Previous posts suggested that a recovery in US money growth would stall in Q2 / Q3 as Fed QT was no longer offset by monetary deficit financing (at least temporarily).

The broad M2+ measure – which adds large time deposits at commercial banks and institutional money funds to published M2 – fell by 0.1% in April, with available weekly data suggesting marginal growth in May.

Unexpectedly, however, the narrow M1A measure tracked here – comprising currency in circulation and demand deposits – rose by a bumper 1.8% in April. This follows a 1.3% gain in March – see chart 1.

Chart 1

Positive narrow money divergence typically occurs when rates are falling. Lower rates encourage a shift of money holdings from time deposits and savings accounts to demand deposits and cash. Such a shift is usually a signal of rising spending intentions.

Are money-holders front-running rate cuts? The narrow money pick-up is a hopeful signal but there is a risk that it goes into reverse if the Fed continues to delay.

The impact of the US April rise on the global aggregate calculated here was offset by a large monthly drop in Chinese narrow money, as measured by “true M1”, which corrects for the omission of household demand deposits from official M1.

So the six-month rate of change of global real narrow money was little changed in April, following a move back into positive territory in March – see prior post for more discussion.

US six-month momentum moved to the top of the ranking across major economies in April, while China returned to negative territory – chart 2.

Chart 2

Falling interest rates suggest that the Chinese relapse will prove temporary – chart 3 – but the signal for near-term economic prospects is negative.

Chart 3

Eurozone / UK real narrow money momentum continued to recover in April but remains negative. The current UK lead may prove temporary unless the MPC follows the ECB in cutting rates soon.

The Chinese relapse resulted in E7 real money momentum falling back in April, while G7 momentum crossed into positive territory – chart 4.

Chart 4

The still-positive E7 / G7 gap coupled with a recent cross-over of global six-month real narrow money momentum above industrial output momentum could signal improving prospects for EM equities. The MSCI EM index outperformed MSCI World by 10.5% pa on average historically under these conditions.

G7 annual broad money growth recovered further in April but, at 2.8%, remains well below a 2015-19 average of 4.5% – chart 5.

Chart 5

The roughly two-year leading relationship suggests that annual inflation will bottom out in H1 2025 but remain at a low level into H1 2026.

Global (i.e., G7 plus E7) six-month real narrow money momentum returned to positive territory in March, consolidating in April. It has also crossed above six-month industrial output momentum, turning one measure of global “excess” money positive – see chart 1.

Chart 1

Should investors, therefore, adopt a positive view of economic and market prospects? The judgement here is no – or at least, not yet.

Six-month real narrow money momentum bottomed in September 2023 and lows have preceded those in industrial output momentum by between four and 14 months so far this century. This suggests that a recent decline in output momentum will bottom out by December.

The lag may be at the top end of the range on this occasion, for three reasons.

First, lags tend to be longer when real money momentum reaches extremes, and the September reading was the weakest since 1980.

Secondly, the real money stock is below its long-run trend relationship with industrial output – chart 2. A prior overshoot cushioned the impact of a negative rate of change in 2022-23; the reverse effect could apply in 2024-25.

Chart 2

Thirdly, prior recoveries in real money momentum from negative to positive were followed by a recovery in output momentum always in the context of a positively-sloped yield curve (10-year government bond yield minus three-month money rate) – chart 3. The curve is still inverted.

Chart 3

The recovery in real narrow money momentum is a hopeful signal for H1 2025 but there remains a risk of surprisingly negative economic data over the next six months. A pessimistic bias will be maintained until real money momentum returns to its long-run average and the yield curve disinverts.

The cross-over of real money momentum above industrial output momentum is similarly judged to be a necessary but not sufficient condition to adopt a positive view of market prospects.

Global equities have outperformed cash on average historically only when a positive real money / industrial output momentum gap partly reflected above-average real money expansion (measured as a 12-month rate of change). The latter condition is unlikely to fall into place before late 2024 at the earliest.

The current combination was associated with mixed equity market performance with some notably bad periods, e.g. mid-2001 and late 2008 / early 2009 – chart 4.

Chart 4