As expected, lower growth in the inflation-adjusted global money supply since last autumn has resulted in a loss of economic momentum and a correction in equities. The economic slowdown, however, seems likely to be contained, suggesting that equities will trade in a range rather than weaken significantly:
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Six-month growth in G7 real narrow money remains positive and, based on US and Japanese data, may have picked up in April, hinting at a rebound in economic momentum later in 2011 – see first chart.
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Commodity prices are coming off the boil as emerging-world industrial expansion slows, promising real income relief for G7 consumers. Current oil prices imply a significant fall in retail petrol costs – second chart.
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A rally in bonds is also offering support to the economy, with lower yields feeding through to mortgage rates – UK five-year fixed rates have fallen back below 4% (75% LTV).
Downside economic risks focus on Euroland and China / emerging markets, where monetary trends remain worrying – see Monday's post and third chart.
Narrow money, M1, is usually the best monetary leading indicator of the economy but broader measures provide corroborating information. In the US, “money of zero maturity” (MZM) – comprising instant-access forms of money* – slowed around year-end but has revived more recently, rising at an 11% annualised pace in the latest 13 weeks. As well as suggesting economic reacceleration, the MZM surge is flashing a warning signal for Treasuries – fourth chart.
* MZM = M1 + savings deposits + money funds.
