G7 money surge suggesting too-loose policies

Posted on Thursday, August 3, 2017 at 09:34AM by Registered CommenterSimon Ward | CommentsPost a Comment

Six-month growth of global real narrow money* continued to strengthen in June, signalling a likely pick-up in economic momentum in late 2017 / early 2018, after a modest near-term slowdown. Monetary acceleration suggests that major central banks are falling further “behind the curve” and will be forced to tighten policies significantly as economic growth and inflation rebound.

Six-month growth of global (i.e. G7 plus emerging E7) real narrow money, adjusted for Indian demonetisation, bottomed in February 2017, rising for a fourth consecutive month in June to its highest since September 2016. Allowing for an average nine-month lead, this suggests that six-month industrial output growth will strengthen from around November – see first chart.

Economic momentum is likely to moderate shorter term, reflecting a fall in real narrow money growth between August 2016 and February. This is also the message from the global leading indicator tracked here: it typically leads by four to five months and its six-month growth declined again in June**. The one-month change in the indicator, however, rose for a second month, suggesting an imminent turn in the six-month measure – second chart. Such a turn would confirm the signal of economic reacceleration from late 2017 from monetary trends.

Coincident economic news remains mostly solid but is cooling at the margin. The Citigroup G10 economic surprise index turned significantly negative in June and has remained weak – third chart. The global manufacturing business survey indicator tracked here ticked down in July, while the MSCI All-Country World Index earnings revisions ratio was negative for a second month – fourth chart. The Euroland ratio has reversed particularly sharply, partly reflecting the strong euro, consistent with the expectation here of weaker economic news – fifth chart.

The pick-up in global real narrow money growth has been led by the G7 and the US in particular. G7 real money growth is now well above the India-adjusted E7 level, questioning the sustainability of recent EM asset outperformance – sixth chart. E7 real money growth is respectable in absolute terms but has been held back by moderating – though still solid – Chinese expansion and a contraction in Mexico following recent significant monetary policy tightening.

*Narrow money = currency in circulation plus demand / overnight deposits. Financial sector holdings excluded where possible. Real = deflated by consumer prices, seasonally adjusted.
*June estimate based on partial data.

UK inflation: temporary reprieve

Posted on Wednesday, July 19, 2017 at 09:47AM by Registered CommenterSimon Ward | CommentsPost a Comment

UK CPI inflation surprised on the upside in May and on the downside in June. The “big picture” is that it is above the MPC’s forecast and will probably still reach 3.0% later in 2017, despite lower-than-expected energy prices.

Annual CPI inflation fell from 2.9% (2.87% before rounding) in May to 2.6% (2.64%) in June. Lower motor fuels inflation accounted for 11 basis points of the decline (i.e. about half) with the remainder due to “core” components.

CPI inflation averaged 2.74% in the second quarter, above the MPC’s forecasts of 2.65% and 2.43% in the May and February Inflation Reports respectively. The overshoot would have been larger but for a lower crude oil price than the MPC assumed.

Reasons for expecting inflation to reach 3.0% later in 2017 include:

1)    Despite a slower monthly gain in June, core* prices rose at a seasonally adjusted annualised rate of 3.0% in the latest three months from the previous three – see first chart. Annual core inflation of 2.4% in June would rise to 2.9% in October if this pace of increase were to be sustained.

2)    Annual core** producer output price inflation rose to 2.9% in June and usually peaks ahead of core CPI inflation, i.e. it also suggests a further increase in the core CPI rate – second chart.

3)    The headline / core gap is likely to remain positive and may widen, reflecting stronger food price inflation and a stabilisation of energy inflation after a recent slowdown (assuming stable crude energy costs). CPI food inflation rose further to 2.6% in June but is significantly lower than would be expected based on historical relationships with producer output price inflation for food products (5.8% in June) and the annual increase in the FAO’s global food commodity price index, expressed in sterling (19% in June, down from a peak of 36% in January) – third chart.

*Excluding energy, food, alcohol, tobacco and education, and adjusted for the estimated impact of VAT changes.
**Excluding food, beverages, tobacco and petroleum.

Chinese money trends still expansionary

Posted on Tuesday, July 18, 2017 at 10:57AM by Registered CommenterSimon Ward | CommentsPost a Comment

A fall in Chinese money growth since late 2016 has been reflected in an easing of inflationary pressures rather than a loss of economic momentum. Current monetary trends are judged here to remain consistent with respectable economic expansion, while the PBoC has started to reverse recent policy tightening, which may prevent a further slowdown.

Annual growth of real GDP was 6.9% in the second quarter, unchanged from the first quarter and above the consensus forecast of 6.8%. Nominal GDP growth fell from 11.8% to 11.1%, reflecting a slowdown in the price deflator – see first chart.

The decline in nominal expansion is consistent with an earlier fall in annual narrow money growth, as measured by “true” M1*, from a peak in August 2016. This eased further to 13.9% in June but is much stronger than in 2014 / early 2015, when the economy was at risk of serious weakness / deflation – second chart.

Similarly, broad money growth, as measured by M2 excluding financial sector deposits**, fell to 10.3% in June but has retraced less than half of its rise between mid-2015 and late 2016 – third chart.

The transmission of slower money expansion to prices rather than activity is highlighted by producer price / industrial output data. Six-month PPI inflation eased from 5.8% in February to 0.7% in June, while six-month industrial output growth rose to 4.7% in June, a 42-month high – fourth chart.

A further monetary slowdown would raise the risk of economic damage but easing inflation and currency stability have allowed the PBoC to start reversing first-half policy tightening. Three-month SHIBOR has fallen back to its April level, although seasonal factors may also have played a role – fifth chart.

A constructive economic view will be maintained here barring a further decline in money growth. External risks may be more significant – a change in US trade policy and / or a strong rebound US economic growth later in 2017, resulting in upward pressure on US rates / the dollar and a reacceleration of Chinese capital outflows.

*True M1 = currency in circulation plus corporate / household demand deposits. The official M1 measure includes only corporate deposits.
**Financial sector deposits are volatile and contain little information about future spending on goods and services. Such deposits surged in 2014-15 but have stagnated in 2016-17, i.e. they gave a significant boost to M2 growth in 2014-15 but are now exerting a drag.

US ISM strength: signal or "head fake"?

Posted on Thursday, July 13, 2017 at 03:17PM by Registered CommenterSimon Ward | CommentsPost a Comment

A rise in the US ISM manufacturing purchasing managers’ index to a 34-month high in June, reported last week, presents a challenge to the view here that global economic momentum peaked in spring 2017 and will moderate into the fourth quarter. The ISM PMI is widely regarded as a reliable gauge of global as well US industrial activity; indeed, it exhibits a slightly higher correlation with global than US industrial output growth*.

A provisional judgement is that the ISM surge is a reflection of earlier economic strength and will be swiftly reversed. This is supported by three observations.

First, the forward-looking new orders component of the PMI, while rising sharply in June, remained below its level in February / March.

Secondly, the ISM surge is at odds with the Conference Board CEO confidence survey for the second quarter, also released last week, which reported weaker business expectations among manufacturers. The CEO expectations measure usually aligns with the trend in ISM new orders – see first chart.

Thirdly, the ISM result also contrasts with a fall in the IBES US equity analysts’ earnings revisions ratio in June, to an 11-month low. A rise in the revisions ratio in May had suggested that ISM new orders would rebound in June – second chart.

As previously discussed, the global slowdown is expected to be modest and temporary, with money trends now signalling economic reacceleration in late 2017. Near-term negative economic surprises may focus on Euroland, partly reflecting consensus over-optimism.

*Contemporaneous correlation with six-month industrial output growth over 1996-2016: global (i.e. G7 plus E7) +0.77, US +0.71.

UK labour market strength adds to pressure on MPC

Posted on Wednesday, July 12, 2017 at 12:37PM by Registered CommenterSimon Ward | CommentsPost a Comment

The UK labour market tightened further last quarter, consistent with the view here that the economy has retained momentum and strengthening the case for a “pre-emptive” rise in interest rates, despite continued subdued pay growth.

The unemployment rate fell to 4.5% over March-May, below the MPC’s forecast of 4.7% for the second quarter in the May Inflation Report and the lowest since 1975. The single-month estimate for May was 4.4%.

The unemployment rate understated labour market slack earlier in the upswing, because there were unusually large numbers of people either working part-time involuntarily or not actively seeking employment, despite wanting a job. This “hidden” margin has eroded rapidly since 2014. A broader measure* of labour underutilisation (i.e. a UK equivalent of the US U-6 rate) fell further to 12.9% over March-May, close to a 2005 low of 12.5% in the last economic upswing – see first chart. The gap between the underutilisation and unemployment rates is the smallest since 2008.

Annual growth of average weekly earnings, including bonuses, weakened further to 1.8% over March-May, the lowest since 2014. Regular earnings growth, however, ticked up to 2.0%. Private-sector regular growth was 2.2% over March-May and 2.4% in May alone, a five-month high.

While overall pay trends remain subdued, the MPC’s assessment will also take into account recent weaker-than-expected productivity performance, faster growth of non-wage labour costs and a possible lifting of the 1% cap on public-sector pay increases.

Annual growth in aggregate weekly earnings (i.e. average earnings multiplied by the number of employees) was unchanged at 3.1% over March-May, supported by a further rise in employment expansion to 1.3%, a 10-month high – second chart. Aggregate earnings, therefore, are currently still just outpacing consumer prices – a contrast with the last inflation upsurge over 2009-11, when earnings lagged significantly.

*Total unemployed plus number working part-time because could not find full-time job plus number inactive but wanting a job, expressed as % of labour force plus number inactive but wanting a job.