Last week was another emotional roller coaster for investors who were left weighing the progress on a possible vaccine cure versus the increase in Covid-19 cases.
Coronavirus infection counts in the US, Brazil, India and elsewhere are prompting concerns about the health of the economic recovery, but the real story should be how on earth the S&P 500 remains enduringly bid even as worsening economic signals are now the best-case scenario. It’s a perplexing market that has many traders ignoring the newsreels in favor of price action alone.
In the US, while the number of new Covid-19 cases in earlier hotspots continues to decrease, rising infection rates in places such as Florida, California, Texas, Arizona and much of the South have bent the epi-curve for the country as a whole upwards. Moreover, rising mortality growth rates in about half of the states indicate that the spike in cases is not solely due to more testing. Updated estimates show that about 50-80% of GDP comes from counties that have seen worsening Covid trends, demonstrating that the virus's continued spread remains a significant downside risk to the outlook.
This week's jobless claims data will take on elevated significance, given that they correspond with the survey period for July nonfarm payrolls. It’s been documented by readily available mobility data that they’re are seeing a leveling off in small business activity and restaurant seating, mainly in response to the virus flare-ups and lockdowns in the most affected states which could have a more pronounced effect on the labor data until the lockdowns are lifted. Indeed, the US labor market could face more significant headwinds for some time.
This week's economic calendar is relatively sparse, more so given that we’re entering the Fed blackout period ahead of its July 28-29 FOMC meeting. We’re another full week away before the FOMC effect turns full tap, but with Chair Powell peeking around the curtain waiting to rush the stage and deliver familiar themes – be it a small overshoot of the inflation target or their sustained dovish communication – it all continues to suppress longer-term yields. And at the same time, short term rates remain anchored to the Fed’s unambiguous policy of lower interest rates for as far as the eye can see. So, there should be little debate that hawks and centrists alike will continue to roost with the doves.
As for YCC, which continues to fill the Fed watcher's speculative policy sphere, it remains a tool to be considered when guidance is not working. The Fed hasn’t rushed into YCC because it doesn’t need to; its purchases, coupled with "forward guidance" and the market's principle behavior, are holding yields down. The curve is flat, the front-end low, hence there’s no need for the Fed to step in and fiddle with the curve or cap policies. Why fix what isn't broken?
However, it’s fiscal policy headlines that might be a key focus this week as Senate Republicans are expected to release their specific plan for the next stimulus package. The consequences of government income support, which faces potential "benefits cliffs" – will be crucial to support Main Street’s back, even more so with civil unrest rife throughout the US.
The $600 per week in Federal Pandemic Unemployment Compensation (FPUC) is set to expire at the end of the month. Given the short period for negotiations, there’s a rising possibility that something does not get done for a few weeks beyond expiry.
As we move into the summer holidays, FX markets will be reacting to the outcome from the European Council summit on the recovery fund, so it should be a busy week for Forex Traders
The Nasdaq is taking a breather while Cyclicals outperform as positive vaccine headlines continue to pique investor interest. NFLX did not de-rail the Growth/Momentum trade but showed how elevated expectations have become for the 'At-Home' trade beneficiaries; expect a pick-up in single-stock dispersion under the hood.
The internal market dynamic remains strong with multiple short-term bullish market signals and technical support having kicked in since last week. There has been consistent, systematic buying by risk control and risk parity funds.
There’s a ton of earnings: clinical trial data on the AstraZeneca/Oxford vaccine candidate; testimony from vaccine companies; the market will digest the July 17/18 EU Summit; fifth US fiscal stimulus bill; July Flash PMIs.
So buckle in – it could be a fast-paced and action-filled week.
Sticking with the China blueprint, China's Q2 GDP came in better than forecast. Many now think the near-term peak is in as the recovery has begun to slow, especially in the retail area. Trade data, however, surprised the upside in June.
Korea will be Asia's main focus next week, however, the data could be less fortunate. The current whisper is for South Korea to report a 1.9% qoq a decline in GDP in Q2, leaving yoy growth at -1.6% in Q2, vs. +1.4% in Q1. While this marks its second quarterly contraction, using the China V shape recovery blueprint, the worst is likely behind.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies