{"id":2961,"date":"2010-03-17T10:39:48","date_gmt":"2010-03-17T10:39:48","guid":{"rendered":"https:\/\/mmm.9dotdigital.ca\/?p=2961"},"modified":"2025-03-27T15:49:00","modified_gmt":"2025-03-27T15:49:00","slug":"monetary-backdrop-less-favourable-for-markets","status":"publish","type":"post","link":"https:\/\/mmm.9dotdigital.ca\/?p=2961","title":{"rendered":"Monetary backdrop less favourable for markets"},"content":{"rendered":"<p>The liquidity &#8220;jaws&#8221; are closing. Annual growth in Group of Seven (G7) real narrow money, M1, was only marginally higher than industrial output expansion in January &ndash; see first chart. The series are likely to have crossed in February, with the annual output gain boosted by a large monthly decline in February 2009 falling out of the calculation.<\/p>\n<p>Since 1970, global equities on average have underperfomed cash by 5% <em>per annum<\/em> when annual real M1 growth has fallen short of output expansion while outperforming by 11% <em>pa<\/em> at other times &ndash; see previous <a href=\"http:\/\/www.moneymovesmarkets.com\/journal\/2009\/12\/17\/liquidity-tide-beginning-to-ebb.html\">post<\/a>. These averages, of course, conceal significant variation but the <em>ex ante<\/em> return \/ risk profile of holding equities has deteriorated.<\/p>\n<p>Slower real money growth than output expansion implies that the economy is draining liquidity from markets. Historically, cross-overs have also signalled higher short-term interest rates. On average, G7 short rates have risen by 0.7 percentage points <em>per annum<\/em> during real money \/ output growth shortfalls while falling by 0.9 points <em>pa<\/em> at other times &ndash; second chart.<\/p>\n<p>G7 plus E7 industrial output continues to rise solidly and is now only 4% below its pre-recession peak &ndash; see prior <a href=\"http:\/\/www.moneymovesmarkets.com\/journal\/2010\/3\/12\/global-recovery-on-track-but-momentum-peak-approaching.html\">post<\/a> &ndash; while the recovery is broadening to labour markets. Central bank policies adopted during the financial emergency &ndash; suppressing official interest rates below inflation and flooding banking systems with reserves &ndash; are increasingly misaligned with economic developments. <\/p>\n<p>The Federal Reserve last night repeated its commitment to low interest rates for an &#8220;extended&#8221; period but this does not preclude an early withdrawal of liquidity. A rise in Chinese official rates is overdue while the UK <a href=\"http:\/\/www.moneymovesmarkets.com\/journal\/2010\/3\/3\/is-inflation-targeting-lite-contributing-to-sterling-weaknes.html\">&#8220;MPC-ometer&#8221;<\/a> is close to signalling a need for policy restriction. Earlier-than-expected monetary tightening could be the trigger for a set-back in equity markets.<\/p>\n<p><span class=\"full-image-block ssNonEditable\"><span><img decoding=\"async\" src=\"\/storage\/graphs\/g7-ind-output170310.gif?__SQUARESPACE_CACHEVERSION=1268824330098\" alt=\"\" \/><\/span><\/span><\/p>\n<p><span class=\"full-image-block ssNonEditable\"><span><img decoding=\"async\" src=\"\/storage\/graphs\/g7-short-term170310.gif?__SQUARESPACE_CACHEVERSION=1268824344614\" alt=\"\" \/><\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The liquidity &#8220;jaws&#8221; are closing. Annual growth in Group of Seven (G7) real narrow money, M1, was only marginally higher than industrial output expansion in January &ndash; see first chart. The series are likely to have crossed in February, with the annual output gain boosted by a large monthly decline in February 2009 falling out [&hellip;]<\/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-2961","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\/2961","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=2961"}],"version-history":[{"count":1,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2961\/revisions"}],"predecessor-version":[{"id":5270,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2961\/revisions\/5270"}],"wp:attachment":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2961"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2961"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2961"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}