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McConnell to release stimulus plan, coronavirus outbreaks flare, and gold hits a record. 

Starting gun

Senate Majority Leader Mitch McConnell is expected to unveil the Republican stimulus plan later today which will contain around $1 trillion of support for the U.S. economy. The proposed measures, which will be outlined in a series of bills, will aim to extend unemployment benefits, provide a new round of direct stimulus checks and provide money for schools and virus testing. Congressional approval of any package is likely to be very difficult, with a gulf remaining between the level of spending proposed by the GOP and Democrat demands for a $3.5 trillion package. Negotiations are expected to run through the first week of August, with both sides under pressure to reach a compromise before Congress goes into recess.  

Not going away

There were more signs that the pandemic is not under control, as rising cases in China and Spain show the difficulty in stamping out the virus. Hong Kong will ban gatherings of more than two people as it tries to control an outbreak in the city. The epidemic in India is now the fastest growing in the world, with cases increasing 20% to 1.4 million over the past week. The pace of new infections in the U.S. slowed in the hardest-hit states, with daily deaths dropping below 1,000 for the first time in five days. 

Gold rush

The recent rally in gold continued with the precious metal rising to a record $1,944.71 an ounce in trading this morning. If anything, the surge in silver has been more impressive, with the metal hitting $24.399 an ounce, bringing its July surge to around 35%. The rally comes as a key gauge for the dollar showed the greenback at its weakest level since January, with some strategists now predicting an extended period of weakness for the U.S. currency. Among the other factors driving gold higher is increasing fears of a stagflationary-like environment caused by the pandemic, where inflation rises without growth or employment improving. 

Markets mixed

Equity investors aren't panicking over spreading coronavirus outbreaks, with global gauges generally holding their ground ahead of Wednesday's Federal Reserve meeting. Overnight, the MSCI Asia Pacific Index added 0.7% while Japan's Topix index ended its first trading session since Wednesday with a 0.2% gain. In Europe, the Stoxx 600 Index was down 0.1% at 5:50 a.m. Eastern Time as airline stocks were hit after the U.K. imposed a quarantine order for travelers returning from Spain. S&P 500 futures pointed to a higher open, the 10-year Treasury yield was at 0.574% and oil was slightly lower

Coming up...

American durable goods orders numbers for June are at 8:30 a.m., with the Dallas Fed manufacturing index at 10:30 a.m. NXP Semiconductors NV,  Universal Health Services Inc., Avery Dennison Corp. and RPM International Inc. are some of the companies reporting today in a week that is likely to be dominated by results from some of the biggest names in tech. 

What we've been reading

This is what's caught our eye over the weekend.

And finally, here's what Joe's interested in this morning

In the wake of the Great Financial Crisis, the Fed didn't start hiking interest rates until 2015. However it's often forgotten that in 2009, right during the acute phase of the crisis, the first rate hikes were assumed to be coming much sooner, as both economists and the market were forecasting multiple hikes throughout 2009 and 2010. The easiest way to see this is on a chart of the 3-month/2-year bond spread, which is a good proxy for what the market expects for rate hikes over the short term. Throughout 2009, the spread was over 50 basis points. Flash-forward to today and you can see that the same spread is virtually zero. In other words, nobody expects any rate hikes over the next two years. 

There are some obvious differences between the two crises, but probably one of the biggest is that the debate around inflation has just totally changed since last time. Last week I spoke to Goldman's top economist Jan Hatzius, who doesn't see the Fed hiking rates again until at least 2025. As he put it: "I think in the aftermath of 2008, you had a lot of people warning of, if not hyperinflation, of inflation on the back of monetary aggregates and big budget deficits. Those kinds of predictions have turned out to be so wrong, it's hard to get an audience for it. That's going to continue to be the case as long as the labor market stays as underutilized as it is."

This really is one of the biggest changes. There are of course still people out there who think the size of the Fed's balance sheet or the historically wide government budget deficit are going to drive inflation. But they're a lot quieter this time around, because of how badly their framework failed last time. And you can see the market doesn't believe it either. Almost nobody sees any inflation coming soon, or any need for an imminent Fed rate hike.

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