US monetary trends continue to strengthen, supporting hopes of faster economic growth in the first half of 2011.
The monetary pick-up is evident in both narrow and broad measures – see first chart – and began in the summer before QE2 was under serious discussion. By injecting further liquidity, the Fed may again be acting in a destabilising fashion, in a mirror-image of its withdrawal of liquidity in early 2010 when money supply trends were worryingly weak.
The current contrast between real M1 strength in the US and a sharp slowdown in the Eurozone is unusual, last occurring in 1991 – second chart. US equities outperformed continental Europe by 17% in 1991 and 13% in 1992, partly reflecting a stronger dollar. As of the end of November, US stocks are 15% ahead of continental Europe this year (MSCI indices).
