The fall in global six-month real narrow money expansion to a low in April / May argues that economic momentum will continue to slow into October / November. Markets have been buoyed recently by some better economic data but the odds are that near-term news will disappoint.
An immediate risk is further weakness in August manufacturing purchasing managers’ surveys – “flash” readings for the Eurozone, China and the US are released tomorrow. Such weakness is suggested by both a slide in the world equity earnings revisions ratio to a three-year low and last month’s downbeat Federation of Korean Industries survey, which often leads – see first and second charts.
A recovery in global real money expansion since the spring has underpinned the rally in equities but markets have arguably run ahead of economic “fundamentals” while commodity price strength risks derailing the real money pick-up – see Monday’s post. A post in May noted that US equities were following a similar pattern in 2012 to 1987, with this “template” suggesting a strong summer rally to an August peak. The similarity has persisted – third chart – and now argues for caution.
The expectation here is that any near-term market weakness will, in contrast to 1987, be limited and temporary. A key difference is the monetary backdrop – global real money growth was below industrial output expansion and falling ahead of the 1987 crash but is now above and rising. Investor sentiment and positioning, meanwhile, had reached a bullish extreme in August 1987 but remain conservative currently – fourth chart