Category: Money Moves Markets

UK monetary trends are consistent with an ongoing economic recovery but growth is likely to moderate from its recent bumper pace:

• M4 excluding intermediate other financial corporations (i.e. M4ex) rose by 2.9% annualised in the three months to October. Growth remains weak by historical standards but is sufficient to support solid nominal income expansion because of a rising trend in the velocity of circulation, caused partly by negative real interest rates. (Velocity – defined as the ratio of nominal GDP to M4ex – increased by an annual 4.4% in the third quarter.)

• Within M4ex, money holdings of private non-financial corporations rose by 6.6% annualised in the latest three months. Stripping out the overleveraged property sector, the corporate liquidity ratio (i.e. non-financial companies’ sterling and foreign currency deposits divided by their bank borrowing) is at a record high in data extending back to 1998. The ratio leads business spending (i.e. fixed investment plus stockbuilding), which is up by 25.7% from a trough in the fourth quarter of last year.

• Household M4 growth – 2.6% annualised in the three months to October – continues to be depressed by a portfolio switch out of bank and building society deposits into higher-yielding investments. Retail inflows to unit trusts and OEICs totalled £24.9 billion in the 12 months to September, equivalent to 2.5% of household money holdings (October figures are released on Wednesday).

• Two considerations suggest a slowdown in GDP growth from 3.9% annualised in the second and third quarters. First, while M4ex is rising at a satisfactory pace, faster price increases – due to the coming VAT hike and higher food and energy costs – will cut real expansion, implying less monetary stimulus for economic activity. Secondly, narrow money has slowed recently, with annual M1 expansion falling from 8.3% in June to 3.0% in October.

The Dow Jones industrial average fell by 54% between October 2007 and March 2009. There were seven declines in the Dow of 45% or more during the last century – see table. Six of the seven were in a range of 45-55%, the exception being the 89% fall between September 1929 and July 1932.

The chart compares the recovery in the Dow from its trough on 9 March 2009 with the rallies following these six prior bear markets, excluding the 1929-32 decline. The low of each bear was rebased and aligned with the March 2009 trough. The chart shows mean performance and the range across these prior falls and recoveries.

The Dow has been mostly ahead of the average since the March low, sometimes even straying above the range spanned by the prior rallies. This may reflect the unprecedented monetary stimulus unleashed by the Federal Reserve and other central banks amid the post-Lehman crisis. Also, the October 2007-March 2009 decline was slightly larger than the average (54% versus 48%), possibly contributing to a stronger recovery.

As the liquidity backdrop has deteriorated, however, the Dow has converged with the six-bear mean, closing marginally below it yesterday.

The average suggests that equity performance over the next year will be much less impressive than during the first 12 months of the rally. The level of the average at the end of June 2011 is 8% above yesterday’s Dow close.

The chart, however, also shows that the range of performance during the second year of recoveries has been much wider than in the first. The “best-case” historical scenario would involve the Dow reaching 16,000 early next year. The minimum suggested level is 8,800 – still 34% above the 6,547 low reached last March.

Based on liquidity analysis, a fall into the lower half of the historical range seems more likely in the short term than renewed strength. With economic recovery expected to be sustained into 2011, however, a significant undershoot of the average could present another buying opportunity – especially if current turbulence forces central bank easing.

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COMMENT:
AUTHOR: Penny Stock Informant
EMAIL: streetzfanatics772@gmail.com
IP: 75.74.228.225
URL: http://pennystockinformant.com/penny_stock_alerts/1-penny-stock-informant-in-usa/
DATE: 11/28/2010 05:53:26 AM

I just stopped in to check out this site….

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COMMENT:
AUTHOR: Monitoring Social Media
EMAIL: streetfanatics212@gmail.com
IP: 75.74.228.225
URL: http://pennystockinformant.com/penny_stock_alerts/monitoring-social-media/
DATE: 11/28/2010 09:24:50 PM

Maybe the BEST topic that I have read all year?!

Eurozone monetary statistics for October are disappointing, showing a further decline in annual growth of narrow money M1 (from 6.2% to 4.9%) and continued sluggishness in the broader M3 measure.

Real (i.e. inflation-adjusted) M1 is the best monetary leading indicator of the economy and has stagnated over the last six months, signalling a sharp slowdown in Eurozone industrial output in early 2011 – see first chart. Recent buoyancy in business surveys is unlikely to last.

M3 grew an annual 1.0% in October. The counterparts analysis reveals mutual support operations by banks and governments last month – credit to general government rose by €165 billion, or 5%, while central governments increased their deposits and holdings of bank securities by €70 billion. Also notable was a €108 billion fall in banks’ net external assets, consistent with non-bank residents moving funds out of the Eurozone area.

The slump in six-month real M1 growth contrasts with a strong pick-up in the US, suggesting that the US economy will outpace Euroland in early 2011 – second chart. With the US trend improving, G7 real M1 growth remains consistent with respectable global economic expansion. 

Monetary trends suggest that the global economy will grow at a respectable pace during the first half of 2011. The liquidity backdrop for markets remains unfavourable currently but may improve early next year.

The forecasting approach here places weight on the Friedmanite rule that movements in the real (i.e. inflation-adjusted) money supply lead the economy by about six months. Consistent with this rule, a slowdown in G7 industrial output growth from an annual 10% in May to about 5% currently was presaged by a fall in real narrow money expansion from 14% in August 2009 to 4% by early this year – see first chart.

Real money growth, however, has stabilised at 4% since early 2010 – above its long-term average and historically consistent with solid output expansion. As the chart shows, the five global recessions over the last 50 years were preceded by a contraction in real narrow money.

The liquidity backdrop for markets depends less on the level of real money growth than whether it is higher or lower than output expansion – a positive differential may imply that there is “excess” money available to drive up asset prices. Empirical evidence supports this approach: on average, world equities have outperformed cash by a substantial margin when the gap has been positive while underperforming at other times – see earlier post.

Real money growth fell beneath output expansion in early 2010 and remains lower currently, warranting a cautious stance on equities, which have trod water since the spring. The annual output rise, however, should slow further over coming months, partly reflecting base effects, suggesting that the gap will turn positive by early 2011 if real money expansion is stable – second chart. Near-term weakness in equity markets, therefore, could present a buying opportunity.

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COMMENT:
AUTHOR: Tony B
EMAIL:
IP: 81.156.163.236
URL:
DATE: 11/25/2010 03:01:38 PM

Superb analysis, Simon – very enlightening reading – thank you!
Could you just clarify what rate you are using for the 'cash' comparison? An average G7..?
Thanks again
Tony B

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COMMENT:
AUTHOR: Simon Ward
DATE: 11/25/2010 09:57:11 PM

Many thanks for your feedback. I compared the return on a world equities index in USD terms with USD LIBOR; an alternative approach, as you suggest, would be to compare the index in local currency terms with a weighted average of cash rates of the component countries.

Revised figures confirm that GDP grew by 0.8% in the third quarter, with additional detail suggesting a further healthy gain in the current quarter.

Industrial production and services output both rose by 0.6% last quarter, with the increase in overall GDP boosted to 0.8% by a 4.0% rise in construction.

A monthly GDP estimate based on industry and services data stood 0.5% above its third-quarter average in September, implying significant positive carry-over into the current quarter – see chart. With further growth likely in these sectors, GDP should rise by at least 0.4% this quarter even if construction reverses its third-quarter increase.

The expenditure breakdown shows a surprise 0.4 percentage point contribution to GDP growth from net exports – this had not been suggested by monthly trade figures. It would be premature to infer that the economy is finally “rebalancing” in response to the lower exchange rate, since the improvement follows four successive quarters of deterioration.

Household spending rose by only 0.3%, reflecting an inflation squeeze on real employee compensation, while business investment fell by 0.2%. The latter, however, is at odds with encouraging survey evidence on capital spending and early estimates have been consistently revised higher in recent quarters.

Stockbuilding was modest, at 0.1% of GDP. Inventory levels remain much lower than before the recession, suggesting scope for a further rebuild that will contribute to future growth.

The price deflator for household spending – the broadest measure of consumer inflation – rose by 4.9% in the year to the third quarter, above both CPI inflation of 3.1% and a 4.7% gain in the RPI excluding mortgage interest payments. (The CPI understates inflation because it excludes some housing costs and uses geometric averaging to combine prices of individual items.)

Nominal or current-price GDP rose by 5.9% in the year to the third quarter. Growth needs to be constrained to about 4.5% per annum over the medium term to be consistent with the inflation target.

World equities have broadly tracked the G7 monetary base (i.e. currency in circulation plus bank reserves) since the Federal Reserve launched QE1 in late 2008. A wide gap, however, has opened up recently as markets have anticipated a further US liquidity injection – see first chart.

The Fed has now launched QE2 by signalling an intention to buy a net $600 billion of securities by mid 2011. The chart shows a projection for the G7 monetary base assuming that 1) it purchases the full amount on schedule, 2) there is no sterilisation of the impact on US bank reserves and 3) the base is static in other G7 countries.

Based on the relationship to date, the projected level of the G7 monetary base in mid 2011 suggests a further 6% rise in equity markets in US dollar terms. Bulls, however, may wish to consider the following qualifications.

First, equities are currently at a level consistent with the projected G7 base in April 2011, i.e. markets may be five months “ahead of the game”.

Secondly, the Fed could scale back its intended purchases if economic growth accelerates in early 2011. Such a scenario is suggested by a recent strong pick-up in US real narrow money, M1, which leads activity by about six months – second chart. (QE2 is, at best, unnecessary. There was a stronger case for action last spring, when money growth was weak; instead, the Fed allowed the monetary base to contract, contributing to recent sluggishness.)

Thirdly, even if it buys the full $600 billion, the Fed may choose to sterilise part of the impact on the monetary base, for example by offering banks term deposits or expanding the “supplementary financing programme”, under which the Treasury issues additional bills to soak up liquidity (used during QE1).

Finally, US monetary base expansion may be offset by contraction elsewhere. The Eurozone base, already down by 20% from a summer peak, may continue to decline as the European Central Bank restores pre-crisis liquidity provision arrangements. Further rises in reserve requirements and official rates, meanwhile, are likely in China, where inflation has been driven higher by surging commodity prices caused in part by the Fed’s expansionary policies.



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COMMENT:
AUTHOR: stockmtd
EMAIL: maoyufeng109@gmail.com
IP: 125.69.96.152
URL: http://www.stock-market-today.cc
DATE: 11/21/2010 01:01:12 PM

The employment is better-than-expect.stock market today will open higher I think.US stock market will restore the level before the financial crisis

US CPI inflation was an annual 1.2% in October while the “core” rate – excluding food and energy – fell to just 0.6%. These figures have reinforced perceptions that inflation is lower in the US than in other major economies and that pressures are continuing to weaken.

As previously discussed, however, the US numbers are lowered by the inclusion of imputed housing rents, which are estimated to have been unchanged over the last year. If recalculated using the EU’s HICP methodology, US CPI inflation was 1.8% in September (the latest available month for this measure) – the same as in the Eurozone.

Rents have risen slightly in recent months, probably in response to a fall in rental vacancy rates – see first chart. The drag effect on the published inflation numbers, therefore, could lessen.

The “core” rate has been driven lower recently by goods price weakness – services inflation has been stable. Producer price inflation for core consumer goods, however, has been firming and normally leads the CPI measure. The PPI pick-up, meanwhile, partly reflects a rise in import prices, including from China – second chart.

The bottom line is that inflationary trends are not significantly different from those in other countries and do not warrant the Federal Reserve’s decision to implement further unilateral monetary easing – especially with money supply growth accelerating and fiscal policy less restrictive than elsewhere.

The net percentage of manufacturers planning to raise prices over the next three months is at its highest seasonally-adjusted level since September 2008, according to the November CBI industrial trends survey. The CBI attributes the increase to pass-through of higher raw material costs; the survey refers to factory-gate prices so should be unaffected by the coming VAT hike.

The CBI balance correlates with CPI goods inflation, suggesting that this would be heading significantly higher into early 2011 even in the absence of the VAT rise – see chart.

CPI inflation rose to an annual 3.2% in October, above the Bloomberg consensus forecast of 3.1% but below the 3.3-3.4% suggested in a post a fortnight ago.

The favourable surprise relative to that projection partly reflected a fall in food inflation from 4.9% to 4.2% as fresh food prices increased by less than a year earlier. This is likely to prove temporary, with recent increases in global commodity costs suggesting a rising trend into early 2011, allowing for the normal lag – see chart.

As expected, higher fuel costs added 0.1 percentage points to the CPI headline rate. Services inflation, meanwhile, firmed from 3.7% to 3.8%, mainly as a result of year-earlier reductions in bank overdraft charges and mortgage arrangement fees falling from the calculation.

With little news in today’s report, CPI inflation still appears likely to rise to about 4% by early 2011, reflecting high VAT pass-through, food and energy cost increases and stable “core” pressures. The Bank of England last week revised up its central projection for the first quarter to about 3.5% from 3.0% in the August Inflation Report.

Governor King’s latest exculpatory letter was accepted uncritically by a Chancellor keen to leave the door wide open to “QE2”. The “temporary shocks” defence, however, is wearing thin. Commodity price gains are partly the consequence of a secular rise in demand for raw materials from emerging economies, a trend the MPC has consistently ignored. Similarly, exchange rate weakness has not been imposed on the UK but partly reflects the MPC’s policy choices. The scale of the recent fall is no guarantee that it will not be repeated. The effective rate had also declined by 20% over three years at the end of 1974 but plunged a further 25% over the following two years.

The extent, moreover, to which such “shocks” pass through to inflation, instead of being absorbed by a reduction in profit margins or nominal wages, depends on the stance of monetary policy and its impact on inflationary expectations. A high degree of pass-through is prima facie evidence that monetary conditions are too loose and that the inflation target is failing to anchor expectations, with firms confident that price hikes will not cause them to lose market share because the MPC will tolerate a general rise in inflation.

Global industrial output – as proxied by combined production in the G7 and seven large emerging economies – is back on its post-2000 trend path, having staged a V-shaped recovery since early 2009. The “E7” have accounted for 60% of the rise in combined output, with production now well above trend in these economies, explaining recent evidence of “overheating” – see first chart.

Rapid E7 growth fuels inflation partly by boosting food demand and prices. A GDP-weighted average of E7 consumer price inflation moved above 5% in October and should rise further as a result of recent food commodity price gains – second chart. (The average weight of food in the CPI baskets of 120 non-OECD countries was 37% in 2006, according to a 2008 IMF study.) Pressures, moreover, may be spilling over to non-food prices – see last week’s post on Chinese inflation.

E7 central banks have been trying to tighten monetary policies without jacking up interest rates, which have risen meaningfully only in India and Brazil. An average of E7 short rates remains well below inflation, with the gap widening recently – third chart. This policy approach may have reached its limit. The last tightening cycle, in 2007-08, ended only after the average interest rate had risen above headline inflation.

E7 growth outperformance since early 2009 has been supported by faster monetary expansion but real M1 has slowed recently, narrowing the gap with the G7 – fourth chart. Rising inflation and further policy tightening – particularly if in the form of higher interest rates – could sustain this trend, in turn suggesting that E7 relative economic performance will be less impressive during 2011. Emerging market equities may not be priced for this outcome, currently trading on a higher price to book than developed markets.