Last week it was improved economic data and a less harmful growth outlook that intersected fears of a "second wave" and the reclosing of the economy. This week it will be a continuation of second wave fears and a rare "jobs Thursday" due to the July 4th holiday, and for the macro purists it’s all about jobs when it comes to yields. 

The week's shortened data docket is nevertheless packed with notable data releases, particularly the June employment report (Thursday) mentioned above; there should be a lot of noise in the data, but most important will be the temporary vs. permanent job losses in the household survey. 

Wednesday's ADP private employment survey (+2.300mn vs. -2.761mn) will anchor expectations ahead of Friday's release though, given the historic miss last month, this week's series may be discounted somewhat. Nonetheless, Thursday's initial jobless claims data (1450k vs. 1480k) remain one of the best real-time indicators of the labor market and a major tradable event. 

That said, while the number of new US Covid-19 cases in earlier hotspots continues to decrease, rising infection rates in Arizona, California, Texas and much of the South has skewed the epi-curve for the country as a whole upwards. Moreover, rising mortality growth rates in nearly one-quarter of states indicate that the spike in cases is not solely due to more testing.

The continued spread of the virus remains one of the most significant downside risks to the economic outlook as about 30-50% of GDP comes from counties that have seen worsening Covid trends. 

While gauges of mobility have risen over the past few weeks as state economies reopened, this increased mobility likely contributed to the recent pickup in Covid-19 cases which, in turn, is causing a reversal of mobility trends and a reduction in economic activity, particularly in the hardest-hit states.

Another data highlight will be the final June PMI releases from around the world. The manufacturing numbers are out on Wednesday before the services and composite PMIs come out on Friday, while the US ISM manufacturing index (Wednesday) could be another tradable event. Last week the flash PMI reading generally surprised to the upside.

And, as always, it’s worth keeping an eye on the numbers for China, given they’re some way ahead in the reopening process relative to the US and Europe. 

In Asia, export data will be the main focus where economists expect South Korea's exports are likely to contract at a slower pace of -15.7% in June vs. -23.6% in May. As for other economies, Hong Kong and Malaysia will release their May reports next week, both of which are likely to deteriorate from April. Hong Kong's exports are expected to contract at a faster pace of 8% in May vs. 3.7% in April, while analysts expect Malaysia to see exports decline by 25% vs. 23.8% in the same period.

Gold market musings 

When stocks make multi-year highs, CNBC and the mainstream media cheer. When gold or bitcoin make multi-year highs, Twitter goes euphoric. 

Yet, outside of Twitter’s gold-fevered echo chamber, there’s highly sophisticated modeling at work that goes well beyond the low-interest rate or balance sheet expansion. But Fed balance sheet expansion (on its own) probably isn’t a great reason to buy gold since stocks have had a higher beta than gold to past QE, both on and off. 

The first thing that pops out is that it looks like QE123 was more bullish stocks than gold. The trajectory of the stock market outperformance follows the expansion of the Fed's balance sheet pretty closely. 

But gold has offered up a fantastic comfort blanket for most investors. Even more so now as, for most rational investors, it makes more sense to purchase gold over stocks given the incomprehensible high valuations in stocks versus the real economy. Even with the negative carry (SPX 2% yield), gold continues to offer the best non-USD safe- haven.

However, the lack of inflation poses a difficult question for the gold rally. 

The gold price has tracked real 10y yields (inverted) very well. That suggests gold needs real yields to continue to fall for the price to go higher. Either yield does not rise with inflation, or yields must fall faster than inflation. Given inflation is headed lower in both the short and medium-term, gold needs yields to continue to fall this year. Can central banks get rates even lower? If they can't, this could be a risk to the liquidity-driven rally and, therefore, gold may be moving from a "heads I win, tails you lose” asset to one which requires a particular confluence of events to sustain the price rally.

Forex market musing 

The global risk-off sentiment caused by rising Covid-19 cases and the announcement of US tariffs on Europe and the UK failed to impact the FX swaps market, with the main currencies closing the week with tighter FX/OIS basis. The reduction in the Fed balance sheet is mainly due to the low usage of FX swap lines abroad as global central banks can source US dollar funding for less cost than using the Fed lines.

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