Global six-month real narrow money momentum, the key economic leading indicator in the forecasting approach employed here, is estimated to have moved sideways in deep negative territory in August* – see chart 1. Allowing for an average nine-month lead, the suggestion is that an incipient global recession will extend through Q2 2023, at least. 

Chart 1

More specifically, global six-month industrial output momentum, which crossed below zero in July and is estimated to have weakened further in August, may continue to fall into April / May next year, with no monetary signal yet of a subsequent slowdown in the pace of contraction. 

The lack of recovery in real narrow momentum is disappointing since, as previously discussed, global six-month consumer price momentum pulled back in July / August. This slowdown, however, was offset by a further fall in nominal money expansion – chart 2. 

Chart 2

Nominal money weakness, encompassing broad as well as narrow aggregates, is evidence that monetary policies were already over-restrictive before the latest round of hair-shirt rate hikes. 

What does this monetary backdrop imply for markets? The two measures of global “excess” money calculated here, i.e. the differential between six-month real narrow money and industrial output momentum and the deviation of 12-month real money momentum from a long-term moving average, remained negative in August – chart 3. 

Chart 3

Historically (i.e. over 1970-2021), global equities outperformed cash on average only when both measures were positive, with underperformance greatest when both were negative. 

Previous posts suggested that the first measure would turn positive during H2. This remains possible despite the disappointing August monetary data: the measure has recovered since June as industrial momentum has fallen and output may soon be contracting at a faster pace than real money. 

The second measure, however, is likely to remain negative until well into 2023: 12-month real money momentum weakened further in August and the long-term nature of the moving average implies that it will make little contribution to closing the current wide gap.

The projected development of the measures, i.e. the first crossing back above zero but the second remaining negative, would suggest a slowdown but not reversal in the bear market in late 2023. 

The message for government bond markets is more hopeful. Changes in bond yields have been inversely correlated with changes in the first excess money measure historically, i.e. bonds have, on average, rallied when the measure has risen, even while it has remained negative – chart 4**. 

Chart 4 

The six-month change in the excess money measure turned positive in August, having been negative – implying an unfavourable monetary backdrop for bonds – between November 2021 and July. US 10-year Treasuries have outperformed cash by 4.2% pa on average historically following positive readings. 

*The estimate incorporates monetary data covering two-third of the aggregate and complete CPI results.

**The change in the measure is plotted inverted in the chart.

Global six-month consumer price inflation peaked in June and fell further in August, reflecting pass-through of lower oil prices and a small decline in core momentum. Current commodity prices suggest a sizeable further drop into Q4 – see chart 1*. 

Chart 1

Annual as well as six-month CPI inflation probably peaked in June, with the peak occurring within the expected time band following a major top in annual broad money growth in February 2021 – money trends lead inflation by two to three years, according to the monetarist rule of thumb. 

G7 annual broad money growth is estimated to have fallen further to below 4% in August, widening an undershoot of its 4.5% average in the five years before the pandemic – chart 2. The suggestion is that G7 inflation rates will be back at or below target around end-2024, if not before. 

Chart 2

Markets were spooked by last week’s news of a hefty monthly rise in US core CPI in August but six-month momentum was little changed and below a June peak, while PPI pressures continue to ease – chart 3. 

Chart 3

Central bankers are supposedly focused on preventing high inflation from becoming embedded in expectations. The view here has been that expectations were unlikely to become “unanchored” against a backdrop of weak money growth. The latest consumer surveys by the New York Fed and University of Michigan show longer-term inflation expectations back within 2010s ranges – chart 4. 

Chart 4

UK annual core CPI inflation made a marginal new high in August but money trends mirror the global picture and are signalling a 2023-24 collapse – chart 5. The latest Bank of England / Ipsos inflation attitudes survey, meanwhile, reported a fall in consumer longer-term inflation expectations, which have remained within the 2010s range – chart 6. 

Chart 5

Chart 6

The apparent anchoring of longer-term US / UK expectations suggests that wage pressures will dissipate rapidly as current inflation rates fall sharply in 2023. 

*The GSCI commodity price index uses US prices for the natural gas component; the series shown by the gold line in the chart incorporates an adjustment for European prices.