Partial information indicates that global (i.e. G7 plus E7) six-month real narrow money momentum fell for a third month in March, possibly breaching a low reached in June 2022. This increases confidence that a recent recovery in PMIs will reverse into H2. 

The June 2022 low in real narrow money momentum presaged a low in global manufacturing PMI new orders in December – see chart 1. Assuming the same six month lead, the roll-over in real money momentum since December 2022 implies a PMI decline from June. 

Chart 1

Chart 1 showing Global Manufacturing PMI New Orders & G7 + E7 Real Narrow Money (% 6m)

The fall could start earlier. The recovery in real money momentum between June and December 2022 was minor and driven entirely by a slowdown in six-month consumer price inflation. Momentum failed to break into positive territory. Credit tightening due to recent banking stresses may accelerate economic weakness. 

The renewed fall in global real money momentum since December reflects nominal money weakness rather than any inflation rebound: the six-month rate of change of nominal narrow money appears also now to be negative, a feat never achieved during the GFC – chart 2. 

Chart 2

Chart 2 showing G7 + E7 Narrow Money & Consumer Prices (% 6m)

Nominal money contraction is being driven the US and Europe, with momentum positive and stable in the E7 and Japan. 

Global real money momentum will be supported by a further inflation slowdown but a significant recovery is unlikely without a policy reversal that revives nominal money growth. As previously argued, recent reexpansion of the Fed’s balance sheet has no direct – or, probably, indirect – impact on money stock measures. 

The fall in global real money momentum has further delayed the expected cross-over above weakening industrial output momentum, suggesting fading the Q1 equity market rally and favouring defensive sectors, quality and yield.

Eurozone February monetary data were extraordinarily negative, suggesting that interest rates were already at a restrictive level before the 50 bp rate hikes in February / March. 

Economic sentiment has lifted in early 2023 in response to a collapsing gas price and China’s reopening but the impact of monetary restriction has yet to kick in. 

The headline M3 broad money measure was down again in February and has fallen in four of the last five months. The six-month rate of change turned negative and is the weakest since 2010 in the aftermath of the GFC – see chart 1. 

Chart 1

Chart 1 showing Eurozone Broad Money M3 (% 6m)

Bank deposits are contracting at a faster pace than then because of a portfolio switch into money market funds and short-term bank bonds. This switch has been motivated by relative yields but the banking crisis could give a further boost to money fund inflows. 

Corporate money trends are particularly alarming. Bank deposits of non-financial corporations contracted at a 4.0% annualised pace in the latest three months, with the overnight (M1) component down by 16.6% – chart 2. Household deposits fell in February and are barely up over three months, with a shift out of overnight accounts suggesting weak spending intentions. 

Chart 2

Chart 2 showing Eurozone Household & NFC* Deposits (% 3m annualised) *NFCs = Non-Financial Corporations

Talk of households still sitting on substantial spendable “excess” savings is suspect. Allowing for inflation erosion, household M3 deposits are below their pre-pandemic trend – chart 3. 

Chart 3

Chart 3 showing Eurozone Real Household M3 Deposits (January 2003 = 100)

Country deposit data suggest that a core / periphery divergence is opening up, with Spain following Italy into year-on-year contraction – chart 4. 

Chart 4

Chart 4 showing Bank Deposits of Eurozone Residents* (% yoy) *Excluding Central Government

Monetary weakness partly reflects a collapse in credit growth: three-month loan momentum was running at an annualised 7.6% as recently as September but turned negative in February – chart 5. 

Chart 5

Chart 5 showing Eurozone Bank Loans* to Private Sector (% 3m annualised) *Adjusted for Sales, Securitisation & Cash Pooling

Corporations have been repaying short-term loans in size since November, consistent with a downswing in stockbuilding, which reached a record share of GDP in Q4. Numbers could bounce near term as firms draw down credit lines while they still can.

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

Chart 1 showing Eurozone GDP & Real Narrow Money* (% 6m) *Non-Financial M1 from 2003, M1 before

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 time deposits into sight 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

Chart 2 showing Eurozone Household & NFC* Deposits (% 3m annualised) *NFCs = Non-Financial Corporations

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 3 showing France GDP (% qoq saar)

Chart 4

Chart 4 showing Germany GDP (% qoq saar)

Chart 5

Chart 5 showing Spain GDP (% qoq saar)

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

Chart 6 showing Eurozone Stockbuilding as % of GDP

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

Chart 7 showing Germany Ifo Business Survey

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

Chart 8 showing Germany Dwellings Investment as % of GDP & Housing Construction New Orders

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

Chart 1 showing Japan Nominal GDP & Narrow / Broad Money (% yoy)

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

Chart 2 showing Japan BoJ Net JCB Purchases (¥ trn)

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

Chart 3 showing Japan M3 & Credit Counterparts Contributions to M3 % yoy

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

Chart 4 showing Japan Bank Lending (% yoy)

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

Chart 5 showing Japan Core Consumer Prices & Effective Exchange Rate (% yoy)

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.

A Canadian ten dollar bill on a background of dollar bills

This summary provides a perspective of the modern-day history of Canadian-US dollar exchange rate fluctuations. Figure 1 shows the level of month-end exchange rates from 1953 to December 31, 2022.

Figure 1: History of Canadian-US Exchange Rates

1953-1960 The Canadian dollar spent much of 1953 to 1960 in the $1.02 to $1.06 (US) range. It topped out at $1.0614 (US) on August 20, 1957. Until 2007 this was considered the modern-day peak for the Canadian dollar versus the US currency. The Canadian dollar was at $2.78 (US) in 1864 during the US Civil War, but in those days, it was pegged to the gold standard, a practice the US had already abandoned.
1961-1969 In the early 1960s, the Bank of Canada governor James Coyne and Prime Minister John Diefenbaker were on different economic paths. The government wanted expansion while Coyne wanted to maintain a tight money supply. Coyne subsequently resigned and in May 1962, the government pegged the Canadian dollar at 92.5 cents (US) plus or minus a 1% band.
1970-1972 In May 1970, with rising inflation and serious wage pressures, the Trudeau government allowed the Canadian dollar to float. It drifted to parity with the US dollar by 1972.
1974 On April 24, 1974, the Canadian dollar reached $1.0443 (US). This was the high point for the dollar from when it entered its most recent float period and would not trade at these levels again for another 30 years.
1976- 1986 In November 1976, René Lévesque became Premier of Quebec with a platform that promoted political independence for Quebec. A slide in the Canadian dollar resulted, lasting into the first half of the 1980s. This was a period characterized by rising inflation and interest rates. The Bank of Canada’s key interest rate reached 21.2% in 1981, and the Canadian dollar hit an all-time low of 69.13 cents (US) on February 4, 1986.
1987- 1997 The Canadian dollar rose through the latter part of the 1980s and early 1990s, and on November 4, 1991, reached 89.34 cents (US). This was the high point for the 1990s.
1998-2002 Budget deficits, weaker commodity prices and the aftermath of the international crisis in 1998 in the emerging markets of Russia and Latin America, saw a downward path for the Canadian dollar. On January 21, 2002, the Canadian dollar hit its all-time low against the US dollar dropping to 61.79 cents (US). At this level it cost $1.62 CDN to buy $1 US.
2003- 2006 Through 2003 to 2006, the Canadian dollar started to appreciate sharply driven by a robust global economy that boosted prices of Canada?s commodity exports and pushed the Canadian dollar above 90 cents (US).
2007 On September 20, 2007, the Canadian dollar reached parity with the US dollar for the first time in close to 31 years, with a 62% rise in less than six years driven in part by record high prices for oil and other commodities. The Canadian dollar was named the Canadian Newsmaker of the Year for 2007 by the Canadian edition of Time magazine.
2008- 2009 The Canadian dollar continued to trade near parity in the first half of 2008, but then started a decline that saw it drop below 80 cents (US).
2010 After a strong bounce back, the Canadian dollar reached parity for the first time in 20 months in April 2010.
2011 At the height of the commodity boom, the Canadian dollar reached $1.06 (US) on July 21, 2011. It then experienced its fastest decline in modern-day history as commodity prices rapidly deteriorated.
2016 The Canadian dollar fell to 68.68 cents (US) on January 19, 2016, approximately 7 cents (US) from its historic low, before starting to strengthen against the US dollar and finishing the year at 74.57 cents (US).
2017- 2022 Currency fluctuations have been somewhat muted since 2016, although the Canadian dollar dipped back down to around the 70 cents mark in March 2020 during the outset of the COVID pandemic. The Canadian dollar subsequently strengthened and ended 2022 at 73.80 cents (US).


Figure 2 shows the history of exchange rates from 1970. It captures three modern-day major declines in the Canadian dollar versus the US dollar.

Figure 2: Canadian-US Exchange Rates

The three peak to trough declines in the Canadian dollar have all been down a little over 30%. The first two declines took around 10 years, while the most recent has been the fastest decline, which was in part due to the swift collapse in oil prices.

Since the last trough in 2016, the Canadian dollar continues to move in a relatively narrow range even accounting for the uncertainty associated with the COVID-19 pandemic and the current high levels of inflation. The Canadian dollar would have to fall below 68.68 cents (US) to test what was previously thought to be the low point for the most recent peak to trough.

Sources: Bank of Canada, CBC, Globe & Mail.

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

Chart 1 showing UK GDP & Real Narrow Money* (% 6m) *Non-Financial M1 from 1977, M1 before

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

Chart 2 showing UK Household & PNFC* Money (% 3m annualised) *PNFCs = Private Non-Financial Corporations

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

Chart 3 showing UK Employee Jobs (mn) & Vacancies* (000s) *Single Month, Own Seasonal Adjustment

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

Chart 1 showing Eurozone Narrow / Broad Money & Bank Lending (% 3m annualised)

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

Chart 2 showing Eurozone Stockbuilding as % of GDP (yoy change) & Short-Term* Bank Loans to Non-Financial Corporations (yoy change in % 3m) *Up to 1y Maturity

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

Chart 3 showing Eurozone GDP & Real Narrow Money* (% 6m) *Non-Financial M1 from 2003, M1 before

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

Chart 4 showing Real Narrow Money* (% 6m) *Non-Financial M1 Deposits

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

Chart 5 showing Germany Ifo Manufacturing Survey & MSCI Europe Cyclical Sectors ex Tech* Price Index Relative to Defensive Sectors *Tech = IT & Communication Services

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

Chart 1 showing China Nominal GDP & Money / Social Financing (% 6m)

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

Chart 2 showing China “Credit Impulse” Change in Rolling TSF Flow as % of GDP

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 3 showing China Household Sector Real M2 Deposits (RMB bn, 2015 consumer prices)

Chart 4

Chart 4 showing US Household Sector Real M3 ($ bn, 1982-84 consumer prices)

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

Chart 5 showing China Interest Rates

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

Chart 6 showing China Broad Effective Exchange Rate (JP Morgan, 2010 = 100)

Gas price relief and Chinese reopening have tempered pessimism about Eurozone economic prospects, contributing to a Q4 rally in equities. Monetary trends, by contrast, suggest a worsening outlook due to the ECB’s scorched earth policy tightening. 

The preferred narrow money measure here – non-financial M1 – contracted for a third straight month in November. The three-month annualised rate of decline of 5.3% compares with a maximum fall of 1.7% during the GFC – see chart 1. 

Chart 1

Chart showing Eurozone Money Measures

Narrow money weakness is being driven by households and firms switching out of overnight deposits into time deposits and notice accounts – a normal pre-recessionary development. Broad money, in addition, is slowing – non-financial M3 rose by only 0.2% in November, pulling three-month annualised growth down to 3.4%, the slowest since 2018. 

The headline M1 and M3 measures are displaying greater weakness, reflecting a fall in money holdings of non-bank financial corporations.

Broad money growth had been supported by solid expansion of bank loans to the private sector but, as expected and signalled by the ECB’s lending survey, momentum is now fading – chart 2. Slumping credit demand and forthcoming QT suggest that broad money will follow narrow into contraction. 

Chart 2

Chart showing Eurozone Bank Loans to Private Sector and ECB Bank Lending Survey Credit Demand Indicator

Corporate loan demand had been boosted by inventory financing but stockbuilding reached a record share of GDP in Q3 – chart 3 – and is probably now being cut back sharply, contributing to a move into recession. Consistent with this story, short-term loans to corporations contracted in both October and November. 

Chart 3

Chart showing Eurozone Stockbuilding as Percent of GDP

A sharp fall in inflation will support real money trends but has yet to arrive. The six-month rate of contraction of real non-financial M1 reached another new record in November – chart 4. 

Chart 4

Eurozone GDP and Real Narrow Money

Monetary tightening in 2007-08 and 2010-11 was associated with a divergence of money trends across countries, reflecting and contributing to financial fragmentation. This is occurring again, with weakness focused on Italy. 

Italian real narrow money deposits contracted by 9.7%, or an annualised 18.4%, in the six months to November, with the larger decline than elsewhere due to both greater nominal weakness and higher CPI inflation – chart 5.

Chart 5

Chart showing Real Narrow Money

In nominal terms, total bank deposits in Italy were unchanged in the year to November – chart 6. Italian banks’ assets grew modestly over this period. The banks funded this expansion by increasing their net borrowing from Banca d’Italia, which in turn accessed additional funding from the Eurosystem, resulting in a further widening of its TARGET2 deficit. The deficit reached a record €715 billion in September following a surge in Italian BTP yields, falling back in October / November – chart 7. Another rise in yields since early December may have been associated with deposit outflows from the banking system and renewed upward pressure on the TARGET2 shortfall. 

Chart 6

Chart showing Bank Deposits of Eurozone Residents

Chart 7

Chart showing TARGET2 Balances

The global manufacturing PMI new orders index was little changed in November, the six-month rate of change of the OECD’s G7 leading indicator has hooked up and cyclical sectors have been outperforming defensive sectors in the recent equity market rally. Do these developments signal a bottoming of global economic momentum and a prospective H1 2023 recovery? 

Monetary trends argue not. Global (i.e. G7 plus E7) six-month narrow money momentum rose slightly for a fourth month in October but remains in negative (i.e. recessionary) territory. All previous recoveries through the 50 level in global manufacturing PMI new orders were preceded by real money momentum rising above 2% – see chart 1. 

Chart 1

Chart 1 showing Global Manufacturing PMI New Orders & G7 + E7 Real Narrow Money (% 6m)

The June low in real narrow money momentum will probably hold but a corresponding PMI new orders low is unlikely before Q1 2023. There was a 10-month lag between the most recent real money growth peak (July 2020) and the matching PMI top (May 2021). 

There are additional negative considerations. The rise in real money momentum since June has been due to an inflation slowdown, with nominal money growth weakening further – chart 2. Previous PMI recoveries were preceded by nominal as well as real money accelerations. 

Chart 2

Chart 2 showing G7 + E7 Narrow Money & Consumer Prices (% 6m)

The rise in global real money momentum reflects the E7 component, with G7 momentum still weakening – chart 3. China, India, Mexico and Brazil have contributed to the E7 recovery but the increase has been exaggerated by a nominal money surge and inflation drop in Russia – chart 4. The latter may be of limited global relevance given Russia’s partial economic isolation. 

Chart 3

Chart 3 showing G7 + E7 Real Narrow Money (% 6m)

Chart 4

Chart 4 showing Real Narrow Money (% 6m)

The six-month rate of change of the OECD’s G7 leading indicator rose slightly for a third month in November, according to calculations here. This appears to be a hopeful signal – bottomings historically have usually been followed by sustained recoveries, as chart 5 shows. The uptick is also consistent with recent better relative performance of cyclical equity market sectors. 

Chart 5

Chart 5 showing G7 OECD Leading Indicator (% 6m) & MSCI World Cyclical Sectors Price Index Relative to Defensive Sectors (% 6m)

Initial indicator readings, however, are often revised significantly and previous sustained recoveries in the six-month rate of change from negative territory were accompanied or more usually preceded by a revival in G7 real narrow money momentum – chart 6. With the latter yet to bottom, the uptick in indicator momentum may be either revised away or reversed. 

Chart 6

Chart 6 showing G7 OECD Leading Indicator & Real Narrow Money (% 6m)