Eyes on Yellen for rate-hike signals after payroll data shocks

By Leigh Thomas

PARIS (Reuters) – Investors will be looking for signals from Federal Reserve chair Janet Yellen this week about the U.S. central bank’s next rate move after shockingly weak payroll data all but killed off chances for a hike this month.

But the focus will also not stray far from developments in Britain as voters there prepare to vote in a referendum on June 23 on whether to stay in the European Union.

Expectations for the next Fed rate hike were knocked back to at least July or later after U.S. non-farm payroll data on Friday showed U.S. employers added only 38,000 jobs in May, far below expectations of 164,000.

At an event on Monday in Philadelphia, Yellen gets her last chance to offer insight into Fed thinking before a media blackout takes effect ahead of the June 14-15 monetary policy meeting.

“We will have to listen carefully for her analysis of what definitely is a deterioration of the labor market conditions,” economists at BNP Paribas wrote in a note.

Investors will be looking to see whether Yellen, who had said last month she expected interest rates to rise “in the coming months”, sticks to her tune after the data.

The Fed raised its key benchmark interest rate in December for the first time in nearly a decade, but has held off since then due to concerns earlier this year about a global economic slowdown and financial market volatility.

BREXIT FEARS

The latest polls on British voters’ intentions in the EU referendum will guide investor risk appetite with recent surveys suggesting the Brexit camp making creeping gains.

Investment bank J.P. Morgan said on Friday that opinion polls suggest the “In” camp had seen its lead narrow to just two percentage points from nearly eight points just over a week ago.

“As we move closer to the referendum date, markets are likely to become ever more sensitive to the signals stemming from Brexit polls,” Unicredit fixed income strategist Kornelius Purps wrote in a note.

UK manufacturing output data from April will offer insight on Wednesday into how much damage the uncertainty over the referendum is wreaking on the British economy with economists expecting on average a flat reading.

In the euro zone, the industrial sector will offer clues into how well the economic recovery there is holding up heading into the second quarter.

Economists polled by Reuters are on average looking for German industrial output on Tuesday to show a 0.6 percent jump in April, recovering somewhat after a 1.3 percent drop the previous month.

In France, April industrial production is seen bouncing back 0.4 percent while Italian output is seen picking up to 0.9 percent after stalling in March.

Elsewhere, Chinese foreign exchange reserves and trade data on Monday and Wednesday respectively will update views on how well its economy is coping with slower growth.

U.S. Treasury Secretary Jack Lew told Reuters on Friday he would “keep the pressure” on Chinese officials during talks in Beijing on June 6-7 to stick to their reform commitments and execute pledges to reduce excess industrial capacity that is distorting world markets.

(Reporting by Leigh Thomas; Editing by Richard Balmforth)