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U.S. jobs report again at center stage

Fri Jul 30, 2004
By Burton Frierson

LONDON, July 30 (Reuters) - The U.S. labour market will take centre stage next week as markets look to the August 6 non-farm payrolls report to confirm or confound expectations the Federal Reserve will gradually keep moving interest rates higher.

Next Friday's U.S. jobs release will follow euro zone and U.S. manufacturing and service sector surveys during the week, as well as central bank meetings expected to keep euro zone rates on hold and raise British borrowing costs by a quarter point.

But the payrolls report is likely to overshadow other events and analysts see a firm reading as key to supporting the optimistic view Fed chief Alan Greenspan expressed last week -- that a recent soft patch in the U.S. economy was transitory.

"The biggest number next week is clearly non-farm payrolls," said Jim Webber, chief economist at Toronto Dominion Securities.

"For the moment we are looking for signs the U.S. economy is creating jobs because in most people's minds that is the key to whether the Fed continues to tighten, and how quickly."

Economists predict July's report will show the U.S. economy created 220,000 new jobs.

This would compare favourably the modest gain of 112,000 payrolls recorded in June, which was only half of analysts' forecasts at the time.

The June report poured cold water on some of the more aggressive bets in the market for future Fed tightening, before Greenspan's reassuring testimony before Congress last week.

"You saw the way the market reacted to the Greenspan speech in that it created a revision of expectations, growth and inflationary expectations," said Mark McFarland, currency strategist at UBS.

"A bigger number than expected for payrolls growth could make that situation more positive for the dollar."

Economists expect Monday's U.S. Institute of Supply Management manufacturing index to show a rise to 61.5 in July from 61.10 in June and Wednesday's ISM services survey also to show a rise to 61.50 from 59.9.


Analysts are almost unanimous in predicting that factors such as a strong British economy, robust consumer spending and rising inflation pressures will prompt the Bank of England (BoE) to raise interest rates to 4.75 percent next Thursday.

All but one of the 45 economists surveyed said the Bank would add another quarter point hike next week to the four it has delivered since November.

"The money supply numbers, the lending numbers suggest the UK economy is growing pretty quickly, well above trend, and that the BoE is going to have to raise rates fairly aggressively," said McFarland at UBS.

"Sterling's pretty well underpinned by the prospects of higher interest rates."

Strong quarterly gross domestic product and monthly retail sales data helped intensify rate hike expectations recently.

Data on Thursday showed easing demand for home loans, but the same release showed consumer credit rising sharply.


In contrast to the BoE, analysts were unanimous in predicting the European Central Bank would leave interest rates unchanged at the historically low level of 2.0 percent when it meets on Thursday.

Weak jobs growth and a strong currency were keeping euro zone inflation in check and most of them said the ECB would wait until early next year to raise interest rates.

With no change in interest rates expected, markets will watch the manufacturing and service sector surveys for a forward looking view of the euro zone economy, as well as German July unemployment on Wednesday which is forecast to remain steady at 10.5 percent.

Economists expect Monday's Reuters manufacturing euro zone purchasing managers index for July to improve to 54.7 from 54.4 and Wednesday's services PMI to rise to 55.50 from 55.30.

"The manufacturing sector is in boom territory. The services side will tell us how the domestic demand is shaping up," said Harvinder Sian, strategist at ABN AMRO.

"One topic of discussion in the market is with the employment market stabilising and domestic credit rising, there could be renaissance in domestic demand...but you don't want to do too much ahead of payrolls."





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