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TL;DR: The Central Bank of the Republic of China (Taiwan)'s discount rate and money supply indicators (M1B and M2) are key to understanding capital flows in the Taiwan stock market. In particular, the "golden cross" and "death cross" of M1B vs. M2 growth rates are classic entry and exit signals used by seasoned Taiwan stock investors.

Concepts

Taiwan's Central Bank Rate: The Discount Rate

Taiwan's central bank, like the U.S. Federal Reserve, uses interest rate adjustments to influence the economy. Taiwan's most important policy rate is the discount rate, which functions similarly to the U.S. federal funds rate.

The central bank holds a quarterly board meeting (March, June, September, December) to decide whether to adjust rates. A rate hike signals that the central bank sees an overheating economy or rising inflation and wants to apply the brakes; a rate cut signals the economy needs stimulus.

Taiwan's central bank rate is relatively stable compared to the Fed's more frequent adjustments. However, each change affects mortgage rates and corporate borrowing costs, which in turn influence the stock market and real estate market.

What Are M1B and M2?

To understand the stock market's capital momentum, you need to know these two money supply indicators:

M1B: Includes cash in circulation, demand deposits, and passbook savings deposits. This money is "available to use at any time" and represents the most liquid funds in the market. When M1B increases, it means people have more "ready cash" on hand -- and that cash is likely to flow into the stock market.
M2: Includes everything in M1B plus time deposits, foreign currency deposits, and other less liquid instruments. M2 represents the total money supply in the economy.

The M1B-M2 Golden Cross and Death Cross

This is one of the most classic indicators in Taiwan's investment community:

Golden Cross: When M1B's year-over-year growth rate rises above M2's growth rate, it signals that money is flowing out of time deposits and into demand accounts (likely in preparation for stock market investment). Historically, a golden cross has often preceded a rally in Taiwan equities.
Death Cross: When M1B's YoY growth rate falls below M2's growth rate, it signals that money is moving out of the stock market and back into time deposits. This is typically a warning sign that the market is weakening.

The logic is intuitive: when people break their time deposits and move money into demand accounts to invest, M1B grows faster than M2. Conversely, when people take profits from stocks and lock money back into time deposits, M1B growth slows down.

One caveat: this indicator has some time lag and is not accurate every time. It is best used in combination with other indicators rather than in isolation.

Hands-On: Using CTSstock

On the CTSstock homepage (/home), the economic indicators dashboard includes:

Discount Rate Trend: Track the historical changes in Taiwan's central bank rate.
M1B and M2 YoY Growth Rates: Observe the trends and crossover patterns to assess capital momentum.
Golden Cross / Death Cross Signals: Quickly identify the timing of M1B-M2 crossovers.

It is recommended to revisit your capital flow assessment each month after the central bank publishes new money supply data.

FAQ

Q: How reliable is the M1B-M2 golden cross? A: Looking at historical data, the golden cross has reasonable value as a "big picture" directional guide, but it does not perfectly predict every time. Sometimes the crossover appears after the market has already rallied. Treat it as a supplementary indicator rather than relying on it as your sole investment signal.

Q: How much does a Taiwan central bank rate hike affect the stock market? A: The impact depends on the magnitude and context of the hike. A modest hike amid a healthy economy is usually absorbed well by the market. But consecutive or aggressive hikes increase the burden on mortgage holders and businesses, creating pressure on both the stock and real estate markets.

Q: What is the relationship between the central bank rate and mortgage rates? A: The discount rate serves as one of the benchmarks for mortgage rates. When the central bank raises rates, commercial banks typically raise mortgage rates as well. For homeowners with mortgages, each half-point hike (0.125%) increases monthly payments, which squeezes consumer spending and indirectly affects the broader economy and stock market.