Key events in developed markets next week

Market attention will obviously continue to focus on the Russian military assault on Ukraine and the geopolitical fallout. Sanctions are being ramped up and tensions, along with market volatility, will likely remain high. This is going to be reflected in the commentary from Federal Reserve Chair Jerome Powell when he appears before both the House and Senate banking panels next week. His hawkish commentary following the January Federal Open Market Committee (FOMC) meeting resulted in market interest rate hike expectations jumping higher with a strong chance of a 50bp interest rate increase priced in by financial markets. We suspect he will be more cautious next week given the financial market nervousness and this will likely cement expectations for a 25bp rate increase on 16 March.

Nonetheless, Powell will continue to suggest we should be braced for a series of interest rate increases given the economy is performing well, is creating jobs in significant numbers, and is experiencing broad-based inflation pressures. Indeed, the spike in commodity prices makes it even more likely that we will see headline US inflation touch 8% in the next couple of months.

Datawise, the February jobs report is set to show another decent increase in employment with the unemployment rate expected to fall back to 3.9% with average hourly earnings rising at a 5.7% annual rate. Business surveys are also likely to rebound following the depressing effect of the Omicron wave in January and early February.

For the eurozone, next week’s data will still not have incorporated the recent escalation of the Russia-Ukraine conflict, meaning that final Purchasing Managers' Index (PMI) data will still provide limited information about current events. The February inflation release will nevertheless be key for the European Central Bank (ECB). It will be the last inflation reading before the important March ECB meeting and we could move even higher than January. Petrol prices have been rising steeply in February, resulting in plenty of potential for energy inflation to have increased further.

By the end of Wednesday, we will have heard from all nine Bank of England committee members in the space of a little over a week. That's interesting in itself, having had virtually no commentary from Bank officials in the December-February intermeeting period.

What we've heard so far, including from Governor Andrew Bailey, suggests officials are likely to continue hiking rates at the March and probably May meetings amid concern about higher domestically-generated inflation. But it's also clear that there is growing wariness about the amount of tightening markets are pricing for this year, which amounts to at least five more hikes. So far the pushback from policymakers has been fairly subtle, and we doubt that will change with the speeches we get over the coming days. After all, market expectations, while steep, are effectively providing policymakers with a hedge against persistently high inflation.

However, the pressure on household incomes from energy prices is likely to result in slower, perhaps negative growth, later this year. We also expect some of the recent pressure on wages to abate now that the post-reopening movement in the jobs market slows. We therefore think the Bank will deliver fewer hikes than markets expect this year.

Concern about the Omicron wave led the Bank of Canada (BoC) to delay hiking rates in January. These worries appear to have been misplaced with the domestic economy firing on all cylinders and inflation at 30-year highs. A 25bp rate hike is our call for next week’s meeting despite geopolitical nervousness. We continue to look for six interest rate increases in total from the BoC this year, with a further three in 2023. This would leave the policy rate at 2.5% by the end of next year, a level it was last at all the way back in October 2008.