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Assumptions in state of flux
CHICAGO, June 7 (Reuters) - The likely path of the U.S. economy and interest rate policy made an abrupt shift on Friday, but prospects for a speedy recovery face more tests next week with the latest large sale of long-term government debt and a key retail report. A surprising May jobs report on Friday suggested a U.S. rebound could be closer at hand than some pundits had guessed, giving investors food for thought even in a week when the data diet is a bit thin. Indeed, some of the more cautious assumptions about the U.S. and global economies, and the trading strategies associated with them, were jettisoned after Friday's potentially game-changing payrolls report. U.S. nonfarm payrolls fell by 345,000 in May, the fewest job cuts since September. The total was far less than both the expected 520,000 drop and the revised 504,000 reduction in April. The data left investors in "a state of flux," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut. U.S. short-term interest rates jumped after the jobs report as traders braced for an interest rate increase from the U.S Federal Reserve as early as November -- a move that would shift the landscape for other central banks. Many economists and traders are still unconvinced that the U.S. economy, which just ended its 17th month of recession, can so easily absorb a spike in interest rates without choking off the recovery. "In the absence of a more accommodative financial backdrop, the prospect of a languishing consumer and hesitant business sector cautions that a broad-based upturn still faces key hurdles," said Robert DiClemente, economist at Citigroup. The next chance to test the hypothesis of a resurgent U.S. economy will come on Thursday, when retail sales for May are reported by the Labor Department. The data could show whether rising consumer confidence is making cash registers ring, or if consumers are still not in a mood to spend freely, as recent reports on consumer credit and chain store sales suggest. Sales are forecast to rise by 0.5 percent against April's 0.4 percent decline. MORE DEBT SALES ON TAP Also next week, the U.S. Treasury will auction $35 billion in three-year notes on Tuesday, $19 billion in 10-year notes on Wednesday and $11 billion in 30-year bonds on Thursday. Recent auctions have been well received, surprising some analysts, and foreign central banks continue to buy Treasuries. But traders and some Fed officials worry that the United States will go to the well one too many times. Ten-year Treasury yields <US10YT=RR>, which stood near 3.16 percent a month ago, have climbed to 3.83 percent, and 30-year yields <US30YT=RR> have jumped to 4.6 percent from 4.06 percent.
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