Jobs, subprime mess to rule July 4 week

By Cal Mankowski

NEW YORK (Reuters) - Investors are hoping this week brings some answers to the question of whether an improving U.S. economy unleashes inflationary forces, and one place to look will be in the June payrolls data.

At the same time, the potential for defaults in subprime loans to spill over to the general economy remains a concern. Nervousness that tighter credit may affect the availability of financing for buyouts prompted investors to sell banks' and brokers' shares on Friday, which helped cut short a morning rally.

In this holiday-shortened week, the most significant data, the June payrolls report, will come on Friday.

U.S. financial markets will be closed on Wednesday, July 4, for the Independence Day holiday. The New York Stock Exchange will close at 1 p.m. EDT (1700 GMT) on Tuesday.

A month earlier, investors were cheered by news that nonfarm payrolls increased by 157,000 in May. According to the median forecast in a Reuters poll of economists, nonfarm payrolls added 120,000 jobs in June.

Bill Dwyer, chief investment officer at MTB Investment Advisors in Baltimore, expects the June nonfarm payrolls to show growth of 120,000 to 130,000 jobs.

"I think the economy is still chugging along and the consumer is in pretty decent shape," Dwyer said. He added that with decent economic fundamentals, no recent announcements of major layoffs, and signs that manufacturing is picking up, the payrolls report should be at or a little better than the consensus.

Other data during the week includes a pair of reports from the Institute for Supply Management. The group has a report on manufacturing activity in June coming on Monday, and another on the services sector due on Thursday.

The Reuters survey forecasts that ISM's June index of national factory activity will be unchanged at 55.0.

The ISM services index is expected to drop to 58.0 from 59.7 in May.

Al Kugel, chief investment strategist at Atlantic Trust in Chicago, noted that some recent data from regional Federal Reserve banks has been good. He said he expects the ISM data to be strong.

"People need some new information to become more bullish and the ISM could be the trigger," he said.

ROBUST SECOND QUARTER

The U.S. stock market turned in a strong performance for the second quarter, but lately seemed to hit a wall as bond yields climbed above 5.0 percent and problems surfaced at certain hedge funds that held investments in subprime loans.

For the second quarter, the Dow jumped 8.5 percent, the S&P 500 rose 5.8 percent and the Nasdaq gained 7.5 percent.