US Open – Income, Spending and Inflation Data Key

The next week could be extremely important for markets this year, with Greece looking for a cash-for-reforms agreement by Friday in order to fund the latest €300 million repayment to the International Monetary Fund and the U.S. releasing a whole host of data that could open or close the door to a rate hike in 2015.

It all sounds very dramatic but that is the feeling that is being experienced in the markets right now. The latest round of negotiations between Greece and the institutions – IMF, E.U. and European Central Bank – has gone on for four months and until now the country has always found a way to fund itself, sometimes in rather creative ways. This has bought the country time to try and negotiate a better deal for Greece with its creditors, something it has thus far struggled to do.

I cannot see a deal being done this week with both sides apparently still far off on key issues of labour and pension reform and VAT, areas where Greece has drawn supposed red lines. The most likely outcome this week is likely to be the IMF rolling together all four repayments due to it in June totaling €1.6 billion and requesting it be paid at the end of the month. This buys the country a few more weeks although I do have doubts about what they believe they can achieve that they were unable to do in the four months preceding it.

I can only assume that if the IMF is willing to do this, there must be hope that something productive can come from a few more weeks of negotiations. I would still be very surprised if we got a disorderly default from Greece. What could be more likely is that plans are being put in place for some form of future debt forgiveness which would technically still be a default but a far less threatening kind and one that most people agree is necessary. For this to happen though, Greece would have to remove the red lines drawn on those issues and accept its medicine.

In the U.S. it’s also a massive week and there’s two batches of data that I think will be very key. The obvious one is the jobs report on Friday when we’ll learn how many jobs were created in May and whether we saw any growth in incomes that could spur sustained growth in spending going forward. The poor first quarter appeared to carry through to April which has cast doubt on whether the Fed will raise rates this year. While the Fed still believes it to be transitory, they may struggle to support that view if the May data doesn’t improve. Job creation has never really been a problem but I still think investors and the Fed will want to see strong figures, the same applies to the unemployment rate.

The other batch comes today, with the U.S. releasing personal income and spending figures as well as the core personal consumption expenditure price index, the Fed’s preferred measure of inflation. These figures are key and could highly influence whether the Federal Reserve hikes interest rates this year, even as early as September. I think the inflation reading will remain fairly subdued at the moment and market expectations are for it to rise slightly to 0.2%.

Personal income and spending figures will be watched very closely as they will offer insight into inflation expectations, which is what the Fed takes into consideration when making its policy decisions. Income is seen rising by 0.3% having stagnated in March, while spending is expected to rise 0.2%, down slightly from 0.4%. This would be the first time we’ve seen three months of rising spending since the start of last year, although none of the figures have blown us away. If we could see stronger number today, it puts a September hike well and truly back on the table. Worse figures would seriously raise questions over whether spending will pick up enough this year to convince the Fed that inflation will rise to its 2% target or whether the economy requires lower rates for longer.

For a look at all of today’s economic events, check out our economic calendar.

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