Monday’s post argued that global six-month real money growth was on course to approach (narrow definition) or exceed (broad definition) the highs reached before the post-GFC economic recovery. New information from Euroland and China necessitates a further upgrade to the assessment. Global money growth – whether nominal / real, narrow / broad or six-month / year-on-year – may soon be the highest since the 1970s. This suggests an economic boom when pandemic containment measures are relaxed, with attendant risk of an inflationary upsurge unless the monetary overshoot is corrected early in the recovery phase – implausible given likely pressure on monetary authorities to maintain super-low rates, finance fiscal deficits and promote bank lending.

Euroland narrow and broad money (non-financial M1 / M3) rose by 2.5% and 1.8% respectively between February and March, pushing year-on-year growth rates up to 9.9% and 6.8%, the latter being the highest since 2008 – see first chart. The broad money surge was driven by a 1.5% rise in (adjusted) loans to the private sector – mainly non-financial corporations – supplemented by strong bank buying of government bonds. The latter may partly reflect front-running of ECB purchases, which were still stepping up and had a smaller monetary impact.

Six-month real narrow money growth matched a high reached in 2015, with the divergence with the manufacturing PMI comparable with early 2009 – second chart.

The money / lending pick-up was particularly strong in France, suggesting that the policy / banking sector response to the crisis has been more effective than elsewhere: M1 deposits of French non-financial corporations rose by €49 billion or 9.1% in March alone – third chart.

The good news in China was in the form of a sharp rise to a record level in the loan approvals index of the PBoC’s quarterly survey of bankers: this index leads credit and money trends – fourth chart.

The US, China and Japan, among others, have released March monetary data, with Euroland and UK numbers due this week. Global six-month real money growth, on both narrow and broad definitions, is estimated to have risen sharply. The first chart also contains April forecasts, which take into account US monetary data through 13 April while assuming 1) an oil-driven 1 pp fall in global six-month consumer price momentum and 2) unchanged nominal money growth rates outside the US. Real money growth is projected to approach (narrow definition) or exceed (broad definition) the post-GFC high. Assumption 2) suggests that forecast risk lies to the upside.

Monetary trends are strengthening across countries but the US has played a dominant role in the global pick-up. 52-week growth of M1 (nominal) and M2+ (close to the old M3 definition) rose to 24.8% and 18.4% respectively in the latest week, representing records in weekly data extending back to the early 1980s – second chart. Based on earlier monthly data, annual narrow and broad money growth is the fastest since World War Two.

Chinese money growth picked up further in March, supporting expectations of a strong economic bounceback during H2 2020.

As always, narrow and broad money trends are best assessed by focusing on true M1 and non-financial M2 respectively. The headline M1 measure is deficient because it excludes household demand deposits, while M2 can be distorted by large swings in money holdings of financial institutions. The additional details needed to calculate March values of the preferred measures were released today.

Six-month growth of true M1 rose to 4.4% in March, or 8.9% annualised, the fastest since 2017 – see first chart. Non-financial M2 growth increased to 11.2% annualised. Monetary acceleration has been driven by a pick-up in credit expansion, with the monthly flow of social financing reaching a record in yuan value terms last month.

Real money growth has been further boosted by a fall in six-month consumer price inflation, with a further significant decline likely as food prices normalise and the collapse in the oil price feeds through – second chart.

The sectoral breakdown shows that narrow / broad money acceleration reflects a strong recovery in deposit growth of non-financial enterprises, with household deposit growth stable at a normal level by historical standards – third chart. This is encouraging, indicating that policy initiatives to support firms are working, in turn suggesting reduced risk of failures / permanent job losses and improving prospects for business spending.

The last quarterly commentary expressed a cautious view on the outlook for the global economy and risk markets, on the grounds that monetary trends remained weak and did not support early recovery hopes. Market falls in Q1, of course, mainly reflected the coronavirus crisis – the monetary analysis was a “lucky general” on this occasion. The economic policy response to the health shock has already been reflected in a strong pick-up in money growth, suggesting a V-shaped economic rebound when pandemic containment measures are relaxed. The crisis, indeed, may prove to be the catalyst for a sustained period of monetary strength, thereby laying the foundation for a secular upswing in inflation. Broad money trends will be key for assessing this prospect.

The forecasting approach followed here relies on the empirical rule that swings in real (inflation-adjusted) narrow money lead swings in economic activity, usually by between six and 12 months. Six-month growth of “global” real narrow money (i.e. in the G7 economies and seven large emerging economies) fell from 2.6% (not annualised) in September 2019 to 1.7% in January 2020, signalling deteriorating economic prospects as the coronavirus shock arrived – see first chart. The assessment last quarter was that a rise above 3% was needed to signal an economic recovery.

The initial market / policy response to the crisis was reflected in a recovery in six-month real narrow money growth to 2.4% in February but a much bigger rise, to 4% plus, is expected to have occurred in March. US M1 and M2 grew at record rates in the five weeks to 30 March as the Fed expanded its balance sheet by 40% and corporations drew down commercial bank credit lines. Chinese March numbers were also significantly stronger while global real money growth is being further boosted by a sharp fall in consumer price momentum due to the collapse in the oil price.

Narrow money outperforms broader measures as a leading indicator of economic activity but broad money trends are more important for assessing medium-term inflation prospects. Narrow money velocity is more variable than that of broad money over the medium term, resulting in a weaker relationship with nominal GDP and inflation trends. The average level of global narrow money growth has been high by historical standards since the GFC but a faster-than-average fall in velocity has resulted in modest nominal GDP growth and inflation. Broad money growth has been lower and a better guide to inflation quiescence, as illustrated by the second chart (which uses G7-only data because of its much longer history).

Japanese experience provides further evidence of the greater importance of broad money trends for medium-term inflation performance. Annual narrow money growth averaged 6.0% over 1995-2019 but broad money growth of 2.1% better reflected secular nominal GDP weakness and price deflation. By contrast, both measures grew strongly when Japan suffered bouts of severe inflation from the 1950s through the late 1980s.

The second chart shows that G7-only narrow money growth had rebounded before the coronavirus shock – the continued sluggishness of the global real measure tracked here reflected weakness in China and a pick-up in inflation in late 2019 / early 2020. More significantly, broad money growth had also strengthened, reaching its highest level since the GFC. This suggests that the medium-term inflation outlook was shifting before recent policy actions.

Global narrow money growth is expected to surge as a result of these actions but a sustained acceleration in broad money is also now plausible. While major central banks have had less scope to cut interest rates than during the GFC, their QE response has been much larger and faster – third chart. These QE programmes represent – whether or not central bankers care to admit it – monetary financing of fiscal deficits that may rise to 10% of GDP or more as a result of relief spending and recession, probably remaining wide well beyond the crisis.

Policy-makers are, in addition, promoting an expansion of commercial bank lending to support economic activity via a combination of relaxation of capital requirements, loan guarantees, cheap funding schemes and “moral suasion” verging on compulsion.  Changes to rules globally have released capital of $500 billion supporting potential lending of $5 trillion, according to the Financial Times – $5 trillion amounts to 7% of the global broad money measure tracked here. The weak response of broad money to policy easing during the GFC partly reflected regulatory pressure on banks to contract their balance sheets to boost capital ratios. Regulatory policy has switched from brake to accelerator, suggesting a surprisingly large current response.

The Fed’s interventions have dwarfed those by other central banks, resulting in a 71% rise in US bank reserves since the start of the year; the ECB’s actions, for comparison, lifted Eurozone reserves by 18%, with a smaller increase in the UK – both, however, will rise much further. The surge in relative supply of US high-powered money may arrest or reverse a destabilising rise in the US dollar during March, suggesting, among other consequences, a slowdown or cessation of EM capital outflows.

Chinese monetary weakness, as noted earlier, was a significant drag on global money growth in early 2020. Previous commentaries attributed this partly to funding difficulties of smaller regional banks, causing them to restrict credit. PBoC liquidity injections have eased funding conditions – 3-month SHIBOR has fallen by 150 bp since end-2019 – and banks have been directed to expand loan supply. The monthly flow of total social financing in March was a record in yuan value terms, while narrow and broad money measures rose sharply.

Euroland and UK March money numbers, to be released around end-April, will reflect the initial impact of new QE programmes amounting to 6% and 9% of GDP respectively and involving record monthly flows – the ECB’s purchases are scheduled to be completed by end-2020 and the Bank of England’s “as soon as is operationally possible”. The Bank of Japan’s policy changes were relatively minor but this should not be taken to imply inaction – the “yield curve control” policy allows for potentially unlimited QE if planned large-scale fiscal stimulus and / or global market trends put upward pressure on intermediate JGB yields.

The suggestion from monetary trends of strong global economic growth in late 2020 / 2021 is supported by cycle analysis. The latter provides a longer-term framework for anticipating rises and falls in economic momentum; monetary analysis narrows down the timing of such shifts. There are three cycles: the 3-5 year stockbuilding or inventory cycle, the 7-11 year business investment cycle and the 15-25 year housing cycle.

Recessions are usually associated with downswings in at least two of the cycles. Strong growth and booms occur when all three are in upswings. Upswings last longer than downswings, typically occupying at least two-thirds of overall cycle length.

Global GDP growth reached a seven-year high in 2017 as the stockbuilding cycle recovered from a 2016 low while the business investment and housing cycles remained in uptrends, having bottomed in 2009. The business investment cycle, however, entered a downswing in 2018, with the stockbuilding cycle following in 2019. The housing upswing, meanwhile, lost momentum in response to rising interest rates in 2018 and as the other cycles exerted a drag.

The last quarterly commentary suggested that stockbuilding cycle had bottomed in late 2019 but the coronavirus shock may have shifted the low to H1 2020. The business investment cycle was expected to bottom in H1 2020; this timing is maintained but the trough level of investment, probably in Q2, will be much lower than previously foreseen. Both cycles, however, are scheduled to be in recovery phases by late 2020 while the housing cycle upswing will be reenergised by interest rate falls in 2019 / early 2020 – housing investment had already started to regain momentum in late 2019.  The stockbuilding cycle, moreover, is not due to peak until late 2021 or, more likely, 2022. The suggestion is that an initial economic recovery as coronavirus-related restrictions are relaxed will develop into a full-scale boom in 2021-22.

Readers have pushed back against the idea that the stockbuilding and business investment cycles will bottom in H1 2020, arguing that financial losses and weak confidence will result in further spending cut-backs in H2. The impact of stockbuilding on GDP, however, depends on its rate of change – a cycle reversal requires only that the decline slows from a likely extreme level in early 2020. As for business investment, companies delay replacement capital spending during the downswing, resulting in a build-up of potential demand that plays an important role in driving an initial recovery.

Sceptics are right to point out that the 2020 recession reflects a supply-side shock and was not foreordained by cycles. The judgement here is that the global economy would have avoided a recession in the absence of the health crisis – real narrow money growth was not sufficiently weak and there have been historical examples of joint stockbuilding / business investment cycle downswings resulting in slowdowns rather than contractions, e.g. the US near-recession of 1967. The cycle backdrop, however, may have influenced the health policy response – the long business investment cycle upswing and an associated fall in unemployment to multi-decade lows may have fed into government overconfidence about economic resilience and consequent willingness to impose costly shutdowns.

The economic scenario described above suggests that investors should use any set-backs caused by near-term negative news on activity / profits or pandemic developments to increase exposure to cyclical assets and inflation hedges. Previous commentaries noted that the 18-month periods following lows in the stockbuilding cycle have been associated, on average, with strong equity market performance, outperformance of cyclical sectors and emerging markets, a fall in the US dollar, significant price rises for precious metals and commodities generally, rising “safe” government bond yields and weaker relative performance of US equities and the quality factor compared with the cycle downswing phase.

The geographical pattern of equity markets returns is also distinctive in these periods, reflecting the sensitivities of individual economies to global activity and differences in sectoral market makeup. Of the MSCI developed markets, the performance improvement between the 18-month periods before and after stockbuilding cycle lows was largest in Singapore, Hong Kong, Sweden, Canada, Spain and Australia, while Swiss, US and UK performance weakened – see table.

The following summary points are taken from the regular start-of-week update circulated to investment teams.

• Record surge in US M1 and M2 over last four weeks
• Global six-month real narrow money growth = 2.4% in February, likely to rise to 4%+ in March
• Ignore economic stats – we know they’ll be awful + there are huge measurement issues + they won’t give any leading indicator signal for an activity bottom and recovery, which depend on an easing of lockdown restrictions
• The lockdowns are working – daily new cases peaked over a week ago in most European countries
• The counterpart of a record monetary surge is a record fast rise in unemployment - but this suggests an early peak and markets anticipate turning points
• Fed liquidity injections have dwarfed those elsewhere and may succeed in reversing USD strength
• Chinese manufacturing PMI new orders rebounded to c.50 in March, two months after lockdown – why shouldn’t global new orders do the same in May / June?

Global six-month real narrow money growth bounced back in February but remained below the 3% level cited in previous posts as a necessary condition for adopting an economic recovery forecast. This level is judged likely to be exceeded in March, partly reflecting a surge in US money data. Global annual real narrow money growth, meanwhile, may rise above 5.5% in March, which would result in the conservative equities / cash switching rule followed here recommending a move back into markets at end-April.

The first chart shows six-month rates of change of industrial output and real narrow money in the G7 economies and seven large emerging economies. The latest data points are for February, with the output series partly estimated. The February output slump was driven by China. Shutdowns elsewhere will be reflected in March data and are likely to result in the six-month output decline matching or exceeding the GFC peak of 12.6% (not annualised) in January 2009.

Six-month real narrow money growth rebounded from 1.7% in January to 2.4% in February. The fall from a peak of 2.6% in September 2019 was the main reason for the view here at the start of 2020 that economic recovery hopes were premature. Monetary trends, however, were not signalling a recession – real money growth was well above levels reached before prior contractions in output.

Global economic upswings starting in 2001, 2003, 2009, 2012 and 2016 were preceded by a rise in six-month real narrow money growth above 3%. This level is likely to be reached in March. Weekly US data suggest that six-month nominal narrow money growth will rise by about 2 percentage points (pp), which would add 0.6 pp to the global measure – second chart. Falls in oil and other commodity prices, meanwhile, are likely to cut six-month consumer price inflation by over 1 pp, with the impact spread over March / April.

A conservative equities / cash switching rule discussed in previous posts recommends equities only if 1) the six-month rate of change of global real narrow money exceeds that of industrial output and 2) the annual rate of change of real money exceeds a long-term moving average, currently at 5.5%. The latter condition remains unfulfilled, with annual growth at 4.6% in February. A rise above 5.5% is possible in March and would trigger a switch into equities at end-April – the rule allows for data publication lags. For background, the rule has recommended cash since end-February 2018 and would have outperformed a buy and hold strategy by 3.6 pp per annum on average over 1970-2019.