Markets are overly focused on tomorrow’s US employment report – a coincident economic indicator at best. Two releases next week will be of much greater import.

The first chart below shows the six-month rate of change of global (i.e. G7 plus emerging E7) industrial output together with the two key forecasting measures monitored here – the rate of change of global real narrow money and a longer leading indicator derived from OECD country leading index data.

A post three weeks ago discussed reducing exposure to equities and other risk assets in part because the leading indicator had fallen further in March, suggesting weaker economic news ahead. Subsequent April monetary and inflation data, however, have been favourable, resulting in a rebound in global real narrow money growth to its highest level since January. The forecasting measures, in other words, are giving a conflicting signal about global economic prospects.

An April reading of the leading indicator is available on Monday and will be an important influence on the assessment here. Another fall would warrant continued caution but a stabilisation or recovery would confirm the more positive message from monetary trends, suggesting that current market weakness is another temporary correction providing an opportunity to increase risk asset exposure.

The recent set-back in equities, of course, has been led by Japan. Posts in April – e.g. here – voiced scepticism about the euphoric market reaction to the expanded QE programme, arguing that the boost to liquidity would be modest (because of offsetting JGB sales by banks) and might not filter into the economy.

If QE is gaining traction, narrow money M1 should pick up as households and firms shift liquidity into spendable form. Six-month Japanese real narrow money growth has been stable recently and is lower than in the US and Europe, so does not currently support overweighting Japanese equities – second chart. May monetary data will be released on Tuesday.

Money supply-based optimism about Eurozone and UK economic prospects is supported by manufacturing purchasing managers’ surveys for May released today – the Eurozone and UK new orders indices reached their highest levels since June and March 2011 respectively.

Within the Eurozone, the Italian, Spanish and Greek surveys have recovered notably over the last two months – see chart below from data provider Markit. Further improvement is needed but this is consistent with the forecast that peripheral economies will return to growth in the second half of 2013.

The labour market will lag economic improvement but Eurozone unemployment may be close to stabilising. The net percentage of households expecting unemployment to rise has fallen since December 2012 and is now at a level that signalled a peak in the unemployment rate in 2010.

Current UK unemployment of 7.8% is already down significantly from a peak of 8.4% in late 2011. Labour demand appears to be picking up, judging from a strong May reading of the Reed job index, which measures online vacancies.