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        Monthly Cash Review – EUR State Street EUR Liquidity LVNAV Fund, November 2024

        Policy

        There was no European Central Bank (ECB) Governing Council (GC) meeting in November, with the next meeting scheduled for 12 December.

        Data

        • Headline annual inflation increased from 2.0% in October to 2.3% in November, in line with expectations. This was due to a base-effects driven increase in energy inflation. Core inflation remained unchanged at 2.7%. Services inflation fell marginally from 4.0% in October to 3.9% in November.
        • Eurozone GDP growth for Q3 2024 was reported at 0.4%.
        • The euro area composite purchasing managers’ index (PMI) declined from 50.0 in October to 48.1 in November, below consensus expectations of 50.0. Readings below 50 are indicative of weakening activity. The manufacturing PMI was down 0.8pts to 45.2 and the services index was down 1.8pts to 49.2. Overall activity was dragged down by Germany and France, where political and economic uncertainty weighed on activity combined with subdued demand.
        • The region’s unemployment rate for October remained unchanged at 6.3%.
        • Negotiated wage growth for Q3 2024 increased to 5.4% from 3.5% in Q2. This was mostly due to one-off tax-free payments in Germany to compensate for past rises in inflation. Wage growth elsewhere was little changed.

        Outlook

        Market focus during November was on economic data releases. The increase in headline inflation was expected, but the continued strength of services inflation in November remains an area of concern for the ECB. GDP for Q3 2024 appears to be strong but this was partly due to a strong increase in GDP in Ireland, where the data can be volatile, and an Olympics-related boost in France. The decline in the PMI reading for November suggests that the economy is losing momentum in the final quarter of 2024, with weaker growth the likely outcome. The labour market remains tight with the unemployment rate stable; however, this looks set to change in the coming months on the weaker economic growth outlook. In addition to economic factors, political uncertainty has increased in both France and Germany, which could also dampen growth prospects.

        ECB policymakers have expressed differing views on the way forward for interest rates. GC member Isabel Schnabel stated that there is "only limited room" for further rate cuts and that the ECB "may not be so far" from neutral, which is considered to be somewhere between 2-3%. Banque de France Governor François Villeroy de Galhau said that the ECB will be "careful" of the risk of undershooting its target. The ECB's Mario Centeno believes that the neutral rate is "likely to be around 2% or lower", and would prefer to move in a "gradual, steady way", but that a "bigger cut" can be discussed in any downside scenario. Market expectations are split as to whether the ECB will cut interest rates by 0.25% or 0.50% at the December meeting. The market implied rate for December finished November at 2.85%. The implied rate for January 2025 was 2.51%, suggesting a total of 0.75% of rate cuts over the next two meetings. The implied rate for June 2025 was 1.87%, suggesting additional rate cuts in 2025.

        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 33 days in November and the weighted average life (WAL) averaged 52 days. The majority of investments were made in high-quality credit issuers out to three months, with some selective longer-dated investments out to six months. Investments in bank floating money market securities, linked to the €STR overnight index, were maintained, offering attractive spreads and diversification. Investments in sovereign, agency, and government-guaranteed holdings were maintained to provide high credit quality and maintain liquidity buffers. Asset-backed commercial paper continued to be in good supply, offering flexible duration and attractive returns compared to vanilla paper.

        More on Cash

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