There’s not a lot of economic data due this week, with inflation readings the only numbers likely to garner headlines. A Federal Reserve Board meeting and continuing worries over Iraq will also attract the attention of traders.

RBC Financial notes that this week’s markets will witness just a handful of important Canadian releases. An update on manufacturing conditions in January is released on Tuesday, followed by wholesale trade data on Thursday, and February’s consumer price index will be out on Friday. RBC says that the CPI will be widely analyzed given growing concerns over the Canadian inflation outlook.

“With Bank of Canada Governor Dodge still warning of the need for further rate hikes, all eyes will be on Friday’s CPI report,” agrees CIBC World Markets. “Runaway energy costs look to keep considerable heat on total consumer price inflation, but the trend in core prices is due to moderate — albeit to the very top-end of the Bank’s targeted range.”

BMO Nesbitt Burns predicts that the CPI for February will likely show no let-up in the frothy headline inflation readings for Canada. “With a 7% jump in gasoline prices leading the way, we look for overall prices to post a hefty 0.6% increase in the month, which would be just enough to hold the inflation rate steady at a 12-year high of 4.5%. However, the important core measure of inflation is expected to post a more modest monthly increase, and could see the annual rate dip just slightly below the 3% target ceiling from 3.3% in the prior month.”

Nesbitt notes that this will be the last CPI report Canada’s central bank sees prior to its April 15 decision on interest rates, so it will form a cornerstone in the process. “The inflation data are probably now more important than growth figures, since the Bank is well aware that activity has cooled considerably, but continues to expect a second-half rebound. Officials seem much less certain on the inflation backdrop.”

On the other data, CIBC predicts that an uptick in manufacturing shipments would add further clarity to the January GDP picture. Nesbitt says most indications point to a solid reading for manufacturing activity in January. “Given a rebound in auto production and some upward drift in prices, we expect a solid +0.8% uptick in shipments. However, signs point to a sharp cooling ahead for this series, particularly with U.S. auto sales weakening lately.”

In the U.S., the big event, apart from diplomatic and military machinations, will be Tuesday afternoon’s interest rate announcement. Also, housing starts for February are due out on Tuesday, initial unemployment claims and the Philadelphia Fed’s March survey of manufacturing conditions are due on Thursday. The U.S. also gets its CPI data for February on Friday.

“The Fed’s meeting on Tuesday will compete with fast-moving developments on the geopolitical front for the markets attention over the next week,” says CIBC. “The odds still appear to be tilted against a rate cut from the Fed on Tuesday, but the post-meeting statement will be closely scrutinized for hints about future action.”

“With the distraction of an impending war, the Federal Reserve is seen leaving rates unchanged on Tuesday,” predicts BMO Nesbitt Burns. “A rate cut on the possible eve of the battle would be lost in the wash. While the Fed did cut rates during the Gulf War, the overnight rate was still above 6% at the time and the rate-cut cycle was still very young.”

Nesbitt concedes that there are valid concerns that the economy could slide back into recession, so it expects the Fed to adopt an easing bias, and, “to drop not-too-subtle hints that they are poised to cut again should more stimulus be deemed necessary. For further Fed action to have an impact it needs to push on an open door of consumer and business confidence. This suggests that the most prudent course is to lay the groundwork for a rate cut as geopolitical forces wane.”

TD Bank says that Fed funds futures were pricing in almost a 50/50 chance of a rate cut this past Monday, but by this morning, those expectations had come full circle, with the March and May contracts indicating that markets had priced out any further easing at all. “Taking a step back from the day-to-day volatility, we believe the Fed will stay on hold at Tuesday’s meeting but shift to an easing bias, to signal that it remains attentive to the risks of slower growth in the U.S. economy,” it says. “While a rate cut cannot be ruled out -– particularly in the event of a rapid escalation of the Iraqi situation –- we do not think this is the likeliest outcome. Rather, we expect the Fed to take advantage of the tame inflation environment to keep rates on hold, while shifting to an easing bias, which will limit any sell-off in fixed income markets.”