Global monetary trends have been giving a reflationary message since early 2016. The US election results appear to have acted as a trigger for sceptical investors to adjust their portfolios in this direction. This adjustment probably has further to run.

Annual growth of global (i.e. G7 plus emerging E7) narrow money bottomed in mid-2015 and has vaulted higher since early 2016, with a September reading of 11.6% the equal highest (with August / September 2011) since 2009. Large movements in narrow money growth lead swings in nominal GDP expansion, which appears to have bottomed in the fourth quarter of 2015 – see first chart. The recent upswing in narrow money growth is the largest since 2008-09.


The positive narrow money signal has been confirmed by an upswing in a non-monetary global leading indicator derived from the OECD’s country leading indicators. Six-month growth of this measure rose further in September, according to data released this week – second chart.


An additional reason for the positive economic view here is an assessment that the three- to five-year US Kitchin stockbuilding cycle is at or close to a trough. Stocks were little changed in the third quarter and their ratio to final sales has fallen significantly – third chart. The upswing out of the last US Kitchin cycle trough in 2012 was associated with strong global equity markets, outperformance of “cyclical” stocks relative to “defensives”, and rising longer-term government bond yields.


The increase in yields in 2013 contributed to underperformance of emerging market assets, reflecting a vicious circle of capital outflows, tighter domestic monetary conditions and economic weakness. The E7 grouping, however, is leading the current growth upswing and narrow money trends are much stronger than in 2013, both in absolute terms and relative to the G7 – fourth chart. Another contrast is that commodity prices were soft in 2013 but are now strengthening, implying an income gain for some emerging economies.


Some commentary has suggested that rising US long-term yields and associated US dollar strength are squeezing global liquidity, threatening economic prospects. A steepening yield curve, however, normally signals an improving economic outlook and is particularly noteworthy when accompanied by strong monetary expansion. The slope of the yield curve is a component of several of the OECD’s country leading indicators, including the US, Japan and Germany. The recent steepening, therefore, may sustain the upswing in the global leading indicator tracked here.

The ratio of the MSCI World cyclical sectors index to the counterpart defensive sectors index has risen by 16% from a low reached in early July after the Brexit referendum, a larger gain than during the last global economic acceleration in 2012-13 – fifth chart. The fall into the July low, however, arguably partly reflected a false assessment of the implications of the UK vote, while the global growth / inflation outlook is judged here to be stronger now than in 2012-13. The cyclical / defensive relative rose by 45% during the 2009-11 economic upswing.