continues to be relatively high. From an activity perspective, GDP growth in February and the upward revision for January strongly suggests that the UK will no longer be in recession when the data for Q1 2024 is finalised. In conjunction with this, the rise in the composite PMI for April also suggests that the economy is growing at the start of Q2.
Inflation featured prominently in policymakers’ public commentary through April. BoE member Dave Ramsden said that the UK is less of an outlier on inflation, and he was "more confident" that inflation pressures are easing and that the balance of risks on inflation now "is now tilted to the downside”. BoE governor Andrew Bailey hinted that the UK might be able to lower interest rates before the US, saying inflation dynamics in the two economies are diverging. Chief Economist Huw Pill took a more cautious approach, arguing that the “time for cutting Bank Rate remained some way off”. He acknowledged that inflation was broadly in line with expectations but that there were “greater risks associated with easing too early should inflation persist rather than easing too late should inflation abate”.
Market implied rates (Figure 1) moved in line with economic data. The chances of interest rates being cut for the first time in June have been pared back given the slower-than-expected fall in US inflation and concerns around the persistence of inflation in the UK. Therefore, the focus will likely remain on inflation data. The implied rate for May 2024 moved higher, finishing the month at 5.19%. Market expectations are that rates will be cut in August, with an implied rate of 5.00% as at month-end. The year-end implied rate also moved higher to 4.80%.
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
Volatility around expectations for the timing of the first interest rate cut and the total number of cuts in 2024 remained high in April. Market expectations for the first cut are now firmly priced for August (from June) and the total of cuts for the year is priced at 50bps – or two cuts of 25bps. Overall yields for GBP investments rose slightly in the month but the yield out to six months remained pretty flat, with one-month investments offered in line with six-month investments. Fund investments continued to favour adding duration (6+ months) using high credit quality to lock in yield. A laddered investment approach to shorter duration credits (sub-3 months) was maintained as the yield curve continued to shift. The fund’s weighted average maturity (WAM) was shortened from 40 days to 35 days with fund liquidity requirements, both overnight and weekly, being 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.