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All eyes on the US data calendar this week

New York Fed president William Dudley

MARKETS had expected that the next US rate hike would be in June, but they have moved in recent days to price in an increase at this month's Fed meeting.

The policy statement following the January meeting reaffirmed the tightening bias of the Fed, while avoiding giving any clear indication of the likely timing of the next rate move.

But a series of comments by key Fed officials in the past week have pointed to the likelihood of a rate hike at this month's meeting. While US growth is by no means stellar, Fed officials have been pointing out that the economy is now close to full employment and inflation is moving toward the 2 per cent target level. Thus, the economy no longer needs abnormally low interest rates.

Fed officials have also noted that economic recoveries are now gaining traction in other major economies. New York Fed President William Dudley also highlighted that since the November election we have seen large increases in consumer and business confidence and “very buoyant, financial markets” with US stock markets hitting record highs.

The S&P 500 has risen by 15 per cent over the past four months. He also noted the expectation that, fiscal policy will probably turn increasingly stimulatory. Fed officials are now saying that they don't see any need to delay raising rates and a 25bps hike looks to be on the cards this month, with more to follow later in the year, as the Fed looks to temper market exuberance.

With that in mind, all eyes will be on the US data calendar this week. It includes the key non-farm payrolls number for February. A solid result should help cement market expectations of a rate hike by the Fed next week. Markets anticipate that payrolls will rise by 186k, below the strong 227k result in January, though in line with the 6-month moving average of 183k.

Meantime, the unemployment rate is predicted to edge back down to 4.7 per cent. Average earnings growth is anticipated to have improved from 2.5 per cent year-on-year to 2.8 per cent, after slowing in January. Although, it must be noted that the FOMC's preferred Employment Cost Index based measure of wage growth slowed slightly to 2.3 per cent in the fourth quarter.

In the eurozone, the main focus will be the ECB meeting. Markets do not expect the Central Bank to announce any changes to policy this week. Although, the meeting statement and President Mario Draghi's press conference will still be closely scrutinised, as markets look for the latest views on the appropriate monetary policy stance given recent encouraging eurozone data and inflation now being just above the ECB's target of close to, but below, 2 per cent.

Updated ECB staff economic projections will be of interest in this regard. However, the ‘account' of the January meeting stated that “it was imperative to maintain a very substantial degree of monetary accommodation for inflation pressures to build up…otherwise, recent encouraging developments in inflation...could be put at risk”. Overall then, despite the possibility of a more upbeat economic outlook, the ECB is likely to remain dovish in tone this week, continuing to emphasise it policy easing bias.

In the UK, industrial output data for January is the main release of a relatively light schedule. Production is anticipated to have edged lower, after recording strong growth in both November and December.

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