Monetary trends and leading indicators have signalled respectable global growth through late 2013 – see previous post. The measure of global real money supply expansion tracked here, however, slowed significantly in June, based on data for countries with a weighting of about 60% in the aggregate. Allowing for the usual half-year lead, this suggests that economic momentum will fade at end-2013.

Specifically, six-month growth in real narrow money in the G7 and emerging E7 economies fell from 3.8% (not annualised) in May to an estimated 3.1% in June, which, if confirmed, would be the slowest since July 2012 – see first chart. (Narrow money is more closely related to economic transactions than broad money, which contains a significant savings element; this is confirmed by its superior leading indicator properties.)

The second chart decomposes real money growth into nominal monetary expansion and inflation. A rebound in inflation contributed significantly to the June real money slowdown, although nominal growth also eased.

The inflation drag on real money may intensify. The third chart compares changes in consumer and commodity prices. Commodities have driven the major fluctuations in inflation in recent years. Inflation undershot the relationship in early 2013, giving a temporary lift to real money expansion, but has since reconverged with the “predicted” level. Unless commodity prices show renewed weakness, the suggestion is that inflation will increase further.

The fourth chart shows real money growth for countries that have released June data. The fall in the global measure is mainly due to similar declines in the US and China. Chinese weakness may partly reflect last month’s short-lived money market squeeze; July figures will be awaited before concluding that monetary trends have deteriorated. The final June global reading will depend importantly on Eurozone data scheduled for release on Thursday.

The judgement here is that the monetary information in hand is insufficient to warrant turning more cautious on economic and market prospects. Even with the June decline, real money growth remains comfortably above industrial output expansion, suggesting “excess” liquidity that may support asset prices – see first chart. Relatedly, global fund manager cash balances are elevated, according to the latest Merrill Lynch survey; high cash is usually a signal of near-term market strength rather than weakness.