phancock – CC&L Financial Group Ltd.

US broad – and probably narrow – money growth has been boosted recently by reduced issuance of Treasuries due to the debt ceiling constraint. The accompanying enforced run-down of the Treasury’s cash balance at the Fed has resulted in a resurgence of “Treasury QE”, a proxy for monetary deficit financing. This has more than offset (reduced) Fed QT – see charts 1 and 2.

Chart 1

Chart 2

Conditional on an early lifting of the debt ceiling, however, the Treasury’s financing estimates imply a dramatic reversal over the remainder of Q2 / Q3. The plans involve “catch-up” issuance to restore the Treasury balance to its prior level, with coupon debt – rather than bills – bearing most of the burden. (Coupon sales to non-banks contract the broad money stock; bills are more likely to be purchased by money funds and banks, implying a neutral monetary influence.)

The Fed could neutralise most of the negative Treasury impact by suspending QT. Still, the joint Fed / Treasury influence would swing from being significantly expansionary to neutral or slightly contractionary.

The suggested loss of money momentum could be offset by other factors. A similar swing in the joint influence in Q2 / Q3 2024 was associated with a minor slowdown in broad money as it coincided with a pick-up in bank lending growth.

Will a rebound in issuance put upward pressure on Treasury yields? Over 2010-19, Fed QE / QT – and the joint Fed / Treasury influence – was positively correlated (weakly) with the 10-year yield, i.e. the yield tended to rise when the Fed absorbed more supply and fall when it wound down purchases or ran down holdings.

A possible explanation is that the impact of the Fed’s actions on monetary trends and thereby economic prospects outweighed the direct yield impact of reduced or increased Treasury supply to the market. The suggested negative swing in the joint Fed / Treasury influence, therefore, could be associated with lower not higher yields.

Eurozone March money numbers were mixed, suggesting that further ECB policy easing will be required to insulate the economy from global weakness.

Positively, six-month real narrow money momentum rose further in March, almost closing the gap with the US – chart 1.

Chart 1

The six-month change, however, conceals a pull-back in growth in the latest three months, with broad money also slowing. Bank loan expansion has retained momentum but is a coincident / lagging indicator, while money leads – chart 2.

Chart 2

Annual broad money growth has stalled well below a level likely to be consistent with achievement of the 2% inflation target over the medium term – chart 3.

Chart 3

Weaker narrow money growth in the latest three months may reflect a downward revision of spending intentions in response to US policy news. A Q1 rise in longer-term bond yields may also have acted as a dampener, though has since reversed.

The fall in broad money growth was driven mainly by a slowdown in banks’ net external assets, according to the credit counterparts analysis. The government contribution has been positive recently, with the ECB’s passive QT more than offset by securities purchases by banks – chart 4.

Chart 4

Conceptually, the change in banks’ net external assets is the counterpart of the basic balance of payments position (current account plus net direct and portfolio investment). The basic balance surplus has fallen back as the current account surplus has moderated and a deficit on the direct / portfolio capital account has widened – chart 5.

Chart 5

The capital account deterioration mainly reflects transactions in short-term debt securities, possibly motivated by changes in interest rate differentials.

Changes in the basic balance have been weakly correlated with exchange rate movements historically. Still, the fall in the surplus casts doubt on forecasts of further euro strength.