- Daniel Farrell
- Head of International Portfolio Management, Global Fixed Income, Northern Trust Asset Management
Northern Trust Asset Management Monthly Market Commentary for April 2021
Eurozone Market Update
As anticipated, the ECB Governing Council made no changes to its monetary policy. The ECB reiterated that purchases under its Pandemic Emergency Purchasing Programme (PEPP) are going to be significantly higher over the quarter relative to the first months of the year, in order to maintain favourable financing conditions. Since that announcement, March PEPP net purchases were €74bn, up from approximately €60bn for January and February, providing supporting evidence to their messaging.
The money market reaction was fairly muted, with a 10bps hike from the ECB that had been priced in from Q1 2024 being brought forward to Q4 2023.
UK Market Update
The UK’s vaccine rollout has progressed as planned, as has the government's three step plan to ease lockdown, increasing investor optimism about an economic rebound.
Economic data has reflected this pickup in activity. The composite Purchasing Managers’ Index (PMI) reached 60, up from 56.4 in March (see chart of the month), the highest reading since 2013. Services were particularly strong after feeling the brunt of lockdown restrictions. Retail sales also increased while unemployment fell to 4.9%.
Investors are pricing in a 25bp hike by Q1 2023, unchanged from the beginning of the month. Throughout April, the average yield in the UK T-bill auction drifted higher across the one-month, three-month and six-month tenors.
US Market Update
T-bill paydowns continued, with approximately $380bn paid down by the Treasury since mid-February, compressing yields on bills. Continued outflow from the Treasury General Account is increasing the amount of cash in the front end. Balances are still at nearly $1tr and are required to get to $130bn by July 30th unless the debt ceiling is resolved sooner.
Inflows into money market funds have increased and should continue in the coming months, which will compress spreads further. Reserve growth from the Fed’s continued asset purchases of $120bn per month mean the banking system and money markets are awash with liquidity. There is too much cash looking for a home and not enough high quality assets to meet demand.
Global Outlook
The broad theme for central banks is how they react to increasing economic optimism. With global lockdowns easing, investors are searching for any indication from central banks of tapering asset purchases, or even discussions of tapering, that would in effect signal the reversal of ultra-accommodative monetary policies. Central bank meetings in the coming months will be key for guidance on changes. However, we think they will remain cautious to avoid disrupting the positive economic recovery as countries lift pandemic lockdowns. The potential for the Fed to adjust overnight rates continues to be a focal point for the short-duration investments. If we do not see the Fed make any changes, money market yields are likely to remain at similar levels in the upcoming months.
Chart of the Month
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