It's alive? It's alive!
A curious thing happened with this week’s M2 money supply report. After three years of wild swings, it appears M2 is trying to fall in to its old pattern.
Here’s a closer look without 2020-2023.
As a reminder, this chart is M2 on a 13-week annualized basis. M2 is a measure of the money supply that includes cash, checking deposits, and other deposits readily convertible to cash, such as CDs. M2 is part of the H.8 money supply release which is updated monthly.
The 13-week annualized money supply came in at 4.7% for the week of April 1st. Here are the numbers YTD:
Where did this increase in the money supply come from?
Looking at the H.8 release table, it looks like bank credit is expanding.
It is up 1.1% year-over-year after a sudden dip negative. This will account for part of the money supply expansion.
I’m guessing that the majority of this expansion is happening at larger banks. Looking at the raw M2 weekly data, there were a lot of revisions lower. Some dating back a year. To me, it looks as though the slower reporting banks (mostly smaller ones) are showing declines in money growth.
Some government spending from the Inflation Reduction Act is still trickling through, but keep in mind the recent strong money supply growth doesn’t take into account the nearly $1 trillion in aid for Ukraine, Israel, and Taiwan that was recently passed.
I am also seeing expanded use of margin debt in the stock market:
Margin debt is added fuel for the fire when it comes to the stock market. However, leverage cuts both ways.
Today saw the release of the Fed’s favorite inflation tracker, the PCE index.
Coming in at 2.7% y/y it continues to stray further from the goal of 2%. Fed Chair Powell has pounded the table on needing to see it in the data that inflation was going to move materially towards the Fed’s 2% goal before they would begin cutting rates. The term he has be hammering on was “greater confidence”. That confidence has yet to show up and now the market is starting to get it.
The CME’s FedWatch tool shows we are down to one cut in 2024 and one in the first quarter of 2025. Interest rates have moved strongly higher over the past month.
It took 2-3 years for the big 2020 pump in the money supply to show up in the PCE inflation figures. 13-week annualized money supply bottomed around June of 2022. Does this mean the big bust comes sometime in the next year?
I think it is much more likely that something outside the US goes bust before that. We are seeing strain in Asia as Japan’s currency is losing value quickly and there are predictions that China will devalue theirs soon. Europe is caught between a rock and a hard place. Decision time is quickly coming for the ECB. They will need to make a choice between maintaining bond yields or allowing the Euro to depreciate against the dollar. Their latest trial balloon of cutting rates soon makes me think that the ECB would rather see the Euro depreciate than have sovereign bond yields rise. In a way, this will bail out the euro-zone banks who are holding these bonds.