A “monetarist” perspective on current equity markets

Global monetary conditions point to a cooling economic outlook through mid-2027, with weaker equity returns, stabilising bond yields and greater risks in Europe than in the US or China.

• Global manufacturing PMI new orders reached a four-and-a-half-year high in September after six-month real narrow money growth peaked in February, but the subsequent monetary slowdown signals a reversal in PMI momentum into early 2027.
• The aggregate figures mask strong US monetary conditions, alarming real-term contractions in Europe, Japan and Australia, and Chinese growth that remains modest by historical standards; the expected slowdown should therefore be led by the weak-money economies.
• The author argues that the ECB and BoJ may already have overtightened, while the Fed could still be behind the curve, although US nominal money growth fell back in August and may mark the end of US monetary exceptionalism.
• Higher energy prices initially distorted the global real-money slowdown through an inflation boost, while weaker nominal money growth now reflects the first effects of policy tightening; six-month consumer-price momentum is nevertheless likely to rebound in Q4 on current commodity prices.
• China is an upside risk if weaker exports prompt stronger measures to support domestic demand, but any monetary impulse would probably not affect the economy before mid-2027; in the eurozone, narrow-money weakness is concentrated in France and Italy, while banks have stopped buying French Treasuries.
• The real narrow-money growth gap versus industrial output fell below zero in April and remained negative in August, coinciding with higher bond yields and a stall in equities, including the equal-weighted MSCI World index falling below its end-February level.

Takeaway: With both real-money and industrial-output momentum likely to weaken into year-end, the author expects bond yields to stabilise but equity returns to disappoint, while France faces a potential economic and funding crisis unless the ECB ends policy restraint earlier than expected.