Labour market report to show us economic activity remains buoyant

• Economic data to show US activity remains solid
• Bank of England is expected to leave policy unchanged
• European data to show signs that economic conditions are improving 

Markets to pause for breath as they await US payrolls?... Over recent weeks markets for the most part have been focused on global disinflationary trends and in particular on events in Europe. The coming week, however, could see more attention on key US data releases. Markets may be stuck in a holding range until Friday’s US labour market report.

US data to point to continued solid growth... Upcoming US data are expected to be consistent with the Fed’s description that economic growth is “solid” and jobs growth “strong”. Employment growth in January (Fri) is forecast to be in excess of 200k for the twelfth successive month, while the unemployment rate is expected to remain stable at a cyclical low of 5.6%. Prior to this, January ISMs (Mon and Wed), construction spending (Mon) and the trade balance (Thu) should provide further indications. The Fed has signalled that it expects the disinflationary impact of lower oil prices to be temporary and sees inflation rebounding towards its 2% target. For this prognosis to hold, thereby leaving the door open for possible policy tightening in June, the Fed will be assessing intently domestic inflationary developments. In particular, Friday’s average earnings data will be watched closely. We expect that December’s surprise fall was an aberration and forecast a 0.4%m/m rebound in January.

Fed stands pat as other central banks ease... The Fed’s statement following its January meeting was little changed from December. However, that still leaves open a lot of questions on what the Fed is looking for before it tightens. There are several Fed speakers this week but their views on the interest rate outlook are likely to diverge. None of the most influential FOMC members have as yet made public statements this year and we may have to wait until Fed Chair Yellen’s as-yet-unscheduled February Congressional testimony for real insight into current Fed thinking. Meanwhile, other central banks are moving in a more dovish direction. In the past week the Singapore and Russian monetary authorities eased policy, while New Zealand also signalled a more neutral stance. Next week, it is possible that central banks in India, Turkey, Poland and Hungary may ease monetary policy. There is also a risk that the Reserve Bank of Australia will cut rates, although as core inflation remains stable, it may for now be content with talking down the Aussie dollar.

Europe waits on Greek discussions and QE impact... European data next week including the final estimates of January PMIs (Mon and Wed), December German factory orders (Thu) and industrial production (Fri) may show further tentative signs that economic conditions are improving. Evidence of the effectiveness of QE may show up first in improving confidence and expectations about the future, so upcoming survey data could be particularly important. Negotiations over Greek debt remain a key focus for markets, and further reports of ongoing negotiations are likely. The Greek finance minister is set to meet many of his counterparts in the coming week. However, the next key date seems to be the 12th February when the Greek and German leaders are set to meet at the EU summit.

UK monetary policy to remain on hold... No change in UK monetary policy is expected next week. We expect a 9-0 vote for no change. MPC members Haldane and Miles have recently indicated that they are in no hurry to raise interest rates. With the MPC talking about a near 50:50 chance that inflation turns negative over the next few months, there is a growing risk that policy remains unchanged all year. The UK January PMIs are forecast to strengthen modestly, easing fears over a further slowdown in GDP growth in Q1.