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Money-Supply Growth Surges to 92-Month High

Money-Supply Growth Surges to 92-Month High

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The money supply growth rate rose again in March, climbing to a 92-month high. The last time the growth rate was higher was during July of 2012, when the growth rate was 11.5 percent.  At that time, however, money-supply growth was on its way down. The current upward trend has more in common with the trend we saw during late 2008 and early 2009.

During March 2020, year-over-year (YOY) growth in the money supply was at 11.37 percent. That's up from February's rate of 7.33 percent, and up from March 2019's rate of 1.9 percent. The increase in money supply growth in March represents a sizable reversal of the trend we saw during most of 2019. In August, the growth rate hit a 120-month low, falling to the lowest growth rates we'd seen since 2007. The growth rate has now surged back to where it was in the wake of the 2008 financial crisis.

tms
 

The money supply metric used here—the "true" or Rothbard-Salerno money supply measure (TMS)—is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure of money supply fluctuations than M2. The Mises Institute now offers regular updates on this metric and its growth. This measure of the money supply differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-time deposits, traveler's checks, and retail money funds).

The M2 growth rate also increased in March, growing 10.96 percent compared to February's growth rate of 7.25 percent. M2 grew 3.98 percent during March of last year. The M2 growth rate had fallen considerably from late 2016 to late 2018, but has been growing again in recent months. As of March, it is following the same trend as TMS.

Money supply growth can often be a helpful measure of economic activity. During periods of economic boom, money supply tends to grow quickly as banks make more loans. Recessions, on the other hand, tend to be preceded by periods of slowdown in rates of money supply growth. However, money supply growth tends to grow out of its low-growth trough well before the onset of recession. As recession nears, the TMS growth rate climbs and becomes larger than the M2 growth rate. This occurred in the early months of the 2002 and the 2009 crises.  February 2020 was the first month since late 2008 that the TMS growth rate climbed higher than the M2 growth rate.  The TMS growth rate again exceeded M2 in March 2020. As of mid-April 2020, it does appear that the decline in money-supply growth has again preceded a recession. While some observers will likely claim the current economic crisis is a result solely of the COVID-19 Panic and resulting govenrment-forced shutdowns, several indicators do suggests the economy was primed for a recession. The decline in TMS is one, as is the late-2019 liquidity crisis in the repo markets. The Fed's moves to drop interest rates and to once again grow its balance sheet speaks to the weakness of the economy leading up to March 2020. 

The overall M2 total money supply in February was $16.1 trillion, and the TMS total was $14.9 trillion.

The growth in the money supply is in part tied to the fact that the Federal Reserve grew more accommodative in late 2019, and embraced unprecedented monetary stimulus in March. The 
Fed drove down the target key interest rate to 0.25 percent, and began broad and unprecedented new "quantitative easing" programs. The Federal Open Market Committee (FOMC) cut the target fed funds rate more than once in the months preceding March 2020, but in response to government-forced shutdowns of several sectors of the economy, the Fed responded by cutting the federal funds rate by 150 basis points in less than a month.  The Fed has flooded markets with new money by purchasing a variety of assets from US government debt to securities. The Fed's balance sheet is now at an all-time high.

Another change partially driving the increase in the TMS is the large increase in Treasury deposits at the Fed that we've seen in recent months. In March 2020, this sum remains near an all-time high of $376 billion.

Weekly data suggests money-supply growth is likely to continue growing at highly elevated levels at least through April. Weekly data on commercial loans for recent weeks (not fully reflected in March data) shows year-over-year growth in April is at historic highs.

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Economics

EUR/GBP price prediction: is the bears’ pain over?

Ever since Brexit happened, the British pound gained against the common currency, the euro. Despite many analysts calling for the pound’s decline, it…

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Ever since Brexit happened, the British pound gained against the common currency, the euro. Despite many analysts calling for the pound’s decline, it gained ground in a relentless bearish trend.

The downtrend was so strong that even in 2022, some analysts believe that the EUR/GBP exchange rate will still hover around 0.84 in March 2023 – about 10 months from now.

Currently, EUR/GBP trades at 0.85, bouncing from its lows and looking constructive from fundamental and technical perspectives. So, where will the exchange rate go next?

Here is a price prediction considering both the technical and fundamental aspects.

The two central banks’ policies are set to diverge

Let’s start with the fundamental perspective. A currency pair moves based on the monetary policy differences between the two central banks.

In this case, the Bank of England was one of the first major central banks in the world that decided to increase the interest rate in the aftermath of the COVID-19 induced recession. Moreover, it did so not once but multiple times.

At the same time, the European Central Bank did nothing. It couldn’t do so, as a war started in Eastern Europe (Russia invaded Ukraine) in February.

In order to shelter European economies from the war’s economic impact, the European Central Bank preferred a wait-and-see stance. However, inflation is running way higher than the central bank’s target, and one of the causes is just the war.

As such, the central bank recently announced that it plans to end negative rates by September. Considering that the deposit facility rate is at negative 50bp, it means that a couple of rate hikes are on the table during the summer.

Yet, the Bank of England is now in a wait-and-see mode. Therefore, the fundamentals favor a move higher in the EUR/GBP exchange rate over the summer.

An inverse head and shoulders shows EUR/GBP struggling to overcome resistance

From a technical perspective, the market may have bottomed with the move to 0.82. It was quickly retraced, suggesting the presence of an inverse head and shoulders pattern.

A close above 0.86 should put the 0.90 area in focus. That is where the pattern’s measured move points to, and the move also implies that the lower highs series would be broken, thus ending the bearish bias.

All in all, EUR/GBP looks bullish here. Both technical and fundamental aspects favor more strength in the months ahead.

The post EUR/GBP price prediction: is the bears’ pain over? appeared first on Invezz.

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Economics

Weekly investment update – Weaker economic outlook weighs on markets

Global equities have continued their sell-off over the last week. What is new is that markets are now reacting to risks of weaker economic data weighing…

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Global equities have continued their sell-off over the last week. What is new is that markets are now reacting to risks of weaker economic data weighing on earnings. Real bond yields, whose rise triggered the recent drop in equity markets, have fallen as investors price a higher probability of a recession.   

Yields of US Treasury bonds have slipped since reaching around 3.12% in early May (see Exhibit 1). The rally has been driven by fears of a global recession due to poor economic data, strong inflation numbers, aggressive talk from central bankers and concerns over the consequences of Covid in China.

Recent data that contributed to the bond market’s unease about the prospects for the US economy includes: 

  • The Richmond Federal Reserve Manufacturing survey, which fell to its lowest since 2020 at -9.
  • The monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York fell to -11.6, with the shipment measure falling at its fastest pace since the start of the pandemic two years ago.
  • The Federal Reserve Bank of Philadelphia’s May business index dropped 15 points to 2.6, with the six-month outlook falling to its lowest since December 2008 (though the underlying details were better than the headline number).
  • Existing and new home sales dropped for a third month, to its lowest since 2020, held back by lean inventory, rising prices and higher mortgage rates. 

Taken together, the various regional Federal Reserve surveys suggest that the ISM Report for Business may come in at around 53, above 50 so still clearly in expansion territory for the US economy, but down noticeably from the upper 50s/lows 60s readings to which markets have become accustomed.

US equities still weak

US equities have remained weak as the down move continues for its seventh week.

It has been apparent that, in contrast to the start of the year when rising real bond yields were undermining equity markets, it is now fears of falling earnings due to a weaker economy that are weighing on stocks.

The last week has seen, in accordance with the risk-off regime, more buying-the-dip and selling-the-rally. There has also been a rotation out of growth and cyclicals into value and defensives (healthcare, real estate, utilities and staples).

European markets under the cosh

Bearish sentiment is prevalent in Europe, too, with investors cutting exposures to European equities.

There was another outflow in the week to 18 May, taking the total to 14 weeks of outflows in a row. Cyclicals, in particular, saw strong outflows, led by the materials, financials and energy sectors.

Our multi-asset team are inclined to reduce exposure to equity markets given the deterioration in the outlook.

European economy resists

Economic activity indicators have fallen so far in May, but remain above 50. Activity edged up in the manufacturing sector despite the fallout from the Ukraine war and supply chain disruptions that have intensified with China’s coronavirus lockdowns.

Although factories continue to report widespread supply constraints and diminished demand for goods amid elevated price pressures, the eurozone economy is being boosted by pent-up demand for services as pandemic-related restrictions are wound down.

While purchasing manager indices are still pointing to growth, it may be that these surveys understate the shock to activity, while sentiment surveys likely overstate the shock. Markets are increasingly tilting towards anticipation of a contraction in the coming quarters.

Higher food prices

Restrictions on the export of Ukrainian cereals continue and risks increasing food insecurity as the UN World Food Programme has highlighted.

As much of Russian and Ukrainian wheat goes to poorer nations, hunger could be a critical risk, driving up political instability.

The risk of further rises in food prices will be a key driver of inflation, particularly in emerging markets, the worst-case scenario being that the situation worsens significantly.

Moreover, lower fertiliser supply will have a greater impact on the next few months’ harvests, while the pass-through of costlier logistics and input prices is likely to drive food prices even higher.

Coming up…

Minutes of the meeting of the US Federal Open Markets Committee on 3-4 May will be published later on Wednesday.

However, market conditions have soured appreciably since the Fed’s first 50bp rate rise, so some of the language in the minutes pertaining to financial risks and market conditions will be outdated.

Instead, the three major focus points for market participants will likely be: 

  • Policymakers’ views on the conditions which could lead to a shift down, back to a pace of raising rates by 25bp at each FOMC meeting;
  • Any hints as to how far and for how long policymakers intend to push policy rates into restrictive territory;
  • Guidance shaping expectations for the next Summary of Economic Projections — aka the dot plot — due to be released at the June meeting. 

Forthcoming economic data  

US personal income and spending data for April should give investors an insight into the US consumer’s behaviour: Are they tightening the purse strings? The report may also show the Fed’s preferred inflation gauge (core PCE deflator) starting to decelerate.

Perhaps equally important, the report should shed light on how consumers are responding to the current high inflation environment, indicating how wages are performing relative to inflation and how aggressively consumers are tapping into the USD 2.5 trillion of accumulated savings from the pandemic period.

Disclaimer

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Andrew Craig. The post Weekly investment update – Weaker economic outlook weighs on markets appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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Economics

Philly Fed: State Coincident Indexes Increased in 50 States in April

From the Philly Fed: The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2022. Over the past three months, the indexes increased in all 50 states, for a three-month diffusion index of 100. Additiona…

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From the Philly Fed:
The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2022. Over the past three months, the indexes increased in all 50 states, for a three-month diffusion index of 100. Additionally, in the past month, the indexes increased in all 50 states, for a one-month diffusion index of 100. For comparison purposes, the Philadelphia Fed has also developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index increased 1.1 percent over the past three months and 0.3 percent in April.
emphasis added
Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed:
The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.
Click on map for larger image.

Here is a map of the three-month change in the Philly Fed state coincident indicators. This map was all red during the worst of the Pandemic and also at the worst of the Great Recession.

The map is all positive on a three-month basis.

Source: Philly Fed.

Philly Fed Number of States with Increasing ActivityAnd here is a graph is of the number of states with one month increasing activity according to the Philly Fed. 

This graph includes states with minor increases (the Philly Fed lists as unchanged).

In April all 50 states had increasing activity including minor increases.

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