Thursday’s post discussed a recent divergence between two key forecasting indicators monitored here – global six-month real narrow money expansion and a long-range leading indicator derived from the OECD’s country leading indices. Real money growth was estimated to have risen to a 12-month high in December, suggesting global economic acceleration through the first half of 2013. The long-range leading indicator, by contrast, fell slightly in October and November, hinting at an approaching peak in growth momentum.
Unexpectedly, this disagreement appears to have been resolved by annual revisions to US monetary statistics released late last week. US money measures accelerated strongly in late 2012 but the pick-up was less dramatic than previously estimated. This has affected the profile of global six-month real money expansion, which now falls back in November and is likely to have remained below its October level in December, unless European numbers to be released next week show unexpected strength – see chart.
Real money has led industrial output by an average of six months at recent cyclical turning points, with a maximum of 11 months. For the long-range indicator, the average lead has been five months and the maximum nine. The bias here is to place greater weight on real money. Assuming that the October growth peak is confirmed, and using the average six-month lead, the suggestion is that global industrial output expansion will rise to a peak in April. This would be consistent with the historical lead variation of the long-range indicator, which peaked in September.
Thursday’s post argued that a fall in real money growth would warrant greater caution towards equities and other risk assets. There are, however, some crumbs of comfort for bulls:
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The economic forecast implies much better coincident numbers in early 2013, which may support markets near term (although buoyant investor sentiment suggests that much is discounted).
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Neither real money growth nor the long-range leading indicator has turned down significantly – economic growth could conceivably plateau rather than peak this spring.
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Monetary policy looks set to remain supportive: market weakness associated with growth peaks in 2011 and 2012 occurred after the Fed had suspended QE but its current programme should continue through the first half of 2013 (at least), with the Bank of Japan also injecting liquidity.
This suggests reducing some risk exposure but awaiting additional evidence of less expansionary monetary conditions before shifting to a defensive strategy.