Money trends suggest that global economic momentum is peaking in Q3, with downside risk focused on Europe and Japan.

The global manufacturing PMI new orders index rose in August, though remains below an April high – see chart 1.

Chart 1

The solid August result is consistent with a rise in global six-month real narrow money momentum into early 2026. Growth, however, has eased since February, suggesting a moderation in new orders over the remainder of the year.

A July fall in real money momentum reflected deepening contractions in Europe and Japan, which offset a further pick-up in the US – chart 2.

Chart 2

The suggestion is that the US economy is running hot with the Fed behind the curve, while ECB and BoJ policy tightening is misguided, risking a sharp economic slowdown, or worse.

Meanwhile, six-month growth of global real narrow money is estimated to have fallen below that of industrial output in July, implying a less favourable liquidity backdrop for markets – chart 3.

Chart 3

A previous undershoot in April preceded a sharp correction in momentum stocks but real money growth recovered to close the gap in May / June, following which equity indices reached new highs.

The global services PMI survey for August was stronger than for manufacturing, with new business reaching a 20-month high. Services buoyancy, however, has little implication for manufacturing prospects. Granger-causality tests show that manufacturing new orders predict services new business but not vice versa. Manufacturing deceleration is likely to be reflected in services cooling.

Global six-month real narrow money growth recovered further in June but remains below a February peak, as well as its long-term average – see chart 1.

Chart 1

The earlier slowdown suggested that the global industrial economy would lose some momentum during H2. A cooling may already have begun, with manufacturing PMI new orders easing for a third successive month in July. Still, the latest uptick in real money growth argues against significant weakness, at least through year-end.

The recent violent correction in momentum stocks followed global six-month real money growth – on both narrow and broad definitions – crossing below industrial output expansion in April, suggesting a loss of “excess” money support for markets. Real narrow money growth reconverged with output expansion in May / June, with real broad money growth slightly weaker – chart 2. This suggests a neutral monetary backdrop for markets, in contrast to positive conditions in late 2025 / early 2026.

Chart 2

The rise in real money growth has been driven by US acceleration / strength, contrasting with weakness in the rest of the G7 – chart 3. Such divergence is unhealthy, suggesting a misalignment of policy stances, a correction of which could lead to further monetary / market volatility.

Chart 3

Global six-month real money growth has fallen back since early 2026, crossing below industrial output expansion in April – see chart 1. This suggests that the global economy will lose some momentum during H2, while the monetary backdrop for markets has become less favourable, at least temporarily.

Chart 1

From a cyclical perspective, housing indicators remain weak, while the stockbuilding cycle appears to be reaching a peak, with a downswing likely to extend well into 2027.

The optimistic case is that real money growth will be supported by a reversal of the H1 boost to inflation from higher energy prices, assuming that the reopening of the Persian Gulf proves lasting, while the business investment cycle remains in an upswing driven by seemingly insatiable demand for AI compute. Still, upward pressure on financing costs from the vast spending could start to constrain momentum soon, while the disinflation lift to real money growth could be offset by slower nominal expansion, reflecting H1 interest rate rises.

A conservative view of equity market prospects, therefore, appears warranted, as least until monetary indicators give an “all-clear” signal. The cyclical framework employed here suggests that equities will perform poorly over the medium term: weak phases in the three investment cycles are scheduled to coincide at some point in 2027-28,  a condition historically associated with major bear markets.

An important recent change has been a divergence of money growth across major economies, with US expansion picking up to a level inconsistent with 2% inflation, in contrast to weakness in Europe and Japan – see charts 2 and 3. This suggests superior US near-term economic prospects and a need for opposite monetary policy adjustments. If forthcoming, these could sustain a recent recovery in the US dollar, likely acting as another headwind for markets.

Chart 2

Chart 3

US monetary acceleration gathered pace after the Fed’s December decision to resume balance sheet expansion, a policy that Chair Warsh wants to reverse. Action is unlikely before late 2026 but – if combined with a near-term interest rate rise – could cause money growth to slow sharply in H1 2027.

Despite US strength, global annual broad money growth is below its pre-pandemic (i.e. 2015-19) average, reflecting softness in China as well as Europe / Japan. This suggests that inflationary pressures globally will remain contained, even if US medium-term risks are rising.

The judgement that the stockbuilding cycle is peaking is supported by the global manufacturing purchasing managers’ survey, with an average of the finished goods inventories and stocks of purchases indices reaching its fifth highest level on record in May – chart 4. Downswings in the cycle were historically associated with underperformance of cyclical sectors – notably materials, financials and communication services – versus defensive sectors, especially health care and consumer staples.

Chart 4

Cycle fluctuations were also reflected in prices of production inputs including electronic components as well as industrial commodities. A coming downswing could challenge optimistic forecasts for medium-term earnings growth of chipmakers and other hardware suppliers.

Global equities have lost momentum. The MSCI World index is little changed since mid-May. The equal-weight version of the index remains below a high reached in late February – see chart 1.

Chart 1

The stall could be explained by a less favourable “excess” money backdrop. Six-month growth of global (i.e. G7 plus E7) real money – on both narrow and broad definitions – crossed below that of industrial output in April. Narrow money growth was higher over August-March, while the broad money gap had been positive in most months since end-2022 – chart 2.

Chart 2

Real money growth rates appear to have recovered in May but may not have moved back above output expansion, based on partial information.

Prospects for a restoration of excess money support are mixed.

The real money slowdown reflected an energy-driven rise in six-month CPI momentum. This should reverse if recent commodity price relief is sustained – chart 3.

Chart 3

Yield curves, however, remain higher than before Gulf conflict, reflecting tighter actual and expected monetary policies. Higher rates could dampen nominal money growth.

Meanwhile, solid June flash PMI results suggest that six-month industrial output expansion will hold up near term.

As previously discussed, global money growth has been supported recently by faster US expansion. Six-month growth of the preferred US narrow and broad measures here – M1A and M2+ respectively – rose further to 9.3% and 8.2% annualised respectively in May – chart 4. (The M1A series has been adjusted for a reclassification of some savings deposits as demand deposits in November.)

Chart 4

By contrast, six-month growth of Eurozone and UK broad money – as measured by non-financial M3 / M4 – was just 3.7% and 3.4% annualised respectively in April. May numbers are released next week.

The break-out of US six-month money growth above a January 2025 high coincided with a resumption of Fed balance sheet expansion. Chair Warsh wants to reverse this policy, suggesting a future downside risk to money trends.

OECD leading indicator data and survey evidence on stocks support the forecast of a H2 loss of industrial momentum.

Global manufacturing PMI new orders edged down in May from April’s four-year-plus high. The expectation here has been for a further decline in H2, reflecting a slowdown in global six-month real narrow money momentum from a February peak – see previous post.

Two recent releases support this forecast. First, one-month growth of the OECD’s G7 leading indicator fell again in May. Growth peaked in December and has led PMI new orders by three months on average historically, suggesting that April’s orders high will prove lasting – see chart 1.

Chart 1

Secondly, the PMI stocks of purchases index indicates that stockpiling of inputs accelerated further last month, likely marking a cycle peak – chart 2.

Chart 2

Growth in new orders is related to the rate of change of stockbuilding, implying a slowdown even in the unlikely event that the stocks of purchases index remains at its current extended level – chart 3.

Chart 3

An expected fall in global manufacturing PMI new orders suggests a moderation, at least, in current earnings strength.

New orders reached a four-plus-year high in April but DM flash results imply a pull-back in May. The forecast here is for a further decline in H2, reflecting an inflation-driven slowdown in global six-month real narrow money momentum from a February peak – see chart 1.

Chart 1

A further consideration is that orders have been boosted recently by demand front-loading and stockbuilding motivated by supply concerns, implying future payback.

PMI new orders are contemporaneously correlated with MSCI World earnings revisions, whether expressed in terms of the revisions ratio (net proportion of analyst estimates upgraded each month) or the one-month percentage change in aggregate forecast earnings per share – chart 2.

Chart 2

Both revisions measures remained strong in May but the expected new orders decline suggests a moderation, at least, ahead.

Current earnings strength is focused on the US and AI-spend beneficiaries, with downgrades in Europe, China and EM ex. Korea / Taiwan – chart 3. The suggestion of European relative weakness was echoed in the flash PMIs.

Chart 3

Sector wise, IT extended its lead, with consumer sectors continuing to suffer earnings downgrades – chart 4. The revisions ratio gaps between IT and consumer discretionary / staples reached new records in data extending back to 1995 – another manifestation of economic disparities.

Chart 4

Global six-month real narrow money growth fell in March and is on course to decline further in April-May, suggesting a loss of economic momentum during H2.

The March fall from a four-plus-year high in January / February was due to a pick-up in six-month consumer price momentum, with nominal money expansion unchanged – see chart 1.

Chart 1

Commodity price strength implies a further increase in CPI momentum through May, at least – chart 2. So the slowdown in real money growth will extend unless nominal expansion accelerates – unlikely given recent upward pressure on rates.

Chart 2

The earlier rise in real money growth has been reflected in a pick-up in global industrial momentum, with April manufacturing PMI new orders also the highest for four-plus years – chart 3. Orders have received an additional boost from precautionary stockpiling triggered by Gulf War III.

Chart 3

The lead time between turning points in real money momentum and PMI new orders has recently been running at seven months, suggesting a PMI reversal from September. The stockbuilding boost may have accelerated strength, however, implying an earlier peak.

The March fall in global six-month real narrow money growth was driven by the G7 component, with E7 expansion tracking sideways – chart 4.

Chart 4

US growth fell in March but remains higher than in the rest of the G7 – chart 5.

Chart 5

The March fall in global six-month real narrow money growth is estimated to have been accompanied by a similar slowdown in industrial output expansion, implying a continued small lead for the former – chart 6. The suggestion of “excess” money support for markets is consistent with recent equity market resilience.

Chart 6

The expected further fall in real money growth, however, and near-term support for output from full order books, could result in the series converging or crossing soon.