We will probably spend a big part of Q4 deciphering the economic data through the murky looking-glass of U.S. hurricanes and Asian typhoons, so just to be clear. I am still not happy with the trajectory of global leading indicators. Narrow money growth has collapsed, and recent data suggest that the slowdown will worsen in Q3. M1 in China rose 3.9% year-over-year in August, the slowest pace since the middle of 2015, and the trend in the U.S. and Europe also is poor. In the U.S., M1 is growing just under four percent on the year, the weakest since 2008, and the EZ headline also has slowed, though it is robust overall. The crunch in narrow money chimes with central bank balance sheet data. My home-cooked broad index, which includes the SNB and Chinese FX reserves, is now falling on a six-month basis. These data don’t mean the same in all economies—M1 is not a good LEI in the U.S. for example—and the Chinese numbers will turn up soon to reflect recent efforts to ease financial conditions. That said, a slowdown in US dollar liquidity matters for non-US markets, and the Chinese M1 numbers lead by six-to-nine months. The overall story is clear: Global liquidity growth has slowed to a trickle, warning about risks of growth and asset prices.
Read MoreThis will be a short update. I am working on a more extended macroeconomic essay—and I am trying to finish a short story—both of which are stealing time. In any case, I have little to say about the main themes beyond what I said last week. In the bond market, I concur with the points made early last week by Bloomberg’s Cameron Crise. Everyone knows the Fed is determined to keep raising rates, but market-pricing suggests that we are close to the end of the road for this hiking cycle. Between those contradicting points of view, the debate about the importance, or lack thereof, of the flattening yield curve has turned into a black hole threatening to consume all other stories in the bond market. I am sympathetic to that, but I don’t think the story is complicated. The 2s5 and 2s10 will invert in the next six-to-nine months, setting up an end of the U.S. business cycle towards the end of 2019 or at the beginning of 2020. At least, I think this is a reasonable base case until either of the following things happens. First, the Fed could suddenly decide that it doesn’t want to invert the curve. I doubt it, but the appointment of Richard Clarida as Vice Chair—apparently, he cares about the curve—certainly is an interesting development. Second, it is possible that the curve can steepen, or hold its current spread, even as the Fed fund rate motors higher.
Read MoreLet me run a story by you. The dollar is rising against both its EM and DM counterparts, and U.S. equities— predominantly growth and tech—are gunning higher. By contrast, EU equities are lukewarm, and EMs are outright struggling as balance-of-payment stress take down one domino after the other. In bonds, the U.S. front-end is held up by expectations that the Fed will keep trucking, while the belly and long end are edging sideways. In other words, the U.S. yield curve is, still, flattening. Finally, all measures of global macro-liquidity have rolled over; real M1 growth is falling, and CB balance sheet expansion is kicking into reverse. To boot, most other leading indices also are exhibiting weakness. If this doesn’t sound familiar, it means that you have been living under a rock this year. I have been recounting this story for several months, and I am getting tired of it. But we haven’t yet had the grand finale so it’s probably too early to abandon it, as much as I would like to. In summary, I think we are due a fall in U.S. bond yields, potentially in both the 2y and 10y but almost certainly in the latter. I reckon that this happens alongside, or right after, a final moonshot in the dollar. It should be a cathartic moment for markets, setting the stage for a different story.
Read MoreYou will find no harsher critique of Mr. Trump’s indiscriminate use of social media than yours truly. If it were up to me, the president’s phone would have been deactivated a long time ago. Last week’s performance on economics, however, struck at the heart of a story economists and strategists have been circling for a long time. How far will monetary policy divergence be stretched in this cycle? Mr. Trump first suggested that other major economies—Europe and Asia—are unfairly manipulating their interest rates and currencies, before following up with a swing at Fed for making things worse by hiking rates. In short; the White House is suddenly spooked by the risk to the economy from a stronger dollar and higher rates. This is probably a reasonable political worry ahead of the mid-terms, but it is also sweet irony. If Mr. Trump wants to complain to anyone about the vigour of the dollar, he should start with a look in the mirror. Aggressive tax and short-term inflationary tariffs in an economy with a near record-low unemployment and savings rate could only have one outcome in the end. A more assertive Fed and a stronger dollar always were obvious side-effects of such a policy constellation.
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