Leading indicators still softening

Posted on Wednesday, June 6, 2018 at 01:28PM by Registered CommenterSimon Ward | CommentsPost a Comment

The OECD’s G7 composite leading indicator continues to soften, supporting the forecast here, based on monetary trends, of a global economic slowdown.

The OECD will publish an April update of its leading indicators on 13 June but most of the component information is already available, allowing an independent calculation.

The first chart shows the ratio of G7 GDP to the OECD’s estimate of trend together with the "normalised" (i.e. trend-adjusted) leading indicator – both official and independently-calculated. The indicator is estimated to have declined again in April, increasing the likelihood that the recent peak marked a significant turning point. The indicator, that is, has switched from signalling above-trend economic expansion in 2017 to below-trend now.

The estimated April decline in the indicator was again driven by European countries and Japan but the rise in the US indicator slowed, suggesting that it is approaching a turning point – second chart.

The components of the US indicator are: housing starts, durable goods orders, consumer sentiment, the ISM manufacturing purchasing managers’ index, average weekly hours worked in manufacturing, share prices (NYSE composite) and the slope of the yield curve (10-year Treasury yield minus effective fed funds rate). All components enter as deviations from their estimated trends. The recent slowdown in the indicator reflects negative contributions from the survey measures (consumer sentiment, ISM PMI), share prices and housing starts; its continued rise has been driven by the “hard” manufacturing components – durable goods orders and average weekly hours.
The OECD country indicators do not, in most cases, include a monetary aggregate, so they provide an independent, though less timely, cross-check of monetary signals. Another drawback relative to the monetary data is that the indicators can sometimes be revised significantly, mainly reflecting changes to the estimated trends in the components as new information is incorporated. 

Will global money trends recover?

Posted on Friday, June 1, 2018 at 12:43PM by Registered CommenterSimon Ward | CommentsPost a Comment

Near-complete April monetary statistics confirm an earlier indication that six-month growth of real narrow money in the G7 economies and seven large emerging economies was little changed from March and above the nine-year low reached in February. The earlier monetary slowdown signals a likely loss of global economic momentum through late 2018 but prospects are no longer deteriorating. Real broad money growth has also recovered slightly since February – see first chart.

Will monetary trends revive more significantly into mid-year, implying a brighter economic outlook for end-2018 and early 2019? Such a scenario is possible but does not currently seem likely.

The recovery in G7 plus E7 six-month real money growth since February has been driven by a slower rate of increase of consumer prices (seasonally adjusted) – nominal money growth was unchanged between February and April. Recent firmer commodity prices suggest that six-month inflation will stabilise or partially retrace the recent decline.

The sideways move in G7 plus E7 real narrow money growth between March and April conceals a decline in G7 expansion offset by a pick-up in the E7 – second chart. Real money growth rose in China, Brazil, India, Russia and Taiwan. Recent capital outflows from emerging markets and an associated tightening of domestic financial conditions, however, could be reflected in weaker monetary trends in some countries.

Previous posts discussed the possibility that US money trends would rebound in lagged response to tax cuts, mirroring experience after previous large reductions. No pick-up is yet evident: six-month narrow money growth fell back in April and is unlikely to have increased in May – the third chart includes a May estimate based on weekly data through 21 May.

US and G7 money growth is probably being dragged down by slowing QE, with the 12-month running total of purchases of government and agency securities by the Fed, Bank of Japan, ECB and Bank of England already down by almost a half from its March 2017 peak and projected to continue to decline rapidly – fourth chart.

The six-month rate of change of real narrow money is lower than a year ago in almost all developed economies (exception: New Zealand) and has been negative for several months in Australia, where the housing market is slowing sharply in response to a belated regulatory clampdown on loose lending standards – fifth and sixth charts.

A recovery in money growth is likely in China, reflecting a recent policy shift towards modest easing and an associated fall in market rates. The timing and extent of any rebound, however, are uncertain: the two-year government yield is only 30 basis points lower than a year ago while previous significant reversals higher in narrow money growth have been preceded by a decline of at least one percentage point – seventh chart.

Euroland money trends subdued before Italian crisis

Posted on Tuesday, May 29, 2018 at 11:45AM by Registered CommenterSimon Ward | CommentsPost a Comment

Euroland monetary trends are signalling a further loss of economic momentum but – based on April data – do not suggest outright weakness. Italian political turmoil, of course, threatens to trigger capital flight and a general rise in risk aversion, developments that would probably be associated with additional monetary deterioration.

Softer economic expansion since the start of the year was predicted by a significant fall in six-month growth of real narrow and broad money during the second half of 2017. Last week’s flash purchasing managers’ surveys for May were again weaker than the consensus expected, providing further evidence that slower economic growth represents a change of trend rather than a temporary blip due one-off factors such as disruptive weather.

Six-month growth of real narrow money, as measured by non-financial M1 deflated by consumer prices, eased further in April, reaching its lowest level since 2013. Growth of the broader non-financial M3 measure was unchanged from its March level, which was the lowest since 2014 – see first chart.

Optimists point out that the purchasing managers’ indices remain at a level historically consistent with solid economic growth. The lagged relationship with real money growth, however, suggests that the surveys will weaken further – second chart.

Current monetary trends are still consistent with economic expansion. Six-month real non-financial M1 growth of 2.2% in April, or 4.4% annualised, is only modestly below its average over 2005-17, of 2.7% or 5.4% annualised. Real narrow money contracted before the 2008-09 and 2011-12 recessions – first chart.

Those recessions were also preceded by a divergence of monetary trends across countries. Six-month growth of real non-financial M1 deposits is currently similar in the “big four” economies – third chart. Growth in France and Spain, however, has fallen significantly since mid-2017 – the risk of negative data surprises may be greater in those two economies.

Italian real narrow money trends through April suggest that the economy was on course for continued moderate economic growth before the current political crisis. Recent developments may be contrasted with 2010-11, when monetary / economic weakness drove the rise in Italian government yield spreads, which contributed to a further deterioration in monetary trends – fourth chart. The source of the pressure is now political rather than monetary / economic, although negative feedback is again likely.

Is UK labour market resilience about to crumble?

Posted on Tuesday, May 22, 2018 at 09:09AM by Registered CommenterSimon Ward | CommentsPost a Comment

Last week’s UK labour market report was superficially strong but cracks are appearing under the surface. A stalling of employment and a rise in unemployment would probably put the MPC’s rate-hiking plans on indefinite hold.

We are on the alert for a deterioration in labour market data in view of recent weak corporate money trends – six-month growth of real M1 holdings of private non-financial corporations (PNFCs) fell to zero in March. This may reflect downward pressure on profits and is likely to signal weaker prospects for business investment and hiring. Similar falls in real corporate money growth historically have usually been followed by a slowdown or outright fall in jobs – see first chart.

The labour force survey measure of employment continued to rise solidly in the latest three months and is up by 1.2% from a year ago. Total hours worked, however, increased by only 0.3% over the same period – second chart. Employment, that is, has been supported by a fall in average weekly hours, which may be an early sign of softening labour demand.

Consistent with this interpretation, the official vacancies series, based on a survey of employers, has fallen for three consecutive months, while online postings on reed.co.uk, the UK’s largest jobs board, remain below a peak reached in June / July 2017 – third chart.

The labour force grew by 0.8% over the last year, close to its average rate of increase since 2005, with a net exodus of foreign nationals offset by domestic population expansion and a further fall in inactivity. A decline in growth is likely as weaker labour demand curbs the outflow from inactivity but this may not fully offset a slowdown in jobs, implying an increase in unemployment.

While the labour force survey unemployment measure fell further in the latest three months, a rise in the claimant count gathered pace – fourth chart. The claimant count has been distorted by the roll-out of universal credit, which has resulted in some people who would not have claimed job-seekers’ allowance (JSA) under the previous system being required to search for work. The green line is an adjusted series based on the assumption that one in two of new universal credit claimants with a requirement to look for work would not have claimed JSA under previous arrangements. This assumption is arbitrary but does not seem unreasonable; the suggestion is that the claimant count would be rising under the old system.

Quarterly data on gross flows into and out of unemployment are consistent with the jobless rate being at or near a low. The fifth chart shows a “steady state” unemployment rate to which the actual rate would converge if inflow and outflow rates were to remain at their levels in the latest quarter, based on the method of Barnichon and Nekarda. The steady state rate sometimes leads the actual rate and may have bottomed in the third quarter of 2017.

Any rise in the unemployment rate would be a shock to the MPC, with the May Inflation Report forecasting a further fall from the current 4.2% to 4.0% in early 2019, based on market interest rate expectations.

Global money trends still downbeat

Posted on Thursday, May 17, 2018 at 11:37AM by Registered CommenterSimon Ward | CommentsPost a Comment

Global monetary trends weakened sharply in late 2017 / early 2018 and have yet to recover convincingly, arguing for maintaining a below-consensus forecast for economic growth.

Six-month growth of real narrow money in the G7 economies and seven large emerging economies peaked most recently in June 2017, falling to a nine-year low in February 2018 – see first chart. Based on the historical average nine-month lead time, this suggested that six-month industrial output growth would peak around March 2018, with a subsequent slowdown extending well into the second half. Output growth rose to a seven-year high in March but business surveys are signalling a loss of momentum – second chart.

Real narrow money growth recovered modestly in March but appears to have moved sideways in April, based on monetary data covering 60% of the G7 plus E7 aggregate – first chart. March / April growth was beneath the range between September 2008 and November 2017 and lower than industrial output expansion, a condition historically associated with below-average equity market returns.

Of the major economies, the US, China and Japan have released April monetary data, with Euroland and UK numbers due on 29 and 31 May respectively. US real narrow money growth fell back in April, offsetting rises in China and Japan – third chart.

The recovery in global real narrow money growth between February and April reflected a fall in six-month consumer price inflation, with nominal money expansion little changed – fourth chart. Commodity price trends had suggested that inflation would pull back but a further decline is unlikely unless oil prices weaken.

Previous posts discussed the possibility that global narrow money growth would rebound into mid-2018 in response to US tax cuts and easier Chinese monetary policy, a scenario that would imply better economic prospects for end-2018 / early 2019. US narrow money growth strengthened several months after previous large tax cuts were enacted – fifth chart. April monetary numbers were weak relative to this comparison but it is too early to dismiss the historical pattern.

A possible key difference, however, from these prior episodes is that the monetary base has been contracting, with weakness likely to be sustained by the Fed’s balance sheet reduction plan – sixth chart. Monetary policy, in other words, may be acting as a greater counterweight to fiscal stimulus on this occasion, offsetting the tendency for money growth to rise as tax cuts percolate through the economy.

As expected, Chinese monetary policy has shifted towards easing but this has yet to feed through to a significant rebound in money growth

A downbeat view of global economic prospects, therefore, will be maintained here pending a more convincing recovery in real narrow money expansion.

The monetary signal of slowing global economic momentum through late 2018 is supported by the OECD’s composite leading indicators, an update of which was released this week. Six- and one-month growth of a global trend-restored indicator based on the OECD data fell again in March – seventh chart.