Global Daily – Global liquidity holding up

by: Nick Kounis , Maritza Cabezas

Global-Daily-Insight-10-September-2015.pdf (228 KB)
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  • Real global money supply growth has held up well over recent months at moderate rates…
  • …but this masks big differences, with strength in the developed economies, and weakness in EM
  • Meanwhile, rising US job openings point to further improvement in labour market going forward

 

Focus on global liquidity has sharpened

Focus on global liquidity conditions has intensified recently. Capital outflows from emerging markets and declines in currency reserves, as well as approaching Fed tightening have triggered concern that global liquidity is declining. It is feared that such a development would spell trouble for risky assets. In this Daily we introduce a measure of global liquidity, while we will expand the analysis to look at the relationship with economic activity and financial markets in future editions.

Real M1 money supply growth a good place to start

There are various potential measures of liquidity, but we start with M1 money supply growth, as it is the measure that includes the most liquid components. Using the data from the largest developed market (DM) and emerging market (EM) economies, we have created real M1 money supply measures for the global economy, as well as DM and EM aggregates.

Global liquidity holding up well

On the global level, real M1 money supply growth has been expanding at a steady albeit moderate pace over recent months, with little sign of a sharp slowdown. In July, it grew by 5.6% yoy, which is below the recent historical average (since 2003) of 7.7%. Granted the situation may have deteriorated in August given the market turmoil, but early data from a few countries is not signaling such a development.

Big differences between DM and EM

This relatively benign global picture masks big differences between advanced economies and emerging markets. Real M1 money supply growth has been expanding rapidly in developed markets compared to the historical trend. This is particularly the case in the eurozone. On the other hand, EM money supply growth has been extremely weak, with the pace slowing through 2014. This is likely one of the factors behind the weak evolution of EM economic growth over recent quarters. Tightening financial conditions are a significant risk to the EM growth outlook.

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Positive outlook for US labour market

The number of US job openings broke a new high in July, reaching 5.8 million. The expansion was broad based across most industries, particularly professional business services and accommodation and food services. Other details of the report showed that the hiring rate edged down to 3.5% from 3.7%, while the quit rate was unchanged at 1.9%. Hiring will likely improve in the coming time, as a result of the increase in job openings. This positive report adds to a string of strong labour market data released in the past days.  On Friday, August’s labour market report showed that the unemployment rate is now at 5.1%, the lowest since 2008. The nonfarm payrolls has registered  an average monthly increase of 240K in the past year. Meanwhile, the Federal Reserve’s Labor Market Conditions Index released this week showed the largest monthly improvement since January.

Less slack in labour market versus external risks

Overall, the labour market data showed further improvement, one of the Fed’s preconditions for a rate hike this year. Despite this solid data, instability in financial markets and risks in emerging markets will likely delay the first Fed rate hike to the December FOMC meeting.