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Payrolls Signal Rate Hikes Sooner

Friday’s Substantial Gain in Payrolls Foreshadows Monetary Policy Shift

The blockbuster payroll event on Friday sets the stage for a new phase in monetary policy as the Federal Reserve moves closer to normalization of policies. Dollar momentum was substantial as optimism towards the economy saw the currency gain considerably versus peers.

Last Week

Greece remained in the spotlight most of the week as the impasse between creditors and the insolvent nation continue to drag on. The country decided to defer payment to the IMF, opting instead of bundle IMF payments worth $1.70 billion due for the entire month of June to buy extra time. After rejecting the reform proposal from creditors outright, the Eurogroup has set today as a deadline for accepting the proposals or offering new initiatives. Aside from Greece, payroll numbers played a dominant role in momentum with the number coming in at a blistering 280,000 jobs added versus consensus estimates of 225,000. The unemployment rate rose modestly to 5.5%, however, the gains in the dollar were sharp and swift as traders anticipate an earlier date for interest rate hikes. In other economic data, the Bank of England, European Central Bank, and Reserve Bank of Australia all voted to keep monetary policy measures on hold. ECB President Mario Draghi warned on volatility just as the summer trading months begin, with panic ensuing in the days subsequent to his comments.

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The Week Ahead

After the payroll announcement momentum fades, the main item on the agenda for the week ahead is China-centric. Overnight the country released the trade balance figures which showed the surplus expand by 25%. Coming up tomorrow will be the inflation numbers from China, both on the consumer and producer side. Consumer inflation is expected to fall to 1.30% year over year versus 1.50% in the prior period as disinflation hits the mainland. More concerning is the continued deflation in producer prices with the producer price index printing in negative territory since March of 2012. Industrial production and fixed asset investment re forecast to rise and are expected to be telltale signs of whether looser monetary policies are being felt throughout the economy. Wednesday will see the Reserve Bank of New Zealand release interest rates, forecast to stay on hold at 3.50% but expectations regarding further cuts may rise depending on the statement content. Finally, US retail sales will give a clearer indication of how consumer spending is trending after the massive jump in the savings rate witnessed last month.

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