Investment philosophy

A look at the potential impact of President Trump’s policies on emerging markets, the risks of rising trade tensions with China and the resilience of China’s domestic market.

Japanese money trends remain ominously weak, suggesting poor economic / market prospects and a return of inflation to unacceptably low levels.

Flow and stock measures of “excess” money cast doubt on claims that the liquidity backdrop for markets is unusually favourable.

Global (i.e. G7 plus E7) six-month real narrow money momentum is estimated to have edged lower in September, based on monetary data covering 88% of the aggregate. Momentum has been moving sideways since the spring at a weak level by historical standards, suggesting that the global economy will expand at a below-trend pace through mid-2025. Note that the global narrow money measure incorporates an adjustment for a recent negative distortion to Chinese data from regulatory changes, i.e. momentum would be weaker than shown without this correction.

The MPC’s slowness to cut rates risks aggravating a recent loss of economic momentum and prolonging an inflation undershoot. The expected 25 bp cut in November would be insufficient to catch up with reductions to date in the Eurozone, Sweden, Switzerland and Canada. UK annual headline consumer price inflation is as low or lower than in all these jurisdictions except Switzerland.

A post last month suggested that Chinese money growth was bottoming, based on year-to-date policy easing and the space for additional stimulus opened up by a stabilisation of the currency. September money numbers and recent policy announcements bolster this assessment but the scale of monetary acceleration is uncertain. As previously discussed, narrow money measures have been distorted by regulatory changes in April that reduced the attractiveness of demand deposits, arguing for giving greater weight to broader aggregates.

Beijing signals a new approach to policy – how far will policymakers go to boost growth?

Monetary prospects and cycle considerations suggest global economic strength in H2 2025 / 2026 but a “hard landing” – or at least a scare of one – may be necessary first. Commentary here at mid-year proposed the following baseline scenario: A “double dip” in global industrial momentum in H2 2024 with limited recovery in early 2025, reflecting the profile of real narrow money momentum with a roughly one-year lag.

Monetary trends suggest that UK economic performance will converge down to a weak Eurozone. A post in June argued that Eurozone monetary trends were too weak to support a sustained recovery. The composite PMI output index peaked in May and fell below 50 in September (flash reading of 48.9), confirming an ongoing “double dip”.

A pick-up in US narrow money momentum is a hopeful signal for 2025 but requires confirmation and does not preclude near-term economic deterioration. The measure of narrow money tracked here (M1A, comprising currency in circulation and demand deposits) rose by 0.8% in August, pushing six-month annualised growth up to 10.5%. The broad M2+ measure (which adds large time deposits at commercial banks and institutional money funds to the official M2 aggregate) also rose solidly in August, by 0.5%, but six-month growth remains subdued and within the recent range, at 3.5% annualised.

Chinese money / credit trends remain weak but could be at a turning point. Six-month rates of change of broad money and total social financing have stabilised above June lows. (Broad money here refers to M2 excluding money holdings of financial institutions, which are volatile and less informative about economic prospects.)

The ruling Morena Party’s proposal to compromise judicial independence is a case study in how to derail development.

Monetary considerations argue that the ECB’s latest inflation forecast, like earlier projections, will be undershot. Annual growth of broad money – as measured by non-financial M3 – returned to its pre-pandemic (i.e. 2015-19) average of 4.8% in October 2022. Allowing for a typical two-year lead, this suggested that annual CPI inflation would return to about 2% in late 2024.

The “double dip” downturn in global manufacturing continued last month. Global manufacturing PMI new orders fell steeply from a peak in May 2021 to a trough in December 2022 (first dip), with a subsequent recovery ending in May 2024. The second dip was confirmed by a sharp fall to below 50 in July, with the index unchanged in August.

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.