There’s not much economic data out in Canada this week, but there is a hotly-anticipated decision on interest rates. And although there will be plenty of data released in U.S., the Iraq situation will likely dominate trading anyway.

The rate decision is due out Tuesday morning, with the market expecting a 25 basis point hike. Inflation is running rampant, which calls for a hike, but growth is also apparently slowing, suggesting no move.

“Market attention will focus squarely on the Bank of Canada’s Tuesday announcement, which looks to be a coin-toss, given that both hiking now and deferring until after the war threat would each be consistent with past statements by the Governor,” offers CIBC World Markets. “A rate hike has been pretty much priced-in, so if the Bank goes, the key will be the market’s assessment of how much more is to come. A stand-pat stance would likely see most of the impact at the very front end of the curve, since it would be accompanied by a promise to hike once the war clouds clear.”

TD Bank says, “Putting it all together, we expect the Bank of Canada to raise interest rates on March 4 by 25 basis points, as part of series of increases that will see the Bank’s overnight target rate end the year at 4% –- 125 basis points higher than the level in effect today.”

“While we certainly do not envy Mr. Dodge & Co. and the decision they must make, it would seem that a modest 25 bps rate hike is the most likely course at this week’s decision,” says BMO Nesbitt Burns. “We continue to look for a total rate hike of 100 bps in 2003.”

Apart from the rate decision, RBC says that some tone-setting economic indicators will be released this week. “Whether the Canadian labour market will resume its upward march after only a modest pause in January will be revealed on Friday with the release of the February employment numbers. Market participants expect a bounce-back with the creation of 20,000 jobs and a steady unemployment rate of 7.4%. The release of January building permits on Thursday and the February Ivey purchasing managers Index on Friday round out the week.”

Nesbitt says that the jobs report is not as important as usual this week because this release will follow the Bank’s rate decision, and there will be another jobs report before the Bank decides again. “Following a small job loss in January, we look for only the slightest of retracements for February. The harsh weather will keep a lid on construction payrolls, while other private sector employers are likely to be cautious with the prospect of war with Iraq looming and U.S. growth softening. Accordingly, we look for a modest gain of just 5,000 jobs for the month. However, we also believe the jobless rate will hold steady at 7.4%, as labour force growth will also be subdued.”

The data calendar is much heavier in the U.S. The February reading of the ISM manufacturing index comes out on Monday along with January consumer spending and the February payrolls report on Friday. The Fed’s Beige Book, which RBC says offers a good look at economic activity across all of the Federal Reserve’s regions, will be released on Wednesday along with January factory orders and fourth-quarter 2002 productivity on Thursday.

“In the U.S., news on the Iraq front will continue to compete with economic developments,” says CIBC World Markets. “The patience of the Bush administration with the UN process is clearly wearing thin.”

Looking at the data, CIBC says, “Purchasing managers’ reports from the various regions have generally been softer in February, a result we expect to be mirrored in the national figure. Friday’s payrolls data should confirm that hiring remains in short supply, consistent with what Americans have been saying to confidence poll-takers.”

BMO says, “The good news is that the financial markets probably will hardly notice the softer economic data that could be reported this week. The Fed’s Beige Book may indicate that capital spending is thawing, but it has also no alternative but to confess that job cuts are lasting longer than expected as companies have yet to trim payrolls enough to generate the needed boost to bottom line profits. The twin ISM surveys for February will bear close watching. Our expectation is that both surveys will move down toward the breakeven 50 mark after solid January gains. “