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 Friday's U.S. jobs data will be the highlight of the week after some
members of the Fed's Federal Open Market Committee suggested a rate
increase could come as early as June if the U.S. economy recovered
from a weak first quarter.
A Fed rate hike could send shockwaves across the world at a time
when the global economic is slowing, emerging markets remain fragile
and Britain's EU membership referendum on June 23 is on a
knife-edge.
Economists expect U.S. employers excluding farmers to have added
170,000 workers last month, slightly more than in April, with hourly
wages growing by 0.2 percent from the previous month.
"Anything above last month's 160,000 non-farm payrolls reading
should be sufficient for the FOMC, whilst any unexpected swing in
wage growth could foster some further thoughts of a June hike,"
economists at Dutch bank ING wrote in a note.
"On balance, the FOMC is in no hurry and may wait until July when
the event risk surrounding the UK referendum has passed."
Trading in U.S. federal funds futures on Friday implied a 26 percent
chance of an increase at the June 14-15 meeting and 56 percent at
the July 26-27 one, according to derivatives exchange CME Group.
Growing market expectations of a rate hike may be self-defeating,
though, as they have been accompanied with a tightening of financial
conditions via a stronger dollar and higher bond yields, some
economists said.
These may damage emerging economies where many companies borrow in
dollars and knock down the price of some commodities, risking a
repeat of the market rout seen after the Fed's first post-crisis
rate hike in December.
"A stronger dollar is likely to increase pressure on China’s
currency and weigh on commodity prices, thereby re-introducing the
key elements of stress that led to a sharp tightening of financial
conditions earlier this year," economists at Deutsche Bank said.
"If this view is correct, the scope for further rate increases by
the Fed is reduced."
The dollar was on track for its strongest monthly performance since
last November against a basket of currencies and yields on U.S.
Treasuries were higher on the week.
ECB AND INFLATION
Next week will also see the ECB hold its policy meeting on Thursday
after the publication of inflation and lending data earlier in the
week.
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The euro zone's central bank is expected to keep interest rates on hold and
reaffirm its focus on implementing the stimulus package announced in March.
This included purchases of corporate bonds and a new round of so-called TLTRO
loans for banks, both due to kick off in June.
The ECB will likely have a rare opportunity to raise some of its inflation
forecasts for this year and the next thanks to a rebound in oil prices, giving
it some breathing space to allow its measures to work their way into the
economy.
"The combined economics departments of the Eurosystem central banks must be
sighing in relief over this round of forecasts," Anatoli Annenkov, an economist
at Societe Generale, said.
"With the Corporate Sector Purchase Programme and TLTRO II still to be launched,
and higher headline inflation in the pipeline, the ECB will be in no hurry to
launch any new measures."
Despite the bounce in oil prices and a continued, albeit modest, recovery in
lending, inflation was expected to have remained negative in May.
With price growth likely to remain below the ECB's target of almost 2 percent
until as late 2018, some economists were still betting on more ECB action before
the end of the year.
"We suspect there is some tolerance (about the time it would take to reach the
inflation target)," Greg Fuzesi, an economist at JPMorgan, said.
"But, we also think that the 2018 inflation forecast will set the scene for an
eventual easing, likely announced in September."
Every three in five economists polled by Reuters do not expect the ECB to ease
its policy again this year.
(Reporting By Francesco Canepa; Editing by Angus MacSwan)
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