Geopolitical tensions await a patient Fed

• Key oil market reports a driver of commodities sentiment
• Pulse of US consumer key to Fed ‘patience’ after a mixed February employment report
• Greece still a potential source of market anxiety as ECB buying begins

Geopolitics a focus in a light data week. With the Chinese People‘s Congress setting a reduced GDP growth target of ‘around’ 7%, but Islamist violence threatening to impair Libyan and Iraqi oil production, this week’s oil market reports could be a key driver of commodity market sentiment. Reports from the DoE (Tue) and IEA (Fri) should provide an updated steer on the global demand-supply balance that, in our view, remains constructive for crude in the medium term. Alongside the official start of the ECB’s QE purchases from 9 March, which could add to downward pressure on Eurozone yields but also boost growth prospects, global deflationary worries should continue to abate.

Retail sales report a litmus test of US consumers’ health. With February’s employment report disappointing with soft earnings, US retail sales (Thu) will provide a further steer on the strength of domestic consumption, the principal recent driver of growth overall. Stable-to-higher gasoline prices point to firmer headline retail numbers than in recent months, with the ’control group’ print, feeding into GDP estimates, expected to show a gain of 0.4%. Friday’s University of Michigan sentiment survey for March, along with questions about inflation expectations, will provide further colour. Although recent US data have been mixed relative to expectations, in contrast to improvement in the Eurozone (Chart 1), marked absolute softness would be needed to raise doubts about the Fed’s readiness to drop its ‘patient’ language in the statement of its March 17-18 meeting.

Eurozone data firming, but Greece still a source of anxiety. Following the stronger-than-expected German industrial production data for January, we look for Eurozone-wide data (Thu) to show a 0.7% monthly gain, helped by an unwind of the erratic weakness in data for some smaller countries. Yet the improving outlook for the economy - as highlighted by upward revisions to the ECB’s growth expectations - is still likely to face adverse headlines on Greece.  Monday’s Eurogroup meeting statement could highlight the gulf between demands for a specific timeline for implementation of Greek reforms, and any early disbursal of funds to avert a cash crunch.

First hard data on domestic activity outlook, with growth above trend likely. Following firm outturns for recent survey indicators of UK activity, notably February’s PMIs (Chart 2), industrial production (Wed) and construction output (Fri) for January will give the first steer from official data on UK growth in Q1. We expect a modest 0.2% monthly gain in production and an above-consensus 1.5% expansion in construction activity. Such outturns - consistent with growth remaining at or above 0.6% per quarter - would point to ongoing absorption of the econony’s spare capacity that, in time, would warrant a tightening in UK monetary policy. Of secondary interest will be the RICS housing survey for February (Thu), expected to corroborate the trough in housing market activity already seen in mortgage approvals data for January. An improving activity outlook - supported by falling mortgage rates and a more favourable stamp duty taxation regime - points to a fading drag on GDP from housing market turnover. Finally, trade data for January (Thu) will be scrutinised for signs of UK exports benefiting from a pick-up in Eurozone activity.

Central bank front quieter, but surprises still possible. A lighter central bank calendar for the coming week sees the RBNZ’s Monetary Policy Statement (Wed) alongside an expected no-change rate decision, which could emphasise a dovish policy bias. Meanwhile, the Russian rouble’s appreciation in February should allow the CBR to cut sharply (Fri), easing pressure on the economy, against a backdrop of sanctions renewal discussions by EU foreign ministers meeting in Latvia.