(Repeat of item initially moved Sunday, June 7)
By Ros Krasny
CHICAGO, June 8 (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 18th 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
Technical analysts are watching a major trendline in 30-year Treasury bond yields at 5.09 percent that dates all the way back to 1986.
"The mega-trend lower in yields that we have all become happy with over the past 25 or 30 years would be in jeopardy if 30-year yields start to establish themselves above that trendline," said strategists at 4CAST Ltd in New York.
Such a move would be consistent with fears that the U.S. economy is at risk of entering a higher interest rate environment.
Peter Schiff, president of Euro Pacific Capital in Darien, Connecticut, said Fed Chairman Ben Bernanke, Treasury Secretary Timothy Geithner and President Barack Obama have their work cut out as salesmen-in-chief for the onslaught of U.S. debt offerings.
"Not only must our leaders convince holders of our debt not to sell what they already own, but to back up the truck and buy a whole lot more," Schiff said. "Once the psychology turns, there is no way to stop the rush for the exits."
RECOVERY UNDERMINED?
Mortgage interest rates are rising along with Treasuries. Soft demand at next week's auctions could push up rates even further.
"The economy has been helped by the tailwinds of very low mortgage rates, falling gasoline prices and income support from stimulus. These supports are fading, which provides an important test," said Dean Maki, economist at Barclays Capital in New York.
Chinese demand will be scrutinized in particular, given chatter that the Chinese are "cautiously reducing duration on their Treasury portfolio and focusing more on the short end," said Michael Wallace, economist at Action Economics.
China is the single largest U.S. creditor, holding some $768 billion of U.S. Treasury securities.
China's export-driven economy will be in focus on Thursday with the release of monthly trade figures and industrial production data on Friday.
China's exports for May are forecast to have fallen by a year-on-year 23.1 percent, worse than the 22.6 percent decline in April. But industrial production is expected to have risen by 7.5 percent versus 7.3 percent.
On balance, analysts are cautiously bracing for a revival in Chinese exports over the balance of 2009 based on recent purchasing managers' surveys. (Editing by Dan Grebler)