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Daily Briefing: The long haul - caution as virus cases surge

LONDON (Reuters) - As high-frequency data this week showed a global economy slowly on the mend, the surge in coronavirus cases globally has sharpened the focus on whether the recovery is sustainable in the coming months.

A moviegoer walks at The Tribeca Drive-In outside Rose Bowl stadium in Pasadena, California, July 2, 2020. REUTERS/Mario Anzuoni

In the United States, non-farm employment increased by 4.8 million in June, well above expectations. But beyond the headline numbers, the data is not that upbeat.

The number of permanent job losers continued to rise, increasing by 588,000 to 2.9 million in June while the unemployment rate remains a chunky 7.6 percentage points above February levels. A Deutsche Bank analysis puts the U.S. unemployment rate higher than all its developed market peers barring Canada.

Crucially, the U.S. data confirms that easing lockdowns also helps to create a bounce back on jobs growth but at the same time brings a subsequent increase in Covid-19 cases. In those states where cases are on the rise, job growth is weaker.

On Thursday, the U.S. set a record globally with a rise of more than 55,000 cases in a single day. The resurgence slammed the brakes on a rally in U.S. stocks since it peaked above 3,200 on June 8.

China’s services sector expanded at the fastest pace in over a decade in June, according to a private survey on Friday. But these weeks of noisy data don’t really provide a guide to what’s going to happen in the coming months.

Philip Lane, chief economist at the European Central Bank, told Reuters he expects the European economy to return to pre-crisis levels only around end-2022.

Echoing that sentiment, San Francisco Federal Reserve Bank President Mary Daly said on Wednesday her best-case scenario is that unemployment will still top 10% at year’s end and won’t return to pre-crisis levels for four or five years.

That whiff of caution was evident on Friday with most Asian stock markets treading water and U.S. stock futures steady. With U.S markets shut for the long weekend and little of note on the data calendar on Friday, major markets are closeted in tight ranges.

Over the medium-term, the CBOE SKEW index which measures the demand for out of the money options for U.S. stocks is nearing recent highs, indicating investors are becoming wary of more upside gains.

U.S.-German 10-year government bond yield spreads are near six-year lows while the build-up in long euro positions, a strong indicator of a reflationary environment, has stalled in recent weeks. Despite the negative newsflow on the virus front, the U.S. dollar is set for its first daily gain in a week against its rivals.

Elsewhere, the British pound’s 1.8% rally this week on optimism that Britain and the EU will reach an agreement on future trade relations seem misplaced with meetings between negotiators cancelled this week due to lack of progress.

Emerging market shares rose to a four-month high while in currencies, the Indonesian rupiah fell nearly 2% amid concerns about the central bank’s scheme to buy low-yielding government bonds.

-- A look at the day ahead from Senior FX Correspondent Saikat Chatterjee. The views expressed are his own --