USVM - M2 Money Supply Shrinkage Accelerates
2023-03-07 07:24:00 ET
Summary
- The total amount of money in the U.S. financial system is thawing like spring snow. In the latest reported months, M2 money supply shrank by 1.3% in December and 1.7% in January.
- The only reason inflation was not higher than what we got in the '70s is the fact that the U.S. economy is a lot more digital now, so it is harder to raise prices.
- The wild card remains the Ukrainian situation, which can erupt at any minute, and probably significantly more violently than the way it is proceeding at present.
The total amount of money in the U.S. financial system is thawing like spring snow. In the latest reported months, M2 money supply shrank by 1.3% in December and 1.7% in January. Since this has never happened before, we don’t know what the effect would be, even though my gut feeling tells me that it will be deflationary. Less money chasing a similar amount of goods and services means less price pressure.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That M2 spike (above) was a horrific but necessary surge in money supply in 2020, which caused the recent inflation and subsequent drive to end it through monetary tightening. As they are no longer giving money away that easily in Washington, inflation will go down. I would not be surprised if by the end of 2023 the Fed will be worried about the economy a lot more than it is worried about inflation right now.
The Fed likes to say that there is no strong correlation between money supply growth and inflation, but the recent 26.9% surge in M2 on a year-over-year basis in February 2021 is about double what we saw in the three inflation spikes of the 1970s through the early 1980s, which only reached the low teens.
The only reason inflation was not higher than what we got in the '70s is the fact that the U.S. economy is a lot more digital now, so it is harder to raise prices. Still, with the horrific supply chain bottlenecks during COVID, the inflation spike was inevitable. Yes, I think inflation would have been lower without those bottlenecks, but higher than pre-COVID given the avalanche of government cash that entered the system.
Bonds Hold the Key to the Stock Market
A sharp reversal in Treasury futures, with the 10-year dropping from 4.09% on Thursday to close at 3.97% on Friday, caused a surge of over 125 points on the S&P 500 futures, from a low of 3925 Thursday morning to 4053 on Friday. That’s a pretty big move in just two days. What I have noted is that the stock market ignores a rise in Treasury yields for a week or two and then starts to worry about them. Treasury yields were rising from the start of February, while stocks began to feel it in mid-February.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The key here is to see if the 10-year is headed for a retest of 4.33% and, God forbid, a new cycle high above that. I didn’t think it was going to happen a month ago but given the talk out of the Fed and some hotter inflation numbers and better economic data overall, it sure looks to be in the cards now.
The next catalyst for making that test could be the payrolls report on March 10. Since there were plenty of seasonal factors for the much stronger-than-expected January payrolls report, one has to wonder what happened in February. A much stronger payrolls report means the 10-year above 4.09%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The 2-year note is the only maturity above its November highs, when the 10-year hit 4.33%. Some market participants think that the 10-year won’t make it to its November highs as the economy will weaken this spring. If the economy does not weaken, though, an assault on 4.33% is near-certain and a new cycle high will likely follow because the German bunds and other European government bonds are already above their November highs due to the lagged ECB monetary tightening, which has significantly more room to run compared to the Fed, thus pushing eurozone yields likely higher.
The wild card remains the Ukrainian situation, which can erupt at any minute, and probably significantly more violently than the way it is proceeding at present. I view Ukraine as euro-bearish and dollar-bullish, as well as generally positive for government bonds and negative for stocks, although right now most of those asset classes are ignoring it, likely because it hasn’t escalated significantly yet.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
M2 Money Supply Shrinkage Accelerates