US labour market data remains key to Fed plans

• Geopolitical events may lead to further oil price volatility
• US payrolls expected to post another strong rise in March
• Euro area CPI data to further ease concerns of sustained deflation

Payrolls dominate the US calendar... The upcoming week is holiday shortened in Europe but the US has a full calendar. Within this the payrolls report (Fri) will be the key focus. Indeed the Fed’s assertion that it wants to see further labour market “improvement” before it raises interest rates emphasises its importance. In contrast to most other February US data, the payrolls report was strong, rising by more than 200K for the 11th successive month. This was possibly because the survey date was in the first half of the month before the worst of the cold weather hit the north east. Weekly unemployment claims indicate that the labour market may have weakened in the second half of February but reports for early March suggest that this was short lived.

Another strong payroll report expected... We forecast another big gain in payrolls in March of 245k, close to the consensus estimate, along with the unemployment rate unchanged at its current low of 5.5%. Just as interesting for markets will be the pace of earnings growth. This fell modestly in February after accelerating in January. We expect to see a rebound. While some FOMC members have indicated that they won’t necessarily wait for evidence that wage growth is picking up before raising interest rates, an acceleration would help meet the Fed’s other tightening trigger, that they can be reasonably confident inflation will return to target. Amongst the other data, the manufacturing ISM will be watched for further signs of a negative impact from the strong dollar.

Euro area deflation concerns abating?... The coming week’s ‘flash’ estimate for March consumer price inflation in the euro area may help to further ease concerns about the risk of sustained deflation. The headline annual rate is expected to rise modestly to -0.2% from -0.3% in February, while the ‘core’ rate is likely to be unchanged at 0.7%. The headline rate is likely to return to positive territory later in the year. Recent activity indicators, including the March ‘flash’ PMIs have pointed to stronger growth in the euro area in early 2014. The European Commission’s measures of business and consumer confidence could provide further evidence of this. Meanwhile, Greek debt negotiations continue. Reports suggest that the Greeks have proposals ready, which may be approved in a Eurogroup finance ministers’ meeting early in the coming week. Lack of significant progress could force the Greek government to take extraordinary measures (possibly including capital controls).

UK election campaign gets underway... Monday’s dissolution of parliament will mark the official start of the election campaign, with the only televised debate with PM Cameron and six other party leaders due on Thursday. This is likely to cover a range of topics, including the government’s economic record. Meanwhile, current account deficit data for Q4 (Wed) will indicate the size of the UK’s external financing needs in advance of a highly uncertain election.

Geopolitical concerns to the fore... The rise in oil prices and fall in equities in response to the Saudi-led coalition’s bombing of targets in Yemen highlights the power of geopolitical events to disrupt markets. We continue to believe that oil prices will end the year above current levels. However, other geopolitical developments may push the price back down. In particular the ongoing negotiations between the US and Iran over the latter’s nuclear plans are worth watching. An easing in sanctions could add significantly to global oil supply. The self-imposed deadline for the talks is Tuesday, although some reports now suggest that they could be extended to June.