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US jobs, rates eyed as Greek zero hour approaches

Jun 26 2015 18:59

London - Zero hour comes for Greece on Tuesday, when Athens will either repay $1.79bn to the International Monetary Fund after securing a last-ditch deal with its creditors or plunge into default.

Non-payment after months of failed talks on unlocking frozen aid could trigger a bank run and capital controls and set twice-bailed-out Greece on a path out of the euro zone. It would also discomfit financial markets around the world.

That's to be seen.

Greece aside, the week's focus is likely to be Friday's US non-farm payrolls report and the ADP private sector jobs data a day before, as markets look for signs that continued growth in the world's biggest economy is boosting employment and wages.

Federal Reserve chair Janet Yellen emphasised after the US central bank's June 16-17 meeting that any decision to lift interest rates from crisis-era lows - widely expected to come this year - would rest on labour market improvement.

Yellen said she wanted "more decisive evidence" that labour markets were healing, and that wages would increase beyond their current "subdued pace".

The Fed is expected by economists to hike rates in September for the first time in almost a decade.

Economists polled by Reuters expect the payrolls figure, which comes on Thursday this time because of the July 4 holiday, to show the U.S. economy added 232 000 jobs in June after May's unexpected 280 000 surge, which cemented rate hike expectations.

Wednesday's ADP National Employment Report is expected to show 218 000 jobs added compared with 201 000 in May.

Last month's payrolls report showed hourly wages rose 2.3%, the strongest since August 2013 but still far short of the 3% to 4% wage gains Yellen has said she would see as signalling a healthy job market.

Policymakers said after the June meeting that the US economy was probably strong enough to support an interest rate increase by year-end, despite a downward revision to the Fed's growth forecast after a first quarter contraction.

Policymakers' individual projections for the appropriate federal funds rate at year's end remained clustered around 0.625%, implying two quarter-point rate hikes by then.

Federal Reserve Governor Jerome Powell last week joined four other Fed officials in saying he was prepared to raise rates twice this year as long as the economy performs as expected.

"My own forecast calls for lift-off in September and for an additional increase in December," he added.

The U.S. unemployment rate, which Powell and others including Fed vice chair Stanley Fischer have said they regard as a better measure of economic strength than GDP figures, is expected to fall to 5.4%.

A slight rise in the rate in May, to 5.5%, was received positively by investors, who saw it as a sign that more people who had been sidelined were rejoining the job hunt.

Inflation

With the European Central Bank continuing to pump billions into the economy each month, Tuesday's flash reading of eurozone inflation will give an indication of whether the massive stimulus is succeeding in spurring growth and prices.

Economists polled by Reuters predict a June reading of 0.2% year-on-year - lower than the 0.3 in May, when inflation surprised on the upside after five months of falls and stagnation, It is far from the ECB's near 2% target.

The ECB said at its June meeting that it expects 0.3% inflation this year, rising to 1.5% in 2016 and 1.8% in 2017.

A stronger-than-expected rebound could raise questions among economists whether the ECB needs to continue with its sovereign bond buying programme, launched in March to fight off deflation, until its scheduled end date of September 2016.

A slew of monthly Purchasing Managers Index surveys, which gauge private sector economic activity, will also provide a steer on how the eurozone and other economies are faring.

A continuing trend of weak inflation is the biggest threat to expectations that interest rates will start to rise. Inflation was flat in the United States in May and just 0.1% in Britain - seen as the next most likely candidate to lift borrowing costs, early next year - even though global oil prices have jumped in recent months.

Wednesday's publication of the Bank of England's Financial Stability Report, after which Governor Mark Carney will hold a news conference, could dominate attention in Britain.

The FSR is likely to discuss recent volatility in financial markets stemming from worries about Greece and the prospect of interest rate hikes - and whether the financial sector can deal with a shortage of liquidity.

Signs the UK housing market is picking up again may also be addressed, a year after the BoE imposed a cap on home loans and tougher checks on whether borrowers can repay their mortgages to try to cool a red-hot market.

us  |  europe  |  greece  |  world economy
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