Monthly Cash Review - GBP State Street GBP Liquidity LVNAV Fund, November 2024
On 7 November, the Bank of England’s (BoE) Monetary Policy Committee (MPC) lowered the base rate by 0.25% to 4.75%, in line with expectations, by a vote of 8-1.
Economic Data
- Headline annual inflation rose from 1.7% in September to 2.3% in October, slightly above consensus expectations of 2.2%. Headline inflation was expected to rise above 2.0% due to the 10% rise in the utility price cap in October. Core inflation also rose from 3.2% to 3.3%, when the consensus forecast was for a small decrease to 3.1%. Services inflation rose from 4.9% to 5.0%.
- GDP for September contracted by 0.1% against consensus expectations for growth of 0.2%. For Q3 2024, GDP growth was 0.1% versus consensus expectations of 0.2%.
- The S&P Global composite purchasing managers’ index (PMI) fell from 51.8 in October to 49.9 in October, undershooting consensus expectations of 52.0. Readings below 50 are indicative of economic contraction. The Services output PMI services fell from 51.8 in October to 50.0 in November on the back of weakness in retail, hospitality, and leisure following the rise in national insurance and increases in the minimum wage.
- The unemployment rate rose from 4.0% in August to 4.3% in September, above consensus expectations of 4.1%. Private sector regular pay, a focus for the BoE, was unchanged at 4.8%, in line with the central bank’s forecasts.
Markets
The MPC’s policy guidance was essentially unchanged with its statement repeating the line that “a gradual approach” to rate cuts “remains appropriate”. The BoE noted that there was continued “progress in disinflation”. However, due to the policies in the government’s Budget, the BoE has increased its GDP growth forecast by 0.75% and also added 0.5% to its headline inflation forecast. The BoE now expects headline inflation to be 2.2% in two years’ time from a previous estimate of 1.7%, and 1.8% in three years from 1.5% previously. Overall, the suggestion is that the Budget means that interest rates are more likely to fall gradually. The BoE governor Andrew Bailey also reiterated that rates will not be lowered ‘too quickly or by too much’.
From an economic data perspective, headline inflation had been expected to increase. However, further unfavourable base effects in clothing, cars, and recreation/culture will see headline inflation likely increase further. Concern remains around the level of services inflation, with BoE governor Bailey noting that services inflation was "still incompatible" with the Bank’s target. The fall in the composite PMI suggests that GDP growth is contracting in Q4 2024 amid subdued consumer demand. Furthermore, the tax hikes announced in the Budget may have restrained some private sector activity. An additional factor is the potential for new tariffs to be imposed by the incoming Trump administration, which may weigh on activity as well. Tight labour market conditions appear to be easing and the new higher employer insurance contributions will likely add more pressure on employment.
The anticipated pickup in headline inflation over the coming months may lead the BoE to adopt a more cautious stance. The persistence of services inflation has seen BoE’s Catherine Mann state that the central bank will hold rates for longer to evaluate the data. Market implied rates (Figure 1) for December finished November at 4.67%. The implied rate for February 2025 was 4.48% suggesting that there will be one rate cut over the next two BoE meetings.
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
After the BoE cut policy rates for the second time this year in November to 4.75%, the market priced in three more rate cuts in 2025. However, the investment curve continued to offer yields in excess of 4.75% along the 12-month horizon. The fund took advantage of these yields to add duration and increase the weighted average maturity (WAM) from a mid-30 day range to mid-40 day range, locking in term yield in the highest-rated liquid credits. 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.