US June NFP forecast at 230K, upside risks exist

Market Movers

• Today’s key data release is the US employment report for June (note that this is out on a Thursday due to the US bank holiday tomorrow ahead of 4 July). As long as there is no important news out of Greece, the market is likely to at least temporarily focus on fundamentals.

• We estimate that non-farm payrolls increased 230,000 in June driven by gains in service sector employment and construction. However, the jump in the employment component in yesterday’s ISM manufacturing survey coupled with the improvement in the Conference Board’s measure on the labour market suggest some upside risks to our forecast. This pace of job growth is in our view sufficient to justify a first Fed funds rate hike in September conditioned developments in Greece.

• The gauge on wage inflation, the average hourly earnings index, will also be important. This measure of wage inflation has been lagging behind the employment cost index and as highlighted by NY Fed President Dudley Friday, higher wage inflation will make the FOMC more confident in the inflation outlook.

• Riksbank policy decision is due: we look for unchanged policy measures but see risk of a rate cut. For more on Scandi markets see page 2.

Selected Market News

The rhetoric from Greece’s premier was tougher yesterday as Tsipras in a television address again urged the Greek people to vote ‘No’ at this weekend’s referendum on bailout terms. At the same time Greece sent a counterproposal to the institutions with what Tsipras said was largely an acceptance of the previously agreed terms with some minor changes. This was, however, turned down by creditors saying the new Greek proposal involved more fundamental and non-acceptable amendments. Head of the Eurogroup, Dijsselbloem, said after the meet yesterday that talks would now be cut off until after the referendum. Meanwhile a first referendum poll (GPO, conducted Tuesday) came out a small majority for accepting the present ‘deal’ with 47% leaning towards a ‘Yes’ and 43% towards a ‘No’.

ECB late Wednesday said it would keep the ELA unchanged and not impose any haircuts on collateral posted by Greek banks. Thus the Greek banking sector is set to be kept afloat still by emergency liquidity for now despite the missed IMF payment earlier in the week.

European equities cheered early Wednesday and periphery spreads tightened on the initial prospects of a softening Greek stance but sentiment gradually soured in risk markets again. US Treasury yields rose 5-9bp with rate rises concentrated in the long end and stock markets ended the day with minor gains. Asia more mixed overnight with Chinese equities down yet again. The oil price coming off alongside a continued drift lower in EUR/USD.