Chinese February money / credit numbers are hopeful, signalling stable monetary conditions despite the coronavirus shock. Policy easing, including state-directed bank lending, is expected to lift money growth significantly by mid 2020, with real growth boosted further by a moderation of food inflation.

Annual growth of the official M1 measure bounced back from zero in January to 4.8% in February, the highest since July 2018 (the January spike down reflected a lunar new year timing effect but was wrongly interpreted by some as a negative signal). M2 growth also firmed, to 8.8%, while growth of total social financing (TSF) was stable at 10.7%.

The preferred money measures here are “true” M1 and non-financial M2, with six-month rather than annual growth rates emphasised. True M1 adds household deposits to the official M1 measure; non-financial M2 strips out deposits of non-bank financial institutions, which are less relevant for assessing economic prospects.

The first chart incorporates February estimates of these measures; the final numbers – usually available within a week of the headline release - are unlikely to change the story. Six-month growth of the money measures, as well as of TSF, appears to have bottomed out in late 2019 / early 2020. Nominal GDP will plunge in Q1 but monetary stability suggests a rapid rebound.

The monetary numbers are consistent with other evidence that the policy response to the coronavirus shock has prevented a follow-on tightening of credit supply. The credit conditions index in the Cheung Kong Graduate School of Business survey of private sector firms was higher in February than December – second chart – while commentary accompanying the manufacturing PMI report noted a positive impact of policy measures to support SMEs.

The six-month change in real true M1 remained negative in February, with the coronavirus shock serving to sustain high food inflation – third chart. An eventual normalisation of food prices will give a big boost to real money growth.

The UK government and central bank have launched massive fiscal and monetary stimulus at a time of near-full employment. This is unlikely to end well.

The package of fiscal and financial measures targeted at mitigating damage from the coronavirus shock is welcome. The necessity of a half-point Bank rate cut and the wisdom of “the largest sustained fiscal loosening since the pre-election Budget of March 1992” are strongly in doubt.

The OBR’s characterisation of Chancellor Sunak’s package does not take into account the additional £12 billion (0.5% of GDP) lobbed in at the last minute as a coronavirus response.

Fiscal / monetary easing is being combined with further large increases in the minimum wage against a backdrop of coming negative supply shocks from tighter immigration controls and Brexit trade frictions. The medium-term consequences could be strongly inflationary.

UK policy-makers would make better decisions if they were attuned to the roughly 18 year housing market cycle, which is due to reach another peak later this decade. Inflation usually embarks on a major upswing in the years preceding peaks.

The post-war pattern has been for Prime Minister / Chancellor duos – usually Tory – to embark on significant policy easing as the cycle starts to accelerate, exacerbating later inflationary problems. Think Heath / Barber and Thatcher / Lawson. Johnson / Sunak fits the pattern perfectly.

Bank of England Governors, for some reason, are rarely credited for their role in the historical boom / bust debacles. Mark Carney will deserve an honourable mention if events play to script.

Monetary trends have been weak but may now strengthen significantly, confirming rising medium-term inflation risks.

The coronavirus shock has resulted in a major and probably unjustified cheapening of inflation hedges. Today’s UK policy moves are likely to be mirrored globally and suggest an emerging buying opportunity for such hedges.

The baseline expectation here remains that the market / policy response to the coronavirus shock – compounded now by an oil supply shock – will result in an early and strong pick-up in global real money growth, setting the stage for a solid rebound in economic activity during H2 2020 and above-trend growth in 2021.

PMI results for February confirm a dramatic weakening of economic activity driven by supply-side disruption. The global manufacturing PMI output index plunged to a recessionary level but supplier delivery times lengthened to an extent typical of boom conditions. Production shutdowns led to a rise in order backlogs despite a sharp drop incoming bookings – see first and second charts.

Economies usually recover swiftly from supply-driven shocks. Japanese industrial output plunged 16.5% in March 2011 following the Tohoku earthquake / tsunami but had recouped 70% of the loss three months later – third chart.

The coronavirus shock has depressed demand as well as supply and markets are fearful of a negative spiral of income losses, further spending cut-backs, credit tightening and layoffs. Policy-makers recognise the risks and are likely to provide cash flow support and incentives for banks to extend credit lines.

Chinese policy actions are already yielding results, judging from the February PMI report: manufacturers’ year-ahead output expectations reached a five-year high, reflecting “proactive macroeconomic policies and … support for small and midsized enterprises”.

The market response to the shock, meanwhile, will, on the view here, deliver significant demand stimulus, with lower risk-free yields and commodity prices offsetting equity market weakness and higher credit spreads.

G7 narrow money growth had already recovered in response to the fall in yields through late 2019; the recent further plunge could turbo-charge the revival – fourth chart.

US six-month narrow money growth is estimated to have risen in February, based on data for the first three weeks, while mortgage applications were surging before the latest yield decline – fifth chart. Japanese six-month M1 growth reached a 25-month high last month.

The oil price collapse, meanwhile, will give a significant boost to real money growth. Based on current levels, global (i.e. G7 plus E7) six-month consumer price momentum could fall by more than 1 pp (not annualised) from its January peak – sixth chart.

The long-standing view here has been that a rise in global six-month real narrow money growth above 3% was needed to signal an economic recovery. The failure to reach this level in late 2019 and a subsequent relapse prompted a negative reassessment of economic prospects (e.g. here).

With real money growth at 1.7% in January, the combination of a nominal pick-up and plunge in inflation is judged likely to result in the 3% level being reached in March / April.

Coronavirus developments, of course, will be key for the timing of an economic rebound. Investors should be wary of economists posing as epidemiologists but the declines in daily new cases in China and Korea suggest that containment / delay measures can swiftly yield significant results – seventh chart.