Global six-month real narrow money momentum is estimated to have moved sideways for a fourth month in July at a weak level by historical standards. The baseline scenario here remains that global economic momentum – proxied by the global manufacturing PMI new orders index – will move down into late 2024, echoing a fall in real money momentum into September last year. Based on more recent monetary data, a subsequent recovery may prove limited, with weakness persisting well into H1 2025.

The assessment here remains that the global economy has entered a “double dip” currently focused on manufacturing but likely to extend to services / labour markets, reigniting worries about a hard landing. Economic weakness is expected to be accompanied by an inflation undershoot into H1 2025. DM flash manufacturing PMI results for August were mixed across countries but on balance weak, suggesting a further small reduction in global manufacturing PMI new orders following a July plunge to below 50 (assuming no change for China and other non-flash countries).

Signs of rotation in equities as global volatility picks up – will we see new winners emerge?

The most important issue in the global economic outlook is the meaning of Chinese monetary weakness. Six-month rates of change of narrow / broad money, bank lending and total social financing (on both new and old definitions*) reached record lows in June / July.

A sharp fall in the global manufacturing PMI new orders index in July confirms renewed industrial weakness. The companion services survey, however, reported an uptick in the new business component, which is close to its post-GFC average.

A post in June suggested that a recovery in the OECD’s US composite leading indicator was ending. A calculation based on the latest input data confirms a reversal lower. The historical performance of the OECD indicator compares favourably with the Conference Board leading index

Manufacturing PMI results for July support the forecast of a global “double dip” into early 2025.

The global manufacturing PMI new orders index plunged by 1.9 points from June to 48.8, a seven-month low.

Will the Bank of Japan’s latest attempt to exit ZIRP prove any more successful than its previous two efforts, in 2000 and 2006? The monetary backdrop is no more promising. The six-month rate of change of broad money M3 was 0.5% annualised in June compared with 1.3% and -1.1% respectively before the August 2000 and July 2006 rate hikes.

Global six-month real narrow money momentum – a key indicator in the forecasting process followed here – is estimated to have moved sideways for a third month in June, based on monetary data covering 85% of the aggregate. Real money momentum has recovered from a September 2023 low but remains below both its long-run average and the average in the 10 years preceding the GFC, when short-term interest rates were closer to recent levels. The expectation here has been that the fall into the September 2023 low would be reflected in a weakening of global industrial momentum into late 2024.

Chinese money trends are puzzling but ominous, suggesting – at a minimum – that the economy will remain weak through H2. Q2 real GDP growth came in below expectations but there was better news on the nominal side: two-quarter nominal GDP expansion rose for a second quarter as the GDP deflator stabilised. This improvement tallies with a recovery in six-month rates of change of narrow money and broad credit around end-2023.

Improving global monetary data and signs of a dollar peak bode well for EM returns.

An analysis of the Fed’s historical behaviour suggests that the conditions for policy easing are in place. Chart 1 shows the fitted values and current prediction of a logit probability model for classifying months according to whether the Fed is in policy-tightening or policy-easing mode. The model’s determination for a particular month depends on values of annual core PCE inflation, the unemployment rate and the ISM manufacturing delivery delays index known at the end of the first week of the month (i.e. after the release of the employment report for the prior month).

Monetary analysis suggests that the global economy will weaken into early 2025, while inflation will continue to decline. A cyclical forecasting framework, on the other hand, points to the possibility of strong economic growth in H2 2025 and 2026.

Strategy Commentary for Q1 2024 on the International Equity Strategy