US Data to Provide Indications of the Scale of the Q2 Rebound

• Greek negotiations continue as deadlines for IMF repayments approach
• US payrolls report to show labour market is continuing to tighten
• Euro area CPI to provide further evidence that deflation risks are abating

Greece negotiations at a crucial point. Greece faces another deadline in the coming week as a €300mn debt repayment to the IMF is due on June 5th. While Greek government sources had expressed hopes that some agreement would be reached with its creditors by this weekend, that now looks unlikely. An agreement before June 5th remains a stronger possibility, although a number of differences are said to still exist.  Even if a deal is not done by then, Greece will probably still be able to make both that repayment and a further one of around €330mn due on June 12th. However, June’s third repayment of €560mn, due on June 16th, may prove to be a much bigger hurdle.  

ECB to leave policy unchanged. The ECB’s latest policy meeting (Wed) is unlikely to signal any change in policy direction. After the last meeting, ECB President Draghi noted that, despite encouraging signs in recent economic data, it was far too early to be talking about a tapering of the QE programme. He will probably make very similar comments after the latest meeting and reiterate that the programme will continue until the end of September next year. The ECB will also release its latest staff projections. Although inflation for this year may be revised higher from the 0.0% forecast in March, the projections for 2016 and 2017 (previously 1.5% & 1.8%) will be more closely watched and will probably be broadly unchanged.  Prior to the meeting the ‘flash’ estimate of May CPI inflation (Tues) is expected to show a rise in both headline and core inflation. If realised, this would help to further ease concerns about deflation. 

US labour market continuing to tighten. 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 Friday’s payrolls report will be particularly eagerly awaited. Other indicators suggest that the labour market has continued to tighten in recent weeks, with initial jobless claims falling to a new recovery low during May. We expect a 230k rise in employment, which would be the largest since February, while the unemployment rate is forecast to be stable at 5.4%, and earnings growth is expected to pick up modestly to 2.3%.   

And signs of a rebound in activity expected. Prior to payrolls, other indicators will provide updates on the strength of activity in April and May. The manufacturing (Mon) and non-manufacturing (Wed) ISMs have so far this year looked stronger than ‘official’ data, although it is possible that subsequent revisions may change that. We expect the non-manufacturing ISM to fall modestly following last month’s very strong rise but to still stay at a level historically consistent with above-trend GDP growth. April data for consumer spending, construction (both Mon) and trade (Tues) will give indications as to the extent to which GDP growth will rebound in Q2. We expect GDP to rise in excess of 3% annualised, which will leave a September rate hike by the Fed on the cards.  

UK monetary policy still on hold. The June MPC meeting (Thurs) is not expected to lead to a change in policy. For the next two months the MPC will experiment with a new policy setting schedule but outside observers will not see any difference until August when the policy decision, minutes and Inflation Report will all be released at the same time. For now, the minutes will still not be released for another two weeks. PMI data will give some initial indications of economic activity in May. We expect them to continue to point to an acceleration in GDP growth in Q2. Finally, the recent slide in the Aussie dollar points to the likelihood that the Australian central bank stands pat at Tuesday’s policy meeting.