In economic terminology, the process is depicted as follow:
CPI/PPI ----->> M1-M2 spread/3m-10y yield spread ----->> PMI ----->> GDP
CPI: Stagnant ( This showed that there is no overwhelming demand to support the US economy and the inventory rundown must continue to allow CPI to increase. Thus, there is a supply issue in the US which means that weak economic growth is expected in the future.)
As the US uses interest rates to manage inflation, we will use the 3m-10y yield spread to gauge the situation. This is not applicable to Singapore because we use the currency exchange rate to manage our inflation.
3-month Libor vs US 10-year yield spread:
The 10-year yield is below the 3-month Libor now which depicts a death cross occurrence (negative signal for technical analysis). Fundamentally speaking, this means there is a shortage of money supply which will curb business investments with the ensuing outcome of slower economic growth.
The US PMI has declined in May 2019.
The decline in May inventories under the PMI corroborated the aforesaid CPI situation whereby the continual inventories rundown must persist for CPI to rise since there is no overwhelming demand to deplete the inventories. Without the rundown, the CPI cannot rise to kickstart the change in the economic process.
With the weaknesses in CPI, 3m-10y yield spread and PMI, the next US GDP figure will be weak!
