December 31, 2019
Central Banks Close the Year on a Quieter Note
December 31, 2019
Federal Reserve Board1
The Federal Reserve (Fed) convened on December 10, 2019 for its last meeting of the year. Chairman Jerome Powell and the Federal Open Market Committee (FOMC) voted to keep the federal funds rate unchanged at 1.50%-1.75%. Chairman Powell signaled to the market that the Fed is comfortable with current policy and will take a “wait and see” approach going forward. The Federal Reserve press release stated,
The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.
The past year was eventful for the Fed and Chairman Powell. Entering 2019, investors expected rates to rise systematically during the year, but received quite the opposite policy action.
Chairman Powell and his committee had to navigate the murky waters of global trade tension, economic uncertainty, lower than expected inflation and global economic growth deceleration. In response, the Fed cut rates three times to help bolster the economy. Going into the new decade, market consensus expects the Fed to keep rates unchanged throughout 2020. That being said, Chairman Powell has suggested if data (i.e., inflation, employment) changes materially, the committee stands ready to act in any way necessary. In 2020, data must be monitored closely, as policy could pivot at any moment’s notice, something investors learned in 2019.
European Central Bank1
Christine Lagarde’s first meeting as ECB president. President Lagarde and the policy committee kept ECB interest rates unchanged at -0.50%. The committee noted it expects this rate to remain at or below its current level for the foreseeable future. The committee is looking for inflation to robustly increase towards 2% before considering tightening policy. President Lagarde also mentioned that the ECB’s asset purchase program will remain in effect until it is no longer needed to support the economy.
Data that the ECB considers when making policy decisions continue to show muted inflation and weak economic growth in the region. It remains to be seen when such data will stabilize, but until then Christine Lagarde and the ECB look likely to continue accommodating all sectors of the economy.
Bank of England1
The Bank of England (BOE) Monetary Policy Committee (MPC) met on December 19, 2019 and voted 7-2 to maintain the Bank Rate at 0.75%. Since the MPC last gathered, economic data has been relatively in line with projections. The ratcheting down of global trade tensions, some Brexit clarity and potentially stabilizing global financial conditions have given the MPC reason to be a bit more optimistic looking forward. However, growth in job vacancies and the potential of a loosening labor market have the MPC eyeing the data carefully.
Brexit uncertainty remains elevated. The potential for a smoother Brexit outcome would allow the MPC to chart a clearer course and could potentially lead to policy actions to stave off inflation. However, that is not the base case scenario and certainly not what policy makers expect. Markets will also be watching the BOE governorship transitioning to Andrew Bailey from Mark Carney in late January. The decision was long overdue, with Brexit and other situations further delaying the announcement. The new governor steps into his role as the U.K. enters the next phase of Brexit negotiations. Investors must carefully monitor the new governor as he leads the central bank through an uncertain time. 2020 is shaping up to be a very eventful year for the MPC.
MSLF EURO LIQUIDITY FUND (LVNAV)
The euro market was again the most impacted by the bank balance sheet liquidity squeeze, and therefore had the largest impact on Fund trading strategies through year-end. As is typical, many clients chose the safety of a money market fund for their cash over year-end, increasing the Fund to over €300 million in the final few days of the year. Consequently, overnight maturities were reduced significantly, with a large proportion of the Fund invested into early January maturities. There is typically less opportunity to invest into government assets over this period due to the significantly poorer yields. The WAM and WAL of the Fund were broadly unchanged at 48 and 52 days respectively, as the reduction in overnight maturities was offset by a larger percentage of early January maturities..
MSLF STERLING LIQUIDITY FUND (LVNAV)
As is normal in December, Fund positioning during the month was predicated on preparing for year-end. The drop off in balance sheet availability at year-end in bank names means we typically run less overnight cash into year end, and rely on maturities and highly rated government assets to add to our weekly liquid assets. We also saw sizeable inflows into the Fund at year end, which increased the Fund size from £2.2 billion to £2.5 billion by the end of December. The WAM and WAL of the Fund were broadly unchanged, at 48 days and 60 days respectively, as the reduction in overnight maturities was offset by a larger percentage of early January maturities.
MSLF U.S. DOLLAR LIQUIDITY FUND (LVNAV)
As widely expected, the Fed left interest rates unchanged at its December meeting, while signaling it would keep them on hold through 2020. The Fed indicated that “the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions and inflation near the committee’s symmetric 2% objective.” With elevated year-end stress in the wholesale funding market, 3-month LIBOR touched recent highs, peaking on December 24 at 1.96%, a 6 basis point increase compared to November 29. On the month, we opportunistically added both fixed and floating rate securities to the portfolios, predominantly in the 6- to 9-month tenors. Floating rate securities were weighted towards quarterly resets, enabling the portfolios to lock in an elevated coupon setting for the first three months of the trade. As we look ahead to 2020, we continue to manage our portfolios from a conservative positioning standpoint, maintaining our emphasis on high levels of weekly liquidity and structuring our portfolios to respond to changes in monetary policy.
MSLF U.S. DOLLAR TREASURY LIQUIDITY FUND (PUBLIC DEBT CNAV)
The repo markets were well behaved in December, with overnight repo rates only moving a touch higher on year-end, due the vast amount of liquidity provided by the Fed to primary dealers with the combination of overnight and term repos. Overnight repo rates averaged 1.55% on year-end, slightly higher than what we saw most of the month. During the month, we invested in fixed-rate Treasury bills and notes in predominately 3- to 6-month maturity tenors. At the December meeting, the FOMC remained on hold on its rate policy, as the environment remains supportive for economic expansion. We continue to maintain our emphasis on high levels of liquidity and relatively short duration as we monitor how monetary policy unfolds.
12 Month Performance Periods to Latest Month End (%)
The risk and reward category shown is based on historic data.
This rating does not take into account other risk factors which should be considered before investing, these include:
Past performance is no guarantee of future results. Please refer to the Prospectus for full risk disclosures. All data as of 30 December 2019 and subject to change daily.
1 Source: Bloomberg.