Category: Money Moves Markets

Markets are moving towards the view that the Fed will be forced to suspend or reverse interest rate hikes in response to the SVB crisis but a cessation of QT is a more important requirement for restoring banking system stability. 

QT also caused the 2019 repo rate crisis, which ended only after the Fed restarted securities purchases (Treasury bills) – portrayed, of course, as a “purely technical” measure rather than a return to QE. 

The US weekly broad money proxy calculated here has contracted since April 2022. Weakness initially reflected the US Treasury “overfunding” the federal deficit to rebuild its cash balance at the Fed. QT has been the driver more recently – see chart 1. 

Chart 1

The drain of deposits from commercial banks has been magnified by competition from money market funds, which are able to place overnight funds with the Fed at an interest rate (currently 4.55%) within the Fed’s target range for the Fed funds rate (4.5-4.75%). 

Balances in retail and institutional money funds grew by 5.5% (11.3% at an annualised rate) in the latest 26 weeks, while commercial bank deposits contracted by 2.2% (4.4% annualised) – chart 2. 

Chart 2

In combination, Treasury overfunding, QT and outflows to money funds have resulted in a 30% decline in banks’ reserve balances at the Fed from a peak in December 2021 – chart 3. 

Chart 3

The deposits / reserves drain has caused banks to sell securities and, more recently, restrict loan supply – chart 4. 

Chart 4

The new Bank Term Funding Program will allow banks to avoid selling securities at a loss but fails to address the system-wide loss of deposits due to QT. The Fed facility, moreover, is more expensive than the deposits it may replace. 

Fortuitously, downward pressure on broad money has recently been relieved by a run-down of the Treasury’s cash balance at the Fed, reflecting the debt ceiling impasse. The decline, indeed, may have been accelerated to inject liquidity into the banking system – the balance fell from $345 bn to $247 bn between Wednesday and Friday last week. 

Such relief, however, is temporary. The authorities’ actions to date may be sufficient to avert another bank collapse but the banking system will remain under pressure, with negative economic implications via rising deposit / lending rates, until QT-driven monetary contraction ends.

A Eurozone recession can now be ruled out, according to the ECB and a PMI-hugging consensus. 

Someone forgot to tell the monetary data. 

The favoured Eurozone narrow money measure here – non-financial M1 – fell for a fifth consecutive month in January, while broad money – non-financial M3 – was unchanged following marginal gains in November / December. 

With inflation data remaining hot, six-month contraction of real narrow money (i.e. deflated by consumer prices) reached a new record, of 5.4% or 10.5% annualised – see chart 1.

Chart 1

A post last month noted that UK sectoral money trends were displaying a recessionary pattern: corporate broad and narrow money holdings were falling in nominal terms, suggesting a cash flow squeeze, while households were moving large sums out of sight deposits into time deposits, consistent with a shift in consumer behaviour from spending to saving. 

The same trends are now on show in the Eurozone: corporate M2 and M1 deposits fell in the three months to January, as did household M1 deposits – chart 2. 

Chart 2

The no-recession bandwagon gained momentum following Eurostat’s flash estimate that Eurozone GDP grew by 0.1% in Q4. Recently released national details paint an uglier picture. 

The Q4 fall in German GDP was revised from 0.2% to 0.4%, which will feed into an updated Eurozone number next week. 

More significantly, expenditure breakdowns show that domestic final demand weakened sharply in Q4 in France, Germany and Spain – at annualised rates of 1.6%, 3.7% and 5.4% respectively. The GDP impact was cushioned by a rise in net exports driven by import weakness and a further increase in stockbuilding – charts 3-5. 

Chart 3

Chart 4

Chart 5

Eurozone stockbuilding, therefore, appears to have risen further from its record (in data since the mid 1990s) share of GDP in Q3 – chart 6. A violent reversal from lower peaks in 2007 and 2011 was a key driver of the 2008-09 and 2011-12 recessions. 

Chart 6

The no-recession narrative was bolstered by February PMI results showing a pick-up in Eurozone services activity and new business. Manufacturing new orders, however, remained contractionary and are a better guide to the cyclical trend (since the key economic cycles – stockbuilding, business investment and housing – involve goods demand; there is no independent services cycle). 

The move off the lows in manufacturing PMI results has been mirrored in the German Ifo manufacturing survey. Business expectations, however, remain weak by historical standards and an indicator of demand inflow has risen by less, stalling between December and February – chart 7. 

Chart 7

Residential construction expectations, meanwhile, plumbed another record low in February. Survey weakness has been reflected in hard data: housing construction new orders in Q4 were down 35% from Q1 and the lowest since 2014. Dwellings investment was a drag on GDP during H2 2022 but the orders plunge suggests a further big negative impact to come – chart 8.

Chart 8

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 195.224.78.235
URL:
DATE: 03/02/2023 04:03:40 PM

Looks like hubris similar to the July 2008 rate increase.

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COMMENT:
AUTHOR: Jan
EMAIL:
IP: 178.119.235.25
URL:
DATE: 03/02/2023 04:44:31 PM

Hi Simon,
I guess you mean households were switching sight deposits into time deposits? ("while households were moving large sums out of time deposits into sight deposits, consistent with a shift in consumer behaviour from spending to saving. ")

Why is the extremely negative M1 trend not reflected in the real GDP number nor in company profits' outlook? Because it will take time and/or because nominal GDP acts as a cushion?

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 83.136.249.177
URL:
DATE: 03/13/2023 08:50:02 AM

Look forward to your analysis of the latest Chinese data and monetary data for March once available.

It seems the chances of near term rate cuts have improved quite a lot.

The two measures of global “excess” money tracked here remain negative, arguing for a cautious view of equity market prospects. 

Excess (or deficient) money refers to the difference between the actual money stock and the demand for money to support economic transactions. According to “monetarist” theory, a surplus is associated with increased demand for financial / real assets and upward pressure on their prices, assuming no change in supply. 

Excess money is unobservable so two proxies are followed here: the difference between six-month rates of change of global (i.e. G7 plus E7) real narrow money and industrial output; and the deviation of 12-month real narrow money growth from a slow moving average. 

Historically (i.e. over 1970-2021), global equities outperformed US dollar cash on average only when both measures were positive. Unsurprisingly, average performance was worst when both were negative (underperformance of 8.9% pa). These results allow for reporting lags in monetary / economic data. 

The second measure turned negative in October 2021, which was known by end-November. The first measure followed in November, which was known by end-January 2022 (a longer lag because industrial output numbers are released after monetary / CPI data). 

Previous posts noted a recovery in global six-month real narrow money momentum during H2 2022*. With industrial output expected to weaken, it was suggested that the first measure would turn positive, possibly by December. 

The second measure – based on 12- rather than six-month real money momentum – was deeply negative in late 2022, with a switch to positive deemed unlikely before mid-2023. 

The suggested switch positive in the first measure has yet to occur. The six-month rate of change of industrial output crossed below zero in December but remained just above real narrow money momentum – see chart 1. 

Chart 1

Will a cross-over have occurred in January? Partial data suggest that the recovery in real money momentum stalled last month. A reliable January estimate of industrial output won’t be available until mid-March. A reopening bounce in China could offset weakness elsewhere. 

A further point is that the recovery in global real narrow money momentum since mid-2022 partly reflected a strong pick-up in Russia, which may be of limited global relevance given the country’s enforced economic and financial isolation. 

Chart 2 shows the result of replacing Russia with Indonesia in the G7 plus E7 real money calculation from January 2022, before the February invasion of Ukraine**. The trough in real money momentum is placed in October rather than August, with the subsequent recovery even more anaemic. 

Chart 2

*The trough in real money momentum originally occurred in June but is now placed in August, partly reflecting revisions to US CPI seasonal adjustments.

**The other E7 countries (as defined here) are Brazil, China, India, Korea, Mexico and Taiwan.

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 82.132.230.245
URL:
DATE: 02/22/2023 03:23:52 PM

IFO confirms no renewed positive my momentum. MBA purchase index crashing to new lows.

The run up in rates does indeed suggest trouble.

US and UK CPI data this week elicited opposite market reactions but core momentum has recently slowed notably in both cases, consistent with a moderation in money growth rates two years earlier. 

Chart 1 shows three-month annualised rates of change of preferred core measures – CPI ex. food, energy and shelter for the US and CPI ex. energy, food, alcohol, tobacco, education and VAT change effects for the UK. US three-month momentum was just 1.5% in January, while UK momentum fell sharply to 2.8%.

Chart 1

The ”monetarist” rule of thumb is that money leads prices by about two years. Chart 2 superimposes three-month rates of change of broad money. Growth peaked in May 2020. The recent significant declines in core CPI momentum began in June 2022 in the UK and July in the US.

Chart 2 

Average broad money growth of 4.5% pa in both the US and UK over 2010-19 was associated with sub-2% average core CPI inflation. Three-month rates of change of broad money moved below 4.5% annualised on a sustained basis in March 2022 in the US and June in the UK. A reasonable expectation, therefore, is that core CPIs will be rising at a sub-2% by mid-2024 in both cases.

The path lower in money growth from the May 2020 peak was bumpy and core CPI momentum is likely to display similar volatility around a declining trend.

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COMMENT:
AUTHOR: Rob
EMAIL:
IP: 137.220.78.9
URL:
DATE: 02/17/2023 09:51:54 AM

Thanks Simon! Is outright deflation a risk beyond mid-2024?

Japanese monetary trends continue to argue that current inflation is “transitory” and there is no case for BoJ policy tightening. 

Broad money M3 rose by just 0.1% in January, pulling annual growth down to 2.3%, below a 2010-19 average of 2.6%. Annual M1 growth is also below its corresponding average – see chart 1. 

Chart 1

M3 showed little growth on the month despite BoJ net JGB purchases reaching a record ¥20.3 trillion, equivalent to $155 billion or 1.3% of the stock of M3 – chart 2. The modest M3 increase pushes back against claims that BoJ JGB buying has “pumped liquidity into markets”. 

Chart 2

A counterparts analysis of M3 is not yet available for January but the lack of impact of QE is probably explained by the BoJ transacting mainly with commercial banks. A purchase from a bank involves a JGB / reserves swap with no effect on deposits held by non-banks. 

A further technical point is that Japanese money definitions exclude holdings of non-bank financial institutions, so purchases from such institutions also have no direct effect on M3. 

Chart 3 shows the contributions to annual M3 growth of selected credit counterparts through December. A substantial positive contribution from QE (domestic credit to government from BoJ) was offset by weakness in domestic credit to other sectors and negative contributions from commercial bank JGB sales (domestic credit to government from other banks) and net external flows. The latter drag partly reflects BoJ intervention to support the yen in late 2022. 

Chart 3

The weakness of credit expansion to non-government domestic sectors in the M3 counterparts analysis contrasts with a recent pick-up in annual growth of loans and discounts by major, regional and Shinkin banks – chart 4. The explanation for the divergence is that the M3 credit measure encompasses lending to non-bank financial institutions, including by the BoJ. Such lending surged during the pandemic but has contracted recently. 

Chart 4

Annual all-items consumer price inflation rose to 4.0% in December, the highest since 1981, and may have reached 4.5% in January, based on Tokyo data. Core inflation adjusted for the impact of major policy changes was 1.7% in December and may have increased to 2.0-2.1% in January. The recent pick-up partly reflects yen weakness, which may be reversing – chart 5. 

Chart 5

Annual cash earnings growth surged to 4.8% in December as winter bonuses reflected recent strong profits. Scheduled earnings growth of 1.8% is a better guide to trend but also represents a multi-decade high. 

The reversal of the 2020-H1 2021 M3 growth surge suggests that inflation and earnings growth are at or near a peak and will return to pre-pandemic levels in 2024-25.

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 78.129.191.50
URL:
DATE: 02/15/2023 03:44:43 PM

No surprise. QE is just an asset swap. It's not "money printing of any kind". It's effect on the real world only comes from keeping rates down…

Money growth is fueled by a combination of governments spending, borrowing and creating bonds, adding net financial assets to the system. Along with credit creation from private banks, especially mortgages.

The consensus is gloomy about UK economic prospects but is it gloomy enough? 

The current debate has echoes of mid-2008. Q2 2008 was the first quarter of the most severe post-war recession. The consensus that summer was that the economy would eke out growth with a limited rise in unemployment and no need for significant policy easing. 

A recession is widely acknowledged / expected now but the majority view is that it will be shallow and short-lived, partly reflecting recent energy price relief. Labour market damage is projected to be modest and there is general approval of recent MPC policy tightening. 

Monetary trends warned of worse-than-expected outcomes in 2008 and are giving an equally negative message now. 

The six-month rate of contraction of real narrow money (i.e. non-financial M1 deflated by consumer prices) was unchanged at 5.9% (not annualised) in December, close to a 6.1% peak reached in October 2008 – see chart 1. 

Chart 1

As in 2008, the real money squeeze reflects both high inflation and nominal money weakness. Sectoral nominal money trends are uncannily similar to mid-2008. Corporate M1 and M4 are contracting rapidly, consistent with a sharp fall in profits and suggesting cuts in employment and investment – chart 2. 

Chart 2

Household M4 is still growing modestly but there has been a large-scale switch out of sight into time deposits in response to rising rates – a classic signal of a shift in consumer behaviour from spending to saving. 

A continued rise in employee numbers in recent months has fed a narrative of labour market “resilience” that is expected to persist. Data and complacency were similar in mid-2008. The quarterly employee jobs series rose into Q3 2008 but the stock of vacancies in June was already down by 9% from its peak, warning of trouble ahead – chart 3. The level of vacancies is higher now but the fall from the peak has been larger, at 14%. 

Chart 3

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 85.255.233.226
URL:
DATE: 02/01/2023 11:59:17 AM

Is it gloomy enough? Almost certainly not. About the only positive thing you can say is other regions are in a similar position. Their forecasts therefore are even more optimistic.

It'll certainly be interesting to see what the labour market looks like in 2 or 3 quarters.

The most important thing is when central banks and fiscal policy react finally.

Then at least the where the bottom will be can be roughly charted.

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COMMENT:
AUTHOR: Stefano
EMAIL: sfeltre@fideuram.it
IP: 62.221.168.91
URL:
DATE: 02/01/2023 05:34:06 PM

In the USA, how much can this aspect count in postponing the recession?
Overall financial conditions improved to the levels of last June, when the fed fund rate was at 1.0%: all subsequent increases have therefore been cancelled.
This seems to go against the wishes of the Fed. Powell just doesn't know how to persuade traders and investors about his iron will to cool demand.

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COMMENT:
AUTHOR: Rob
EMAIL:
IP: 140.228.57.187
URL:
DATE: 02/06/2023 08:44:56 PM

Hi Simon, some people are saying that the European credit spread wides in October were likely the wides for this entire cycle/bear market, arguing that everyone was extremely bearish amidst rocketing gas prices, which has now obviously unwound.

I still find this very hard to believe, given your real money analysis, extreme yield curve inversion, volatility (Vix etc) has yet to explode, and we haven't even entered severe recession yet. Interested to know if any of your charts hint that European credit spreads can still rocket higher at some point! Thanks as always!

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COMMENT:
AUTHOR: Simon Ward
DATE: 02/15/2023 03:04:30 PM

Money trends will fully summarize financial conditions. If conditions have eased, this should be reflected in a recovery money growth, of which there is currently no sign. Widely quoted financial conditions indices exclude money.

Credit spreads historically have tended to peak around the time the stockbuilding cycle has bottomed. An exception was 2011, when the Eurozone crisis appears to have brought forward the peak. It’s possible that the gas price surge and collapse had a similar effect. The stockbuilding cycle isn’t due to bottom until H2 (or later) so another rise in spreads seems likely.

The unusually high level of job openings may be affecting the seasonality of US labour market data. An accurate read on the non-seasonal employment trend may not be possible until the spring. 

The normal seasonality of US private payrolls is captured by the difference between BLS unadjusted and seasonally adjusted stock series, shown in chart 1. The seasonal effect is roughly neutral in September, rises to a peak in November, turns substantially negative in January and recovers back to neutral in May. 

Chart 1

The normal pattern of employers shedding jobs on a large scale in January but rehiring into the spring / summer could change when the labour market is unusually tight, as currently. Firms may prefer to hold onto workers as seasonal activity slackens, anticipating difficulties refilling jobs later in the year. Laid-off employees may find alternative work more rapidly than in a normal year. 

A change of behaviour may explain the blockbuster January payrolls rise, i.e. the seasonal adjustment may have significantly overestimated the seasonal drop in employment this year. 

An alternative approach to assessing the underlying jobs trend is to compare months when the seasonal effect is neutral. As noted, September and May are neutral months, while seasonal deviations are significant over October-April. The average change in unadjusted payrolls over September-May should be an undistorted measure of employment growth. 

If the suggestion of a seasonal distortion is correct, headline payrolls growth numbers for February-May could understate the underlying trend, compensating for January’s (possible) overstatement. 

Suppose, for illustration, that monthly growth in unadjusted payrolls turns out to average 150,000 between the two seasonally neutral months of September 2022 and May 2023. (This equates to an annualised growth rate of 1.4%, in line with the reported expansion of the labour force in the year to January, i.e. the assumption is consistent with a stable unemployment rate.) 

Such growth would imply a payrolls level of 132,686,000 in May 2023, with no significant seasonal element. This compares with a currently reported seasonally adjusted level of 132,684,000 for January. The headline payrolls measure, on these assumptions, would show negligible growth over February-May.

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 78.129.191.50
URL:
DATE: 02/09/2023 01:27:06 PM

Will rates rising again after the data affect money growth I wonder ?

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COMMENT:
AUTHOR: T
EMAIL:
IP: 137.220.78.139
URL:
DATE: 02/13/2023 06:04:46 PM

I see U.S. layoffs rising materially, but yet to show up in initial claims. Wondering if we're seeing more of a lag than historically typical…

Recent posts on the “quantity theory of wealth” may have been heavy going, so what follows is an attempt to explain the approach more simply using charts of US data extending back over 100 years.

The starting point is the observation that the stock of broad money has risen by more than nominal GDP over the long term*.

There has, in other words, been a trend decline in the income velocity of money (nominal GDP divided by the money stock). Velocity fell at an average rate of 0.5% pa over 1913-2019.

If nominal GDP had risen line with broad money since 1913, its 2019 level would have been 79% higher.

What explains this divergence? The demand to hold money depends on wealth as well as income. In the same way that consumers and firms hold money in proportion to their income / spending transactions, owners of financial and real assets hold money in proportion to the size of their portfolios.

While nominal GDP has risen by less than broad money since 1913, wealth has risen by more**.

The quantity theory of wealth assumes that a 1% rise in nominal GDP has the same effect on the demand for money as a 1% rise in wealth. Further, a 1% rise in both leads to a 1% rise in money demand. These assumptions are reasonable and imply that the overall demand for money depends on the geometric average of nominal GDP and wealth (the square root of their product).

It works! The actual money stock has grown in line with the predicted level based on the combined nominal GDP and wealth measure.

Equivalently, actual nominal GDP and wealth, in combination, have grown in line with the prediction based on the money stock.

The difference between the combined nominal GDP and wealth measure and its prediction indicates whether current levels of economic activity and prices of goods, services and assets are “too high” or “too low” relative to the money stock.

The largest “overvaluations” occurred ahead of the 1929 stock market crash / Great Depression and during the 1990s tech bubble. The largest “undervaluations” occurred during the Depression and in the inflationary 1970s, with those lows being challenged now.

The last data point in the chart is based on the current level of the money stock and 2019 levels of nominal GDP and wealth. Wealth is little changed from end-2019 but nominal GDP is down sharply. The model suggests that the combined nominal GDP / wealth measure would be 18% “too low” relative to the money stock even with nominal GDP back at its 2019 level.

A return to “fair value” requires some combination of a fall in the money stock and rises in nominal GDP and wealth. If the money stock were to remain stable at its current level, and nominal GDP and wealth were to rise equally, the implied percentage increase in each would be 22% (a 22% rise would eliminate the 18% “undervaluation”). If nominal GDP were also to remain stable (i.e. returning to its 2019 level but no higher), the implied increase in wealth would be 48%.

The chart shows that movements away from “fair value” can take many years to be reversed – the valuation measure is of no use for short-term timing. The value of the approach lies in indicating whether the monetary backdrop will act as a headwind or tailwind for economic activity and prices – including asset prices – over the medium term. The current message is positive.

*”M2+” is defined here as M2 plus large time deposits and institutional money funds. The old M3 measure also included repos and Eurodollar deposits – the Fed no longer compiles monthly data on these.
**”Wealth” is defined here as the combined market value of the outstanding stocks of equities, bonds and residential real estate.

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COMMENT:
AUTHOR: Robert
EMAIL: web@kaught.com
IP: 69.84.126.201
URL:
DATE: 06/12/2020 04:21:14 AM

Fantastic and unique analysis! Thank you, Mr. Ward.

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COMMENT:
AUTHOR: A big fan
EMAIL:
IP: 94.210.199.201
URL:
DATE: 06/13/2020 08:03:23 AM

Hi Simon,
I find your blog awesome. Keep it on.
One question: how do we account for the structural increase in size of wealth basket over time? Easiest example is bonds. In 2020 governments and corporates had to issue a huge amount of bonds. You could argue the newly created cash just ended up financing the newly created debt (MMT-like). How shall we account for the ''supply'' of wealth basket against the supply of money?

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COMMENT:
AUTHOR: Simon Ward
DATE: 07/01/2020 09:16:21 AM

Thanks for the comments. Good question requiring more thought. Most of the issuance has landed on central bank / commercial bank balance sheets so doesn't currently represent "wealth" of the non-bank private sector, which holds money.

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COMMENT:
AUTHOR: Dinesh Ravichandran
EMAIL: dineshravichandran97@gmail.com
IP: 183.82.31.228
URL: https://educatewithdinesh.com/
DATE: 01/31/2023 06:19:43 AM

Wow! Your post looks very easy to understand and enticing with the charts you've provided. Looking forward for more posts from you in educating your readers financially.

Eurozone flash PMIs this week were less bad than expected, bolstering a growing consensus that economic prospects are improving. Monetary trends continue to argue the opposite. 

The preferred narrow money measure here – non-financial M1 – fell for a fourth consecutive month in December in nominal terms. Bank lending also contracted on the month, while the broad non-financial M3 measure grew by just 0.1%. 

The three-month rate of contraction in narrow money is a record in data back to 1970. Three-month growth of non-financial M3 is down to 2.3% annualised, less than half its 2015-19 average. Bank loan growth is also now below its corresponding average – see chart 1. 

Chart 1

Bank lending weakness is being driven by repayment of short-term corporate loans, consistent with a violent downswing in the stockbuilding cycle – chart 2. 

Chart 2

The six-month rate of decline of real narrow money was little changed from November’s record despite a sharp drop in six-month CPI momentum – chart 3. 

Chart 3

The rate of contraction of real M1 deposits remains fastest in Italy, reflecting both weaker nominal money trends and higher inflation. Spanish positive divergence is mainly due to a much sharper recent CPI slowdown. 

Chart 4

Echoing the better PMI news, German Ifo manufacturing expectations rose for a third month in January. The new demand index, however, has recovered by less and fell back this month – chart 5. European cyclical equity market sectors have outperformed on soft landing hopes and are vulnerable if business surveys now stall, as suggested by monetary trends. 

Chart 5

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 78.129.191.50
URL:
DATE: 01/27/2023 03:37:45 PM

Not encouraging. I believe your piece from October 6th sums up the current predicament of the global economy nearly perfectly.

"The risk, therefore, is that housing weakness and its lagged effects on the rest of the economy will offset any recovery impetus later in 2023 from a turnaround in the stockbuilding cycle. A rapid reversal in interest rates may be necessary to avert this scenario."

We haven't had that reversal though it seems highly probable we will later in 2023.

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COMMENT:
AUTHOR: Rob
EMAIL:
IP: 188.211.161.184
URL:
DATE: 01/28/2023 09:28:56 PM

Hi Simon, I’m seeing someone post a chart of copper vs. US CPI, trying to suggest a 2-3 month lead, and a subsequent inflation resurgence. Interested in your take on this! Thanks!

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COMMENT:
AUTHOR: Roberto
EMAIL: we@kaught.com
IP: 69.84.103.212
URL:
DATE: 01/30/2023 12:09:49 AM

Reading the tea leaves has become harder. Depressing financial news from EU cannot and will not stop America's reshoring. That seems like a secular tsunami force that may last decades and has just started. Working powerfully in the background it might help minimize the effects in the US of any EU deep recession.

A post in October gave a hopeful view of Chinese prospects, noting that “excess” money had accumulated and could flow into equities and the economy if policy-makers signalled a commitment to expansion.

The consensus is now optimistic, believing that property market support measures and the removal of pandemic control restrictions will result in strong economic acceleration through 2023. Yet the latest money / credit data signal caution.

Globally, Chinese reopening is expected to be reflationary. Reopening, however, will release supply as well as demand. The former effect could dominate, resulting in additional downward pressure on Chinese export prices.

Six-month growth of true M1 peaked in July 2022, falling back to its March level in December – see chart 1. This suggests a slowing of underlying nominal GDP momentum from Q2. The levels of nominal and real narrow money growth are modest by historical standards. 

Chart 1

Broad money trends are stronger, with six-month growth of the favoured measure here – M2 excluding deposits of non-bank financial institutions – ending 2022 near the top of its range in recent years. Money, however, needs to shift from time deposits into M1 to signal rising confidence and spending intentions. 

Broad money growth may have been inflated by a switch out of wealth management products and other bank liabilities into deposits. The total stock of bank funding has been growing less strongly, with minimal acceleration since 2021 – chart 1. 

Many analysts follow the “credit impulse” – the rate of change of credit growth, usually expressed relative to GDP. This often gives the same message as narrow money trends (but is judged here to be less reliable) and also suggests a loss of economic momentum – chart 2. 

Chart 2

Bulls argue that excess household savings will fuel a consumption boom, drawing parallels with G7 experience following reopenings. Chinese households did not receive stimulus checks or direct wage support and the excess is likely to be considerably smaller, implying less pent-up demand. 

Supporting this view, household real M2 deposits in December were 8% above their pre-pandemic trend (and may have been inflated by the early timing of the Chinese New Year) – chart 3. US household real M3 holdings reached a peak 24% overshoot of the comparable trend in March 2021 – chart 4. 

Chart 3

Chart 4

Fed policy remained expansionary as pandemic drags faded. The PBoC, by contrast, appears concerned about inflationary risks from rapid reopening and has engineered or at least tolerated a significant rise in term money rates. The increase in late 2022 was universally dismissed by China specialists as a year-end phenomenon unrelated to any policy shift but a minor fall in early January has since given way to another rise – chart 5. 

Chart 5

The view here is that the reopening boost to domestic demand will be modest and biased towards services. For goods, supply expansion due to reduced disruption may outweigh the lift to demand. 

Global trade moved into contraction in late 2022, partly reflecting an accelerating downswing in the global stockbuilding cycle. With supply constraints easing, Chinese exporters are likely to cut prices to increase market share, especially given the super-competitive level of the RMB – chart 6. 

Chart 6

 

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 78.129.191.50
URL:
DATE: 01/20/2023 05:25:28 PM

M1 certainly doesn't seem to be giving much hope of a huge reopening boom.

China exporting deflation certainly seems a reasonable probability though. By year end 23 the real money background globally will likely finally see huge improvement ?