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Money & Cycles Weekly Bulletin

Has global liquidity tightened?

July 22, 2024 by Simon Ward

Warning signs. US monetary deficit financing has (temporarily?) slowed, bank reserves are trending lower, US overnight rates have firmed and global six-month real narrow money momentum has crossed back below industrial output momentum (see charts).

US jobs data in focus. The comprehensive Business Employment Dynamics dataset for Q4 is released this week; Q3 data showed a net fall in private jobs vs. a bumper payrolls survey increase (see charts).

Surprise Chinese rate cut. Key rates were lowered by 10 bp despite ongoing currency pressure (see charts).

Japanese CPI boosted by subsidy suspension. Six-month core momentum was stable at 1.5% annualised (see charts).

Mixed Eurozone bank lending survey. Loan officers expect a strong pick-up in mortgage borrowing but SME demand for credit remains weak (see charts).

UK deficit overshoot. Q2 numbers cast doubt on the OBR March forecast for 2024-25 borrowing, while the new government faces calls for higher spending in multiple areas (see charts).

Warning signs

Is violent rotation in markets a symptom of liquidity tightening?:

Chart 1 showing MSCI EAFE Style / Sector Indices Relative to MSCI EAFE, 31 December 2023 = 100

US monetary deficit financing via the private banking system – “Treasury QE” – has slowed sharply, suggesting broad money weakness:

Chart 2 showing US Broad Money M2+ (6m change, $ bn) & Fed / Treasury QE / QT (6m sum, $ bn)

June money numbers are released this week.

US bank reserves are trending lower again as Fed balance sheet contraction continues:

Chart 3 showing US Federal Reserve Balance Sheet ($ bn)

Overnight rates have firmed recently:

Chart 4 showing US Overnight Rates

Global six-month real narrow money momentum has crossed back below industrial output momentum:

Chart 5 showing G7 + E7 Industrial Output & Real Narrow Money (% 6m)

CCC spreads have widened:

Chart 6 showing US High Yield Option-Adjusted Spreads (ICE BofA, bp)

Note a similar divergence with B spreads in late 2021.

Japanese bank reserves have fallen back, with the BoJ due to announce details of reduced JGB buying at its end-July meeting:

Chart 7 showing Japan BoJ Balance Sheet (¥ trn)

Reduced purchases may imply QT given a high flow of redemptions.

Yield spreads have moved further in favour of the yen:

Chart 8 showing USDJPY & Treasury / JGB Yield Spreads

Positioning and complacency also suggest upside risk:

Chart 9 showing USDJPY & Bullish Sentiment / Speculative Futures Position* *Net Long Scaled by Open Interest, 50 = Neutral

US jobs data in focus

The comprehensive US Business Employment Dynamics dataset – based on UI records – for Q4 is released this week:

Chart 10 showing US Private Sector Jobs (qoq change, 000s)

All eyes on whether a Q3 undershoot vs. payrolls is repeated or corrected.

Houses under construction are falling fast – starts are now significantly lagging completions – suggesting job losses ahead:

Chart 11 showing US Housing Units Under Construction & Residential Building Payrolls (000s)

Total retail sales were up just 2.3% yoy nominal in June, with “discretionary” categories back in negative territory:

Chart 12 showing US Retail Sales (% yoy) Discretionary vs Non-Discretionary* *"Discretionary" = Motor Vehicles & Parts, Furniture, Electronics, Building Materials, Clothing, Sporting Goods & Department Stores *Non-Discretionary" = Food & Food Services, Gasoline, Health & Personal Care, Other General Merchandise, Miscellaneous & Non-Store

Surprise Chinese rate cut

The PBoC lowered its benchmark seven-day reverse repo rate by 10 bp following off-target Q2 GDP growth, with one- and five-year loan prime rates also cut:

Chart 13 showing China Interest Rates

The RMB has remained under significant pressure, with the “best” intervention proxy rebounding to $44 bn in June:

Chart 14 showing China Net F/x Settlement by Banks Adjusted for Forwards ($ bn) & Forward Premium / Discount on Offshore RMB (%)

Japanese CPI boosted by subsidy suspension

Japanese headline CPI jumped on suspension of energy subsidies but six-month core momentum was stable at 1.5% annualised, with money trends signalling a further fall:

Chart 15 showing Japan Consumer Prices & Broad Money (% 6m annualised)

Mixed Eurozone bank lending survey

The ECB lending survey suggests a strong pick-up in mortgage borrowing but SME demand for credit remains weak:

Chart 16 showing Eurozone ECB Bank Lending Survey: Credit Demand Net % Expecting Stronger Demand

UK deficit overshoot

Three months in, the OBR forecast for UK government borrowing in 2024-25 is already looking unachievable:

Chart 17 showing UK Public Sector Net Borrowing (12m sum, £ bn)

Six-month headline and core CPI momentum ticked down, with money trends suggesting a big fall into 2025:

Chart 18 showing UK Consumer Prices & Broad Money (% 6m annualised)

NS Partners Ltd.
July 22nd, 2024