Global six-month real narrow money momentum is estimated to have rebounded from a sharp December fall to reach a new high in January, based on monetary data covering three-quarters of the G7 plus E7 aggregate tracked here – see chart 1.

Chart 1

The December drop was the basis for an earlier forecast that a rise in global manufacturing PMI new orders would fizzle out in Q2, with a relapse into Q3. The January monetary news suggests that the current upswing will be sustained into H2 – chart 2.

Chart 2

Both G7 and E7 components contributed to the January rise in real money momentum, but the G7 series is estimated to have remained below a February 2025 peak, whereas E7 momentum reached a new high – chart 3.

Chart 3

The rebound in global real money growth has likely restored a positive differential with industrial output momentum, suggesting “excess” money support for markets – chart 4.

Chart 4

Previous posts noted that EM equities outperformed DM on average historically in months following positive readings of this differential and the E7 / G7 real money growth gap (allowing for reporting lags). The joint condition was in place in nine of the last 12 months. Chart 5 shows the performance of a monthly switching rule that prefers EM only when the joint condition is satisfied, otherwise reverting to DM. The latest news implies that the rule will continue to favour EM in March and, probably, April.

Chart 5

A January post noted the possibility that global six-month real narrow money momentum had crossed below industrial output growth in December, suggesting less favourable monetary conditions for markets. Recent dramatic sell-offs in some speculative assets could reflect such a shift.

The suggestion is still tentative: additional – but not yet complete – December data indicate that the two series converged rather than intersected – see chart 1.

Chart 1

Will a cross-over be confirmed soon? Monetary prospects are uncertain but stronger January manufacturing PMI results suggest a rise in six-month industrial output momentum in early 2026.

In data since 1970, global equities outperformed US dollar cash significantly on average in months following a positive reading of the gap between real money and output momentum (by 12.0% annualised). (The calculation allows for reporting lags.)

By contrast, negative gaps were associated with average underperformance in the following month (of 5.5%).

Needless to say, these averages conceal frequent “misses” in both directions.

The six-month real money / output momentum gap was positive in most months in 2025. It was, however, negative in 2023 and much of 2024, when equities rallied strongly.

As previously discussed, the six-month gap was a misleading guide to “excess” money over this period because of a large monetary overhang from the money growth surge in 2020-21.

A simple way of illustrating this overhang is to compare five-year growth rates of real money and industrial output. Real money growth was still much higher in 2023 – chart 2.

Chart 2

The five-year gap turned negative last year. It last closed in the early stages of the GFC bear market.

Back then, the six-month gap had been negative for more than a year. The closing of the five-year gap was followed by an acceleration of the market decline.

With the five-year gap already negative, a negative shift in the six-month gap could be reflected in more immediate market weakness than in 2007-08.

Global manufacturing PMI new orders recovered strongly in January following a November / December relapse. Both the fall and revival had been signalled by money trends: global six-month real narrow money momentum declined sharply in April / May 2025 but rebounded into November. The seven-month interval between a (revised) May low in real money momentum and the December PMI trough matches the lead time at the prior two turning points – see chart 1.

Chart 1

The rise in real narrow money momentum into November suggests that the PMI upswing will extend into Q2. As foreshadowed in a previous post, however, real money momentum declined sharply in December, retracing most of its May-November gain. Accordingly, the manufacturing bounce is expected to fizzle out in Q2, with renewed weakness into Q3.

Real narrow money momentum has slowed across most major economies, though to varying degrees. China and India have contributed most to the global decline, although the Indian number remains strong – chart 2.

Chart 2

The US series shown incorporates an adjustment for a suggested distortion to demand deposit data affecting the M1A measure used here. However, substituting the official M1 measure – unaffected by the mooted distortion – for M1A would give the same current reading.

Eurozone momentum remains above the US level while the UK has recovered from significant weakness in mid-2025, suggesting improving relative economic prospects. Still, both series have stalled at modest levels, cautioning against optimism.

Japanese real narrow money contraction continues to flag a policy mistake, while a faster decline in Brazil argues for urgent rate cuts. (The Brazil manufacturing PMI was the weakest in the global stable in January.)

Elsewhere, prior strength in Australian real narrow money momentum is consistent with recent upbeat economic news but a slowdown since September suggests that prospects were cooling before this week’s rate hike.

Chinese economic growth held up in H2 2025 but a fall in six-month real narrow money momentum in November-December suggests weakening prospects – see chart 1.

Chart 1

December money numbers are also available for Brazil, India and Japan, showing declines in momentum for the former two, with Japan remaining negative.

US and European data will be released next week. Assuming unchanged growth rates, the above information implies a significant fall in global (i.e. G7 plus E7) six-month real narrow money momentum, retracing much of the July-November recovery – chart 2.

Chart 2

Global real money momentum may be about to cross beneath six-month industrial output growth, which rose into November.

Chart 3 shows a long-term comparison of G7-only real narrow money and industrial output momentum, using 12- rather than six-month rates of change. The series converged in November, supporting the suggestion of a change in “excess” money conditions.

Chart 3

Signs of a narrow money slowdown, albeit tentative, are consistent with the negative cyclical view here, based on an expectation that the global stockbuilding cycle will enter a downswing this year into a possible H1 2027 low.

The analytical approach used here is giving mixed messages for 2026 prospects. Global monetary trends appear modestly supportive of economic growth and markets, but the stockbuilding cycle remains on course to enter a downswing this year, with the housing cycle also in a time window for weakness.

Further considerations are likely suppression of labour demand from AI deployment and the unusual magnitude of gains in risk asset prices during the upswing phase of the current stockbuilding cycle.

The judgement here is to give greater weight to cyclical influences and plan for a negative shift in the investment environment during 2026, with caution to be reinforced in the event of deterioration in monetary indicators and / or data confirmation that a stockbuilding downswing is under way.

Global six-month real narrow money momentum – the key monetary leading indicator employed here – fell between March and July 2025 but recovered into November. The decline and rebound were driven by nominal money trends, with global CPI momentum stable at around its pre-pandemic pace (vindicating the monetarist forecast of full retracement of the 2021-22 inflation spike) – see chart 1.

Chart 1

The earlier fall in real money momentum has been reflected in a decline in global manufacturing PMI new orders – a timely indicator of economic momentum – from an October peak. Based on recent lead times, however, the monetary rebound suggests that the PMI will bottom out in early 2026, with a recovery into mid-year – chart 2.

Chart 2

While global growth may hold up in H1, it may not be strong enough to prevent a further rise in unemployment rates, partly reflecting AI job displacement – chart 3.

Chart 3

Meanwhile, the stockbuilding cycle – averaging 3.5 years in length historically – remains on course to enter a downswing in 2026, with a possible low in H1 2027. The focus here is on the survey-based indicator shown in chart 4, which has been moving sideways at a level consistent with a cycle peak – a decline into negative territory would confirm a phase shift.

Chart 4

Global inflation is expected to be little changed in 2026, with downside risk judged greater than upside. A key consideration is that G7 annual broad money growth, while recovering further over the past year, remains below its pre-pandemic average – chart 5.

Chart 5

A downside surprise could arise from AI job displacement depressing wage growth. One upside risk is a near-term burst of commodity price strength before the stockbuilding cycle moves into a downswing. Industrial commodity prices rose by less than usual earlier in the upswing and a catch-up could be in progress – chart 6.

Chart 6

The expected transition in the stockbuilding cycle coincides with the housing cycle – averaging 18 years, with a previous trough in 2009 – being in a time window for weakness. G7 housing investment moved sideways between 2023 and H1 2025 but fell to a new low in Q3 – chart 7.

Chart 7

Cyclical hopes rest on further strength in business investment, which follows an average 9-year cycle, with a previous low in 2020. While tech capex is booming, however, it accounts for only one-third of US business investment (and less than 5% of GDP), with other segments weak – chart 8.

Chart 8

The dispersion of real narrow money momentum across countries has narrowed – chart 9. Adjusted for a recent apparent data distortion, US momentum remains slightly below the Eurozone level. Japan is still a negative outlier but the UK has returned to mid-range. Strength in Australia / Canada suggests upside economic and rates risk, with an opposite message from a Swedish move into contraction.

Chart 9

Global real narrow money momentum remains below its long-run average but is nevertheless above weak industrial output momentum, suggesting “excess” money support for markets – chart 10.

Chart 10

Against this, risk assets have usually corrected – or worse – in the 18 months leading up to stockbuilding cycle troughs, with another such window now open on the analysis here. Table 1 compares moves in selected asset prices in the current cycle with averages across the previous nine cycles, with the mean maximum rise from the beginning of the cycle in column 1 and the subsequent fall into the cycle trough in column 2.

Table 1

Global / US equities, tech and other cyclical sectors, and precious metals have significantly outperformed their average gains in the current cycle, suggesting larger-than-normal reversals into the cycle trough. By contrast, European equities, EM, small caps and industrial commodity prices are lagging their respective averages, so may have more upside potential while a positive environment persists and / or prove more resilient in a subsequent risk-off phase.

A fall in the US dollar boosted risk appetite in 2025. The timing of the decline echoes the last three housing cycles, in which the dollar trended lower from an overvalued level in the years preceding and beyond the cycle trough – chart 11.

Chart 11

US currency weakness could become market-negative if a decline becomes disorderly, resulting in upward pressure on longer-term rates, for example in the event of further fiscal profligacy or unwarranted additional rate cuts by a politically controlled Fed. Alternatively, a negative market shift could be triggered by a temporary dollar rebound, if US economic news surprises positively and the Fed remains orthodox. Dollar sentiment and positioning were contrarian-bearish at the start of 2025 but current signals are neutral / positive.

Global manufacturing PMI new orders fell back in November, consistent with the forecast here of an inflection weaker from late 2025, based on a slowdown in six-month real narrow money momentum from a March peak – see chart 1.

Chart 1

The PMI decline was mirrored by an alternative global survey indicator derived from national polls. The alternative indicator has been undershooting the PMI recently, reflecting relative weakness in the US ISM and Chinese NBS surveys compared with their S&P Global counterparts – chart 2.

Chart 2

The suggestion of a turning point is supported by the OECD’s G7 composite leading index. The one-month change in the index usually moves ahead of the PMI and peaked in July, easing further in November. The slowdown, however, has been minor and numbers can be revised – chart 3.

Chart 3

A recovery in real money momentum since July suggests a PMI low around end-Q1. Still, approaching downswings in the stockbuilding and housing cycles argue against a sustained rebound.

PMI swings are typically mirrored by the price relative of cyclical equity market sectors (excluding IT and communication services) versus defensive sectors (excluding energy). Relatives peaked in September, consistent with the October PMI high, but have rallied with rising Fed rate cut expectations – chart 4. A further PMI decline into late Q1 could be associated with renewed underperformance.

Chart 4

 

Global money trends suggest that major economic weakness will be deferred until later in 2026.

Six-month real narrow money momentum in the G7 and seven large emerging economies recovered further in October, almost returning to its March high – see chart 1.

Chart 1

The fall from March into the summer is expected here to be reflected in a slowdown in industrial momentum – as proxied by global manufacturing PMI new orders – into late Q1 2026. The recent money growth recovery suggests a partial PMI rebound in Q2 – chart 2.

Chart 2

The cyclical framework used here implies rising recession risk, with the stockbuilding and housing cycles in time windows to begin downswings. Monetary weakness would signal that a negative scenario is crystallising. The latest numbers appear to signal a delay.

The composition of the money growth rebound gives pause. The return towards the March high has been driven by further strength in the E7 component, with G7 real money momentum lagging significantly – chart 3.

Chart 3

Narrow money trends are respectable or strong across major EMs, with the exception of Brazil – chart 4.

Chart 4

Soft G7 growth reflects a slowdown in the US and continued – though moderating – weakness in Japan and the UK. Eurozone momentum rose further last month, though remains unexceptional.

Chart 5

The forecast that global manufacturing PMI new orders will inflect weaker from a Q4 peak is supported by the “internals” of the October survey.

While new orders rose on the month, the increase was smaller than had been suggested by DM flash surveys, reflecting an EM decline led by China and Korea – often global bellwethers.

Firms were gloomier despite the orders uptick, with the future output index falling to its lowest since April in the wake of the “Liberation Day” shock. In contrast to new orders, this component is below its post-2015 average – see chart 1. (So is the corresponding services gauge.)

Chart 1

Pessimism may partly reflect an inventory overhang: indices measuring additions to stocks of purchased inputs and finished goods were in the 82nd and 97th percentiles of their long-run ranges (i.e. since 1998) respectively last month – more evidence that the global stockbuilding cycle is peaking.

Purchases of inputs boost orders of supplier firms. Accordingly, the new orders index is positively correlated with changes in the stocks of purchases index. The latter is likely to fall from its currently extended level. Even a stabilisation would imply a decline in the rate of change, in turn suggesting softer new orders – chart 2.

Chart 2

Global manufacturing deceleration is often associated with underperformance of cyclical equity market sectors. The price relative of MSCI World non-tech cyclical sectors versus defensive sectors ex. energy is below a September peak – chart 3.

Chart 3

Cyclical earnings are more at risk when pricing power is weak. The output price index has fallen back and is close to its 2010-19 average, while delivery delays remain below the corresponding average, suggesting excess capacity and / or inventories – chart 4.

Chart 4

The suggestion from cycle analysis of significant economic weakness in 2026-27 has yet to receive confirmation from monetary trends.

Global six-month real narrow money momentum recovered for a second month in September, though remains below a March peak. Nominal money growth firmed in August-September, offsetting a small rise in six-month consumer price momentum – see chart 1.

Chart 1

The March peak was expected here to be reflected in a peak in global manufacturing PMI new orders around October. DM flash results are consistent with a further rise in the orders index this month – chart 2.

Chart 2

The latest monetary numbers suggest that the expected PMI fall will be contained, at least through Q1 2026. This is compatible with cycle analysis: the stockbuilding cycle is judged to be at the start of a downswing, so the maximum negative impact could be delayed until H2 2026 or even later.

The minor recovery in global real narrow money momentum since July has been driven by China and Japan, with US, Eurozone and UK readings little changed and Indian growth moderating – chart 3.

Chart 3

Real money momentum remains below its long-run average – chart 4.

Chart 4

Could recent / prospective central bank easing sustain monetary reacceleration, extending economic cycles? While possible, there are also reasons for expecting renewed monetary weakness.

First, policy stances are mostly still restrictive, and real rates may fall by less than nominal as inflation declines further.

Secondly, recent issues in private credit may cause banks to slow lending to shadow banks and tighten standards more generally, dampening (broad) money growth.

Thirdly, money trends reflect as well as influence economic cycles. Stockbuilding cycle downswings are associated with reduced demand for short-term business credit, which could contribute to monetary weakness.

Finally, the demand to hold narrow money is related to consumer / business confidence and spending intentions. Labour market weakness could lead to greater consumer caution, while ongoing trade dislocation and policy uncertainty may dampen business animal spirits.