{"id":2936,"date":"2010-02-12T11:28:19","date_gmt":"2010-02-12T11:28:19","guid":{"rendered":"https:\/\/mmm.9dotdigital.ca\/?p=2936"},"modified":"2025-03-27T15:48:59","modified_gmt":"2025-03-27T15:48:59","slug":"market-musings-will-fed-loosening-outweigh-chinese-tightening","status":"publish","type":"post","link":"https:\/\/mmm.9dotdigital.ca\/?p=2936","title":{"rendered":"Market musings: will Fed loosening outweigh Chinese tightening?"},"content":{"rendered":"

The US monetary base rose again in the week to Wednesday, consistent with the forecast<\/a> in Tuesday’s post – see first chart. As previously discussed<\/a>, markets have recently been sensitive to fluctuations in the base so this pick-up may support a near-term rally in equities, possibly accompanied by a weaker or stable dollar.<\/p>\n

The reversal of the year-end contraction in the US monetary base may also have contributed to a recent resumption of capital inflows to Hong Kong. Under the currency board arrangement such inflows automatically expand the territory’s own monetary base – first chart.<\/p>\n

A post<\/a> in October suggested that the Dow industrial index might follow a path similar to the recoveries after the 1906-07, 1919-21 and 1973-74 bear markets. The second chart provides an update: the Dow recently moved below the range spanned by the three rebounds, hinting at a buying opportunity.<\/p>\n

One caveat<\/a> to a positive view is that annual growth in G7 real money supply M1 is likely to cross below that of industrial output expansion this spring – historically, equities have underperformed cash on average under such circumstances. This analysis, however, allows for near-term market gains before the macro liquidity backdrop turns less favourable.<\/p>\n

Markets are also concerned that China’s policy tightening – banks’ reserve requirement ratios were raised by a further 50 basis points today – will lead to a hard landing for its economy. This hinges on whether a large positive “output gap” has already developed – if so, much higher inflation is inevitable and the authorities will be forced to slam rather than tap on the brakes.<\/p>\n

Output gap estimates are even flakier for China than elsewhere but two pieces of evidence suggest that the economy is not yet “overheating”: industrial output is slightly below its trend over the last 10 years – third chart – while companies were not reporting skilled labour shortages late last year – fourth chart. A managed slowdown may still be possible.<\/p>\n

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The US monetary base rose again in the week to Wednesday, consistent with the forecast in Tuesday’s post – see first chart. As previously discussed, markets have recently been sensitive to fluctuations in the base so this pick-up may support a near-term rally in equities, possibly accompanied by a weaker or stable dollar. The reversal […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-2936","post","type-post","status-publish","format-standard","hentry","category-money-moves-markets"],"_links":{"self":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2936","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2936"}],"version-history":[{"count":1,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2936\/revisions"}],"predecessor-version":[{"id":5245,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2936\/revisions\/5245"}],"wp:attachment":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2936"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2936"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2936"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}