US loan officer survey signalling credit / economic weakness

Posted on Thursday, February 7, 2019 at 01:01PM by Registered CommenterSimon Ward | CommentsPost a Comment

The Fed's January senior loan officer survey provides further evidence of a deterioration in US economic prospects, signalling a tightening of loan supply and – more significantly – markedly weak credit demand.

The net percentage of banks tightening lending standards rose across all four major loan categories in the latest three months. An unweighted average of these balances turned positive, reaching the highest level since May 2017 – see first chart.

An average of the balances reporting stronger credit demand, meanwhile, moved deeper into negative territory, reflecting sharply weaker responses for residential mortgages and consumer loans – second chart.

The standards average rose above 20 before the last two recessions, while the demand average fell below -20. The standards measure remains well below the critical level but the demand measure now stands at -18 – third chart.

The January survey included special questions about banks’ outlook for 2019, assuming economic growth in line with the consensus. The responses suggest a further rise in the standards average to 11, with the demand average falling to -19. Banks are expecting additional demand weakness and tightening of standards for C&I and commercial real estate loans but a recovery in housing credit demand, probably reflecting the fall in mortgage rates at end-2018.

The current weakness of the credit demand average suggests that first-half GDP growth will undershoot the consensus forecast – fourth chart. A growth shortfall would probably result in a further ratcheting up of lending standards.

Credit demand indicators also weakened notably in the latest ECB and Bank of England lending surveys, discussed previously here and here.

Global money trends still downbeat

Posted on Tuesday, February 5, 2019 at 10:42AM by Registered CommenterSimon Ward | CommentsPost a Comment

Additional monetary data released last week confirm that global six-month real narrow money growth ticked higher in November / December. Growth, however, remains below its range over 2009-17 – a further sustained increase is needed to warrant a shift away from economic pessimism. January global manufacturing PMI results, meanwhile, are consistent with the forecast here of a joint downturn in the stockbuilding and business investment cycles.

Global (i.e. G7 plus E7) real money growth may have bottomed in October, suggesting that six-month industrial output momentum will slide further to a low around July, allowing for a typical nine-month lead.

Two-thirds of the recovery in global real money growth in November / December reflected a slowdown in inflation, due to weakness in oil and other commodity prices. Nominal money trends have yet to show much improvement – first chart.

The inflation boost could fade towards mid-year, assuming that commodity prices now stabilise – second chart. With economic weakness expected to intensify, however, a further decline in prices is plausible.

The uptick in global real money growth reflects G7 developments, with no revival in the E7 – third chart. The G7 rise has been driven by the US and, to a lesser extent, Euroland – fourth chart.

Stronger US money growth at year-end may prove temporary. Although the Fed capitulated last week, QT is likely to continue at least through mid-year, implying a further contraction in the monetary base (ignoring possible short-term volatility due to changes in the Treasury’s balance at the Fed) – fifth chart.

The expectation here remains that the current global economic downswing will be more severe than the slowdowns in 2011-12 and 2015-16. Global real money trends are weaker now, while cycle analysis suggests that business investment will exert a larger negative influence, adding to a drag from stockbuilding.

Global manufacturing PMI results are moving in line with the forecast. The new orders index fell below the 2016 low in January, with weakness led by investment goods demand – sixth chart.

The survey, meanwhile, confirms a downswing in the stockbuilding cycle: the annual change in the sum of the inventory indices for finished goods and purchased inputs turned significantly negative in January – seventh chart.

UK money trends: continued weakness

Posted on Thursday, January 31, 2019 at 10:41AM by Registered CommenterSimon Ward | CommentsPost a Comment

UK money trends, while not deteriorating further, continue to suggest a weak economic outlook. GDP growth may fall below 1% this year even if a no-deal Brexit is avoided.

Six-month growth rates of real narrow and broad money (non-financial M1 / M4) were little changed in December and remain low by historical and international standards – see first chart.

Real money growth, as in Euroland, has been supported by a fall in inflation. In addition, Brexit and other risks may have boosted the precautionary demand for money, in which case current money growth rates may overstate near-term prospects for spending on goods and services.

Consistent with the latter story, retail investors sold mutual funds in the fourth quarter of 2018 for the first time since the EU referendum quarter in 2016 (and on a larger scale than then)*. Bank of England commentary, meanwhile, notes an above-average rise in household M4 holdings in December, driven by deposits in interest-bearing instant access savings accounts. A savings measure combining M4 holdings, mutual funds, National Savings and foreign currency deposits (“non-financial M4++”) is growing more weakly than the money aggregates – second chart.

Broad money trends have been supported from the credit side by steady expansion of bank and building society lending to the private sector. The latest Bank of England credit conditions survey, however, suggests a coming lending slowdown – third chart.

The OECD’s UK composite leading indicator continues to give a gloomy message for economic prospects, falling further in December – fourth chart**. The indicator is designed to predict the direction of GDP relative to trend, i.e. a decline signals below-trend growth, with trend currently estimated at 2.0% per annum. Four of the six components exerted a negative influence in December – consumer confidence, local share prices, expected services demand and interest rates***.

The above developments argue for the Monetary Policy Committee to shift to an easing bias at its upcoming meeting, although such a move appears unlikely.

*Source: Investment Association.
**Estimate based on data for five of six components. OECD data released on 11 February.
 ***The other components are car sales and expected manufacturing output.

Euroland money trends: false positive?

Posted on Tuesday, January 29, 2019 at 10:09AM by Registered CommenterSimon Ward | CommentsPost a Comment

Recent Euroland money / credit news has been a mixed bag. The assessment here is that economic momentum is likely to remain weak but a region-wide recession will be avoided barring an external shock.

December money numbers released yesterday were, on the face of it, positive. Six-month growth rates of real narrow and broad money (i.e. non-financial M1 and non-financial M3*) rose notably, in the latter case to an 18-month high – see first chart. Allowing for a typical nine-month lead, the suggestion is that GDP growth will rebound in the second half of 2019.

There are, however, grounds for caution. Stronger real narrow money growth has been driven by a slowdown in inflation, reflecting pass-through of weaker energy and food commodity prices, with nominal money trends stable – second chart. Inflation is likely to recover unless commodity prices weaken further, so real money growth could fall back.

The stronger performance of broad money, which has accelerated in nominal as well as real terms, could be argued to warrant optimism. Narrow money, however, has outperformed broad money as a leading indicator historically. Real broad money growth rose in 2010 and 2015 without a corresponding pick-up in narrow money; the economy subsequently slowed – first chart.

The ratio of narrow to broad money, indeed, has itself been a reasonable leading indicator of activity historically; this ratio continues to slow – third chart.

A further reason for caution is that narrow money trends may be starting to diverge across economies. Italian real non-financial overnight deposits contracted in the six months to December – fourth chart. A core / periphery divergence opened up before the 2009-10 and 2011-12 recessions. Euroland-wide GDP reacceleration is unlikely if the Italian economy is moving into recession.

The ECB's fourth-quarter bank lending survey released last week, meanwhile, indicated less favourable expected trends in credit supply and demand – fifth and sixth charts. A slowdown in private sector lending could dampen broad money growth.

An interesting question for monetary anoraks is why broad money growth has picked up despite slowing QE. The counterparts analysis of the headline M3 measure shows that a fall in the government contribution to money growth, which incorporates the QE effect, has been more than offset by a shift from contraction to expansion in the banking system’s net external assets – seventh chart.

The interpretation here is that QE boosted domestic credit expansion but had little impact on broad money because “excess” liquidity was exported through the non-bank capital account of the balance of payments – the contraction of banks’ net external assets was the mirror-image of this capital outflow. With QE slowing, the outflow fell in the second half of 2018 and was smaller than the current account surplus, resulting in banks’ external position contributing positively to monetary growth. The stronger “basic” balance of payments position, i.e. current account plus non-bank capital account, could support the euro – eighth chart.

*Money holdings of financial institutions are excluded because they are volatile and unlikely to be relevant for assessing near-term prospects for spending on goods and services.

2016 replay?

Posted on Thursday, January 24, 2019 at 12:04PM by Registered CommenterSimon Ward | CommentsPost a Comment

Claims are being made that current economic / market conditions resemble those in early 2016.

The MSCI All-Country World Index (ACWI) fell by 20.2% in US dollar terms between May 2015 and February 2016 as the global economy slowed significantly, with the manufacturing PMI dropping to 50.0. Activity and equities, however, rebounded strongly over the remainder of 2016 as policy stimulus boosted the Chinese economy and the Fed paused rate hikes for 12 months.

The ACWI index fell by a slightly larger 20.7% from a January 2018 high to the Christmas low, while the manufacturing PMI weakened to 51.5 in December, with early flash results suggesting a further decline this month. Chinese policy-makers are easing again and markets are discounting only a 15% chance of a Fed rate rise this year, according to the CME FedWatch tool (as of yesterday).

Commentaries here were positive about economic / market prospects in the first half of 2016 but current conditions differ in two important respects. First, global monetary trends are much weaker. Six-month growth of G7 plus E7 real narrow money bottomed in August 2015 and was moving up to a double-digit annualised pace as the equity market rally started in early 2016. Real money growth may have bottomed in October 2018 but a significant recovery has yet to unfold – first chart.

Secondly, the G7 stockbuilding or inventory cycle was bottoming out in early 2016 but – on the assessment here – is currently in the early stages of a downswing, which may extend into the second half of 2019.

A key cycle gauge is the annual change in G7 stockbuilding expressed as a percentage of GDP. This was still moving higher in the third quarter of 2018, the most recent data point, consistent with the cycle approaching a peak. It was, by contrast, significantly negative in the first quarter of 2016, having topped a year earlier – second chart.

Business surveys provide a cross-check of the national accounts stockbuilding data and are more timely. As the chart shows, the annual change in a G7 survey-based indicator remained positive in December, supporting the assessment that the bulk of the cycle downswing lies ahead.

If the recent recovery in global real narrow money growth were to be sustained during the first half of 2019, and assuming that the current stockbuilding cycle is of average length (3.5 years), conditions could resemble those in early 2016 sometime during the second half of the year. A sustained monetary pick-up probably requires, at a minimum, the Fed to suspend “quantitative tightening”. Markets may have to weaken further to prompt such a shift.