The U.S. government will release the findings on bank stress tests this week, and data expected to show another month of crushing job losses will also test emerging optimism on global economic prospects.
World stock markets have been surging for two months, a rally predicated on the notion that the pace of U.S. economic contraction may be easing, presaging a possible recovery from the first synchronous global recession since World War Two.
The gains also presume that the U.S. banking sector, hit hard by losses in real estate and consumer loans since the credit crisis began, is on its way to receiving enough public and private capital to sustain corporate lending.
Both these assumptions will come under scrutiny in coming days.
While employment is generally seen as a lagging indicator, another bout of severe job cuts could put renewed pressure on housing and consumer spending.
The pace of decline is slowing down, but we're not turning up, said David Wyss, chief economist at Standard & Poor's. We've gone from the black diamond onto the blue slope, but it's still down hill.
The U.S. employment picture, which will become clearer on Friday with the release of the April jobs report, will be a key determinant of whether the export-based economies of Europe and Asia can rebound. Germany, a bellwether for Europe more broadly, will publish data on retail sales and industrial output, offering some hints as to the continent's own troubles.
Part of getting the economy back into shape is sorting out the mess in the financial sector, and the Treasury has come under some fire for using what some observers see as overly optimistic worst-case scenarios for its stress tests.
Elizabeth Warren, chair of the Congressional Oversight Panel for the Troubled Asset Relief Program, said the Fed and Treasury's assumptions are disturbingly close to where we are now.
Their benchmarks foresee 10.3 percent as a ceiling for the unemployment rate, to be reached sometime next year. However, many economists polled by Reuters believe the jobless rate will reach 10 percent by the first quarter of next year, and some even see it climbing to 11 percent.
Another prevalent criticism of the government's handling of the banking sector crisis is the ongoing confusion about when and in what form the stress tests will be released. The Treasury has flip-flopped on the issue, first saying it would unveil the results on Monday, only to backtrack, and then hinting they will now come out late next week.
A government source said on Friday the results would be unveiled late in the U.S. trading session on Thursday.
The real issue is determining how much more money taxpayers will have to shell out to bolster capital in those institutions seen as lacking adequate reserves.
A balance will likely be struck between an amount of capital that is large enough to make the tests credible, but not so large as to make it look like the government could be short on resources to grapple with the banks' problems.
The emerging consensus is somewhere in the vicinity of $200 billion.
Unless the test results show, in the aggregate, the need for at least $100 billion of capital, a lot of people aren't going to think the results are credible, said Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution. I can't imagine officials wanting it to be $300 billion, and it's not clear they could get the money from Congress.
The Treasury has said any new capital injections would come from the $700 billion financial rescue fund approved by Congress in October. Officials estimate they have about $134.5 billion they could still tap.
In Europe, investors will also be focused on a European Central Bank policy meeting on Thursday. Some believe policy-makers might follow the U.S. Federal Reserve's lead and deploy unconventional emergency measures aimed at adding even more liquidity to impaired credit markets, such as direct asset purchases.
Federal Reserve Chairman Ben Bernanke, for his part, will testify before Congress on Tuesday, and could reinforce the Fed's message that things are getting a bit better.
One major stress on the global economy is the mounting toll of a withering U.S. job market, which has cut into export-reliant European and Asian economies and is unlikely to abate any time soon.
The Labor Department's official jobs report for April is expected to show another 630,000 jobs were lost last month, modestly less than recent readings but still a huge figure. Such an outcome would bring total job losses for this recession to a staggering 5.7 million.
The employment report will likely be terrible again, said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.
He also noted that any eventual recovery in gross domestic product, which shrank an annualized 6.1 percent in the first quarter, will likely be meek.
Economists believe over 2 million additional jobs will disappear in coming months, even if there is a second-half rebound. That means that for the broader population, it will still feel like a recession.
Merely getting growth above the number zero is not enough, said Crandall.
(Additional reporting by Mark Felsenthal; Editing by Dan Grebler)