Monday, 1 April 2013

Slower growth in M2 Money Supply, Movements in the U.S Monetary Base and Money Supply (as of 20 Mar-13)


Please note that as of this week the numbers used in this report have been changed from "seasonally adjusted" to "not seasonally adjusted". The numbers in this report are therefore not directly comparable to the numbers in the previous reports even though the general trends will be similar.

Base money (monetary base) increased rapidly for the sixth bi-weekly period in a row according to data released by FRED for the period ending 20 March 2013. The increase of 1.57% during the last two weeks put base money at yet another all-time high, ending the week on USD 2.9528 trillion, 9.7% higher than at the at the end of 2012.  

The M1 and M2 money supply measures continue to increase significantly on a year on year basis. The trend in recent weeks for both series is however a slowdown in the YoY growth rate: 
  • The M1 YoY growth rate (smoothed over four bi-weekly periods) as of this week was 11.12% compared to an average of 15.35% for 2012. M1 money supply is now 3.3% lower than it was at the end of 2012.
  • The M2 YoY growth rate on the same basis was 6.82% this week compared to an average of 8.50% in 2012.
As was reported two weeks ago, "To the extent that growth in the broad measures of money supply drives the stock market, investors should pay attention to this decline". 

Monetary Base
The Monetary Base increased 1.57% for the bi-weekly period. At USD 2.9528 trillion it was the highest base ever reported. The base was up by 10.58% compared to the same period last year.

M1 Money Stock/Supply
The M1 Money Stock decreased 3.12% for the bi-weekly period and ended the week on USD 2.3969 trillion. Compared to the same period last year, M1 increased 9.39%.

M2 Money Stock/Supply
M2 Money Stock increased 0.92% for the bi-weekly period and ended the week on USD 10.5351 trillion. Compared to the same period last year, M2 was up by 6.78%.

M1 Money Multiplier and M2/Base ratio
The M1 multiplier remains considerable lower than it was during 2007 and the majority of 2008. It has however increased steadily from around June 2011, but for the first time since the end of February last year it ended lower this week than one year ago. Though base money is increasing rapidly, most of it is being parked at the Fed (where it earns interest) as excess reserves. As a result, M1 money supply is increasing at a slower rate than it theoretically could (based on reserve requirements) thereby suppressing the M1 Money Multiplier.

The M2/Base ratio also remains considerably lower than the historical average. Following 24 months of YoY growth in the ratio, it declined this week by 3.44% on the same period last year and represented the second bi-weekly period in a row with a YoY decline.