Charts of the Week: The Soft Landing Narrative (Again)

Stocks and broad money growth The relationship between broad money growth and equity markets is complex and influenced by various factors, including monetary policy, investor sentiment, and global economic conditions. While the two are interconnected, the impact of money supply changes on equity markets can vary depending on the broader economic context and the policy environment. Bearing these considerations in mind, it is noteworthy that a divergence has emerged between monetary growth rates in some major advanced economies and global equities in recent months (see chart 1). Although the initial post-pandemic surge and the subsequent slowdown in broad money growth mirrored fluctuations in the global equity markets, this correlation has weakened over the last 12 months. For instance, equity markets have shown remarkable strength even as growth in the broad money supply has remained tepid.

US capital spending This week’s durable goods orders data suggested ongoing – and unexpected – resilience in US capital spending. Core (ex. defence, ex. aircraft) capital goods orders, for example, rose by 0.8% m/m in February to lie 0.6% higher than last year. Their overall level, in the meantime, while admittedly supported by higher capital goods price inflation, has been arguably much stronger than might have been expected in a rising interest rate environment (see chart 2 below). There are several reasons for this including the US government’s stimulus programmes, the Green Energy Transition and broader efforts to reconfigure supply chains.

Inflation expectations in the euro area This week’s European Commission survey of consumer and business confidence chimed with other regional surveys that have been released in recent days by suggesting that activity in the euro area is perking up a little. The underlying details of the consumer confidence survey were also encouraging on the inflation front. Specifically the 12 month ahead inflation expectations gauge fell back, specifically to a percentage balance of 12.3 in March from a prior 15.4, and the first monthly decline since last November (see chart 3).

Supply chain bottlenecks The Red Sea shipping disruptions that had threatened to choke off global supply chains appear to be a little less threatening for the global economic outlook. That at least is the message from last week’s flash PMI surveys of the manufacturing sector in the US and Europe. Supplier delivery times in the euro area, shortened further compared with the previous month and lengthened less acutely in the UK. The US survey also exhibited shorter lead times in March, though not as short as in the previous month (chart 4).

Asia’s portfolio flows Foreign investor inflows into Asian equities took a turn for the better in February, aided by net purchases of assets in Mainland China and South Korea. This followed a stalling of foreign fund flows in January but represents a return of form relative to the pace of inflows that were chalked up in 2023. With that said, and while recent semiconductor sales and exports figures in the broader Asian region have been encouraging, there remains much to watch regarding China’s economic outlook.

India’s catch up potential As that previous exhibit also suggested India has – on the whole - acted as magnate for foreign equity inflows over the past few months. That’s presumably, in part, because of its economic growth potential relative to other, more advanced, economies in the region. Looking at, for instance, the level of internet penetration suggests much scope for India to catch up with the technological progress that’s been achieved by more advanced economies over recent years, for example (see chart 6 below).