A Bank of Canada rate decision and a slew of data that may determine the Fed’s next move in the U.S. highlight this week’s markets.

In Canada, the rate decision on Tuesday will probably be the market’s focus.

TD Bank predicts that the Bank will not move on rates and that it is likely on hold for the rest of the year.

CIBC World Markets says it should be no surprise if the Bank stands pat. But, CIBC says, “close attention will be paid to the accompanying statement. Don’t expect to see a complete U-turn towards an easing bias — the Bank likely believes that when the time does come, the next move on rates will be higher. But the earlier hawkish rhetoric should give way to more of a wait-and-see tone — with uncertainties over the pace and timing of a US pick-up being the key excuse for the change of heart.”

BMO Nesbitt Burns agrees that the Bank probably won’t move. “The recent reversal of Canadian consumer price inflation gives officials the luxury of time to assess the economic impact of the soaring loonie, SARS, mad cow, and soft global activity,” BMO says. BMO believes the tone of the press release may be less hawkish, “although the Bank will seek to avoid stoking talk of possible rate cuts ahead.”

Once the rate decision is out of the way, the big news will be Friday’s jobs report. Ahead of that, building permits data will be released on Thursday. “Friday’s employment report will catch further SARS-related layoffs but a return-to-work of some health care staff, leaving total employment nearly flat in May,” says CIBC.

BMO says that, after slipping by 18,800 in April, employment is expected to show no improvement in May. “If anything, the risks are tilted to the downside for the headline employment number since May is normally the biggest hiring month as students flood into the market. The jobless rate is expected to hold steady at 7.5% after rising two ticks last month, but again there is obvious scope for disappointment on this front.”

In the U.S., traders will be scrutinizing a number of important releases this week. RBC Financial highlights the “highly anticipated” Institute for Supply Management’s manufacturing index on Monday and the employment situation on Friday. “The May ISM index will mark the first full month of activity following the conclusion of the war, and will therefore be closely watched by markets for any indication on where the manufacturing sector is headed,” says RBC.

CIBC says, “In the U.S., payrolls and purchasers top a heavy week for economic data. An optimist might conclude that things are getting worse at a slower rate, but both reports will keep talk alive about a Fed cut later in the month.”

“Key economic data this week may decide the course of Fed policy and will, therefore, attract maximum market attention,” says BMO. It says that the ISM may show improvement, but that the jobs numbers won’t. “Even if ISM is better, we look for bad news at the end of the week, when the critical employment report hits the wires.”

“It is probably wise not to get too clever or forward-looking about Fed easing,” BMO says. “Yes, the Fed knows that the tax cut will provide an economic bounce. Nevertheless, if employment does not pick up, Bush won’t get re-elected. Greenspan is his Fed re-appointee. A team player would ease, particularly a team player who dismissed the risk of higher inflation and stressed the high-price of allowing a deflationary double-dip to unfold.”

Conversely, TD says that it is becoming increasingly uncomfortable with its stance that the Fed will ease at the June 24/25 meeting. It says that the case for a Fed easing is not hard to make, but that it is unsure about the call for two reasons.

“Firstly, under Chairman Greenspan, the FOMC has had a good track record of communicating their intentions to ease before doing so,” says TD. “In his May 21 testimony to Congress, Chairman Greenspan said, ‘We do not yet have sufficient information on economic activity following the end of hostilities to make a firm judgment about the current underlying strength of the real economy’ and that, ‘many more weeks of data will be needed to confidently discern the underlying trends.’ That suggests the Fed is in no rush to change rates. Secondly, the bond market appears to be doing the work for the Fed. Indeed, given the current low level of the fed funds target rate and the steepness of the yield curve, far more economic stimulus is provided by lower bond yields at this stage than by lower short-term rates. If the Fed believes that talk of disinflation can sustain this rally without a further easing in policy, then there is a good chance that the central bankers may decide to leave rates unchanged in June.”