M3 still on top (fg)

Last week, new figures on monetary aggregates were released. They still show high annual M3 growth rates with 10.0% in February 2007 compared to 9.9% in January 2007. However, M3 data may well be distorted due to international carry trades and the flat yield curve. As ECB Board member Lorenzo Bini-Smaghi recently stressed, a flat yield curve increases incentives for investors to optimize their portfolios by shifting positions short-term. This reallocation induces increases in M3. In the mean time, carry trades generated an a abrupt surge in MFI net external assets (260% yoy growth rate!) which represents a direct counterpart of M3 in euro area aggregated balance sheet.