A post in late March suggested that equities and other risk assets faced increasing monetary headwinds:

• A slowdown in G7 real narrow money in late 2010 signalled an imminent loss of economic momentum.

• Six-month growth in G7 real money had fallen below that of industrial output – often a warning signal for equities.

• A surge in bank reserves at central banks seemed to be ending, with a further injection by the Federal Reserve likely to be offset by the Bank of Japan withdrawing liquidity added after the 11 March earthquake and tsunami.

• The US Dow Industrials Index was higher than at the equivalent stage of five out of six prior recoveries that followed a decline of about 50%, suggesting a correction.

The Dow continued higher until late April but the recent set-back has taken it below the level in late March. The correction may have further to run but monetary indicators have improved since the earlier post:

• Six-month G7 real narrow money expansion has revived from a low in February, hinting at a recovery in economic momentum later in 2011 – see Monday's post.

• The real money / output growth gap has turned positive again, partly as a result of Japan-related production weakness.

• Central bank reserves have edged up, reflecting the final tranches of US QE2 and a stabilisation in Japan – see first chart.

The Dow, however, is still 6% above the "six-bear average" of the prior recovery paths, as of yesterday's close – second chart. The average, moreover, falls over the summer, bottoming in late October. While monetary factors are improving, equities may need an extended period of consolidation before embarking on another upward push.