Friday June 26, 2015 - 16:32:06 GMT
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Week Ahead: ECONOMIC DATA ANALYSIS FRIDAY 26 JUNE 2015
DEAL OR NO DEAL?
Greek impasse continues as negotiations enter a critical phase
US payrolls report to show labour market is continuing to tighten
June PMIs to highlight the strength of the UK economy
Despite ongoing negotiations over the past week, a significant gap still remains between Greece and its creditors, so much so that negotiations have entered a critical phase. Political pressure to reach an agreement by market opening on Monday remains intense, the lack of which would likely severely impact on sentiment. This would risk placing Greece’s banking system under further strain, which has seen total deposits plummet by around 25% in the past eight months, raising the potential for capital controls; particularly if the ECB restricts access to Emergency Liquidity Assistance (ELA) which has proved a key lifeline over the past few weeks.
A further meeting of eurozone finance ministers is scheduled for Saturday afternoon, ahead of which a working group of euro officials is expected to continue working behind the scenes to iron out differences. Even with a successful conclusion to negotiations being reached over the weekend, the timetable remains extremely tight in order to ensure that the bailout programme is extended past Tuesday’s deadline. The terms of any agreement would need to be rushed through the Greek parliament and passed successfully before the other euro nations, in particular Germany, present the terms to their own respective parliaments.
In the event of a successful conclusion to the Greek saga, market anxieties are likely to be eased and attention is expected to switch to the US and the likely timing of the first rate hike by the FOMC. The coming week is an important one for assessing the extent to which US economic growth is picking up in Q2 following its weak start to the year. The Fed’s identification of further labour market improvement as one of the key preconditions for a hike in interest rates means that Thursday’s payrolls report - published early due to the Independence Day holiday on Friday - will be particularly eagerly awaited. Other indicators suggest that the labour market has continued to tighten in
recent weeks. With initial jobless claims remaining low during June, we expect a 235k rise in employment, while the unemployment rate is forecast to dip to 5.4%, and earnings growth is expected to remain stable at 2.3%.
Aside from payrolls, other indicators will provide updates on the strength of activity in May and June. The manufacturing ISM (Wed) has so far this year looked stronger than ‘official’ data, although the sector has been impacted by the strength of the dollar. While regional surveys for June have been mixed, we expect the manufacturing ISM to fall modestly following last month’s very strong rise. May data for construction (Wed) and factory orders (Thurs.) will give indications over the extent to which GDP growth will rebound in Q2. A rise in excess of 3% annualised, would likely leave a September rate hike by the Fed on the cards.
Similar to the US, the outlook for UK activity in Q2 remains a key consideration in assessing the timing of the first hike in UK interest rates. Following comments from Martin Weale over the past week, the likelihood of a split vote at the August MPC meeting looks an increasing possibility. While developments in the labour market will be key, a firm activity background also remains essential. The PMIs and hard data for Q2 so far point to an acceleration in GDP growth from the slowdown in Q1. This view is expected to be confirmed by pickups in the June PMIs (see back page). Ahead of which the Lloyds Business Confidence Barometer will be watched for an early insight into June business sentiment.
In a light calendar week for the euro area, aside from the final read of June PMIs, the ‘flash’ estimate of June CPI inflation (Tues.) is expected to show headline and core inflation unchanged, before resuming its upward trend over the coming months as deflation risks recede further.
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