US money growth remained strong in H1 2021 while Chinese growth weakened further following (excessive) policy tightening during H2 2020. This divergence has been reflected in economic and equity market performance.

The tables could now be turning: US nominal money growth has slowed significantly, Chinese growth appears to have bottomed and inflation is exerting a bigger drag on real money in the US.

The previous base case scenario here was that Chinese money growth would recover in H2 2021 in response to modest policy easing since Q2. Economic momentum was expected to weaken further in H2 but a monetary recovery would signal better prospects for 2022.

Financial distress in the real estate sector threatened to derail this scenario by triggering a generalised tightening of credit conditions that would offset policy support for money growth. The PBoC's reluctance to provide additional stimulus magnified concerns.

October money data, however, were better than feared and suggest that the monetary recovery scenario remains on track, albeit possibly pushed back and weakened.

Six-month growth rates of narrow / broad money and credit rose last month, with the broad money series at an 11-month high – see chart 1.

Chart 1

Narrow money growth remains low but may follow broad money growth higher if risk aversion associated with the real estate crisis moderates, resulting in a rise in spending intentions.

The October data are consistent with the suggestion from the Cheung Kong business survey that credit conditions faced by firms were little changed last month.

By contrast, six-month growth of the US weekly money proxies calculated here continued to moderate into late October – chart 2. Growth of the broader M2+ measure (which includes large time deposits and institutional money funds) is now below that of the Chinese equivalent.

Chart 2

With QE tapering under way, a pick-up in bank lending is likely to be necessary to sustain high money growth. Six-month growth of commercial bank loans and leases has recovered significantly adjusting for the PPP distortion but the Fed's October senior loan officer survey was disappointing, showing a pullback in credit demand balances – chart 3.

Chart 3

The opposite moves in nominal money growth rates are more pronounced in real terms because of contrasting US / Chinese inflation experience. The differential between US and Chinese annual consumer price inflation rose to a record 4.7 pp in October, with the gap between six-month annualised rates of change at 6.8 pp.

Chart 4 shows six-month growth rates of real narrow money, incorporating October estimates. China crossed above the rest of the E7 in September and now appears to be overtaking a slowing US.

Chart 4

The Chinese monetary recovery needs to be confirmed and sustained to warrant shifting to a positive view. The value of monetary signals, however, is greatest when they conflict with consensus opinion. The consensus was bullish on China at the start of 2021 when money trends were flashing a warning; the hopeful October money data hint that current overwhelmingly negative sentiment may be similarly misplaced.

Global manufacturing PMI survey results for October are consistent with the base case scenario here of a progressive loss of momentum through end-Q1 2022, at least.

PMI new orders have moved sideways for two months but export orders and output expectations fell further last month, to nine- and 12-month lows respectively – see chart 1.

Chart 1

A striking feature of the survey was a further rise in the stocks of purchases index to a 15-year high – chart 2. Stockpiling of raw materials and intermediate (semi-finished) goods has been supporting new orders for producers of these inputs but the boost will fade even if stockbuilding continues at its recent pace, which is very unlikely. This is because output / orders growth is related to the rate of change of stockbuilding rather than its level.

Chart 2

Chart 3 illustrates the relationship between new orders and the rate of change of the stocks of purchases index, with the coming drag effect expected to be greater than shown because of the high probability that stockpiling will moderate.

Chart 3

Stockbuilding of inputs has been particularly intense in the intermediate goods sector – chart 4. This suggests that upstream producers – particularly suppliers of raw materials – are most at risk from relapse in orders. Commodity prices could correct sharply as orders deflate – see also previous post.

Chart 4

A similar dynamic is playing out in the US ISM manufacturing survey, where new orders fell last month despite the inventories index reaching its highest level since 1984, resulting in a sharp drop in the orders / inventories differential – chart 5. The survey commentary attributes the inventories surge to “companies stocking more raw materials in hopes of avoiding production shortages, as well as growth in work-in-process and finished goods inventories”.

Chart 5

The combination of an ISM supplier deliveries index (measuring delivery delays) of above 70 with new orders in the 50-60 range has occurred only four times in the history of the survey. New orders fell below 50 within a year in every case.

The global PMI delivery times index (which has an opposite definition to the ISM supplier deliveries index, so a fall indicates longer delays) reached a new low in October but a recent turnaround in Taiwan, which often leads, hints at imminent relief – chart 6. The view here is that current supply shortages reflect the intensity of the stockbuilding cycle upswing, with both now peaking.

Chart 6