“Money of zero maturity” (MZM) comprises currency, checkable deposits, instant-access savings accounts and money market mutual funds. The measure has been surging in recent weeks, with growth now running at over 12% on a year ago and 18% annualised over the last three months.

The pick-up partly reflects the woes of the asset-backed commercial paper market. The volume of ABCP outstanding has fallen by $256 billion over the last nine weeks. The cash withdrawn appears to have flowed mainly into money market mutual funds, included in MZM. As a “flight to safety”, this does not appear entirely logical since – unlike bank deposits – money funds are not guaranteed by the Federal Deposit Insurance Corporation and the funds themselves invest heavily in commercial paper, including ABCP. (Total CP holdings amounted to 27% of money fund assets at mid-year.)

While this ABCP effect could be distorting MZM, the recent pick-up is flashing a warning signal for the Treasury market. As the chart shows, swings in the three-month growth rate tend to lead movements in 10-year Treasury yields.

"Other assets" on the Bank of England’s balance sheet rose by a further £2.3 billion in the week to Wednesday 10th October, bringing the total increase since the run on Northern Rock started to £12.9 billion. This is the best available estimate of the extent of the Bank’s support to the troubled mortgage lender.

The weekly increase has slowed from £2.9 billion in the week to 3rd October and £4.9 billion in the prior week. However, the continuing erosion of Northern Rock’s funding base explains the Government’s decision this week to extend its guarantee to new retail deposits.

The Bank of England’s injection of funds into Northern Rock has contributed to an easing of money market conditions in recent weeks. The banking system's reserves at the Bank rose from £19.8 billion on Wednesday 12th September, just before the run on the mortgage bank, to £29.0 billion on 19th September and £29.2 billion on 26th September before falling back to £26.8 billion on 3rd October and £20.8 billion this week. Three-month interbank interest rates fell from 6.90% to 6.27% over the same period. Northern Rock has used the funds advanced by the Bank at a penalty rate to repay its retail depositors and other creditors. (A small portion will also have been needed to fund mortgage commitments.) Rather than stash cash under the mattress, these customers have mostly redeposited their savings with other banks and building societies, which have thereby enjoyed an infusion of liquidity without having to pay the Bank's penalty rate for emergency borrowing. This Northern Rock liquidity effect helps to explain why banks have spurned the Bank of England's offer to supply them with additional three-month funds based on looser collateral requirements but at an interest rate at least 1% above Bank rate. In effect, Northern Rock's shareholders have paid the penalty demanded by the Bank to supply the banking system as a whole with greater liquidity. More controversially, it could be argued that the current structure of incentives has created another form of "moral hazard": by refusing to lend to Northern Rock, other banks have forced the Bank to supply additional liquidity, which they have been able to access at non-penalty rates.

I am a fan of Trim Tabs, a California-based research firm that compiles and analyses data on equity market flows. Trim Tabs have remained bullish on US stocks partly because of a big pick-up in share buy-backs during the recent correction. This resulted in equity market “float” – the number of shares outstanding – continuing to contract despite a slump in cash takeovers; with supply falling, stock prices were supported. Strong buy-backs also suggested corporate insiders were sanguine about profits and saw value in their shares.

Buy-back announcements often accompany earnings releases so the trend over the forthcoming reporting season should be monitored closely. However, Trim Tabs are now pointing to another potentially bullish development – a revival in cash takeover bids. The aggregate value of new cash deals surged to $11.8 billion last week – the highest since July. Normalising credit markets could help to sustain this pick-up, providing fuel for the next leg up in stocks.

The Pre-Budget Report looks insignificant in macroeconomic terms but may deliver short-term political gains, with measures to gather extra revenues from the private equity industry and non-domiciles used to fund a new low capital gains tax rate of 18% and transferable inheritance tax allowances for couples.

As already leaked, the Treasury has revised down its GDP growth forecast for 2008 from 2.5-3.0% to 2.0-2.5%. This forced the Chancellor to push back projected improvement in the public finances but the current budget still miraculously returns to surplus in 2009-10. Risks remain high though: the forecast depends on an optimistic-looking growth rebound in 2009 as well as adherence to restrictive public spending plans and a further rise in the revenue share of GDP.

The centre-piece of the Report was capital gains tax reform, which is projected to raise £900 million per annum by 2010-11 – the abolition of taper relief enjoyed by private equity firms and other holders of “business assets” more than offsets the cost of lowering the headline rate to 18%. The Chancellor plans to use this cash together with an extra £500 million to be garnered from “non-doms” to fund an effective increase in inheritance tax allowances for couples to £600,000, costed at £1.4 billion by 2010-11.

The capital gains tax changes represent a welcome simplification although there is a risk that some private equity activity will now shift offshore. The main criticism of its Report is its failure to provide a fiscal cushion against unforeseen economic deterioration. With an election delayed until 2009 or 2010, there was a case for tightening fiscal policy now to allow more room for manoeuvre nearer polling day. Politically astute? Time will tell.

The consensus view is that downside economic risks are greater in the US than the Eurozone. I am sceptical.

Monetary policy should be a much bigger drag in Euroland. After last month's cut, the Fed funds target rate is unchanged from 18 months ago. The ECB has hiked its repo rate by 150 b.p. over the same period. Credit conditions look at least as restrictive as in the US: according to the latest ECB survey, a net 31% of banks tightened standards on corporate lending in the third quarter – the highest since Q2 2003.

The chart shows the OECD’s leading indicator indices, designed to predict industrial activity about six months ahead. The US index has picked up since the spring, though slipped back recently. By contrast, the Eurozone index has been weakening steadily and now suggests industrial stagnation. Within the region the weakest country indices are Italy and Spain.

If the indices are correct, forecasts of further Fed rate cuts while the ECB stands pat look questionable. Any revision to expectations could hurt the euro.