There is divergence between fixed income strategists regarding the impact Canadian inflation data will have on bond markets and, ultimately, expectations for Bank of Canada interest rates. Annualized core Canadian CPI is expected to rise 1.6% following a rise of 1.5% in June. The monthly core data is expected to rise 0.2% in July following June's 0.1% increase. The annualized headline data is expected to rise 3.4% following a previous rise of 3.1%.

Andrew Gretzinger, portfolio manager at MFC Global Investment, said there are "rumours" about a Bank of Canada rate cut in September, and markets will look for signs that inflation is starting to wane. He added that with lower energy prices, there are expectations that inflation could have peaked.

"The Bank of Canada is concerned about the inflation story," he said. "If we saw something that could allow core inflation to tick a little lower or stay at 1.5%, the Bank of Canada could cut rates to foster weakening growth. I do think there are a lot of people who are thinking that the bank of Canada has to stand up and take notice of the job story and the growth story and I think that is what they are going to be worried about."

On the flip side, Fergal Smith, market strategist for Canada at Action Economics, said higher inflation data will compel the central bank to hold rates for the rest of the year. He said Canadian bonds are vulnerable because a stronger CPI report could cause a selloff.

"The September CGB is technically looking vulnerable because we are near the end of this rally. We think the Canadian market is looking a little stretched," he said. "I think accelerating inflation is going to remain an issue for the bank and it will be sidelined despite [a] slower growth outlook."

Turning to the U.S., the main data release on Thursday is the Philly Fed survey for August. Economists expect the survey to tick modestly higher to a reading of -12.6, up from the previous month's level of -16.3

Jimmy Tintle, futures broker at Transworld Futures.com said traders are looking for a bottom in the U.S. manufacturing sector. He added that the index still remains weak.

"I think the traders are all in line with a slight improvement in the manufacturing sectors and [the] Philly Fed survey should show slight improvement too," he said. "It will take¥much stronger than expected numbers to come in to see big gains."

All times in EDT:

Thursday

7:00 CA Consumer Price Index (M/M) July Exp: 0.4% Prior: 0.7%

7:00 CA Consumer Price Index (Y/Y) July Exp: +3.4% Prior: +3.1%

7:00 CA Bank Canada CPI Core (M/M) July Exp: +0.2% Prior: +0.1%

7:00 CA Bank Canada CPI Core (Y/Y) July Exp: +1.6% Prior: +1.5%

8:30 US Initial Jobless Claims W/E August 16 Exp: 440K Prior: +450K

8:30 US Continuing Claims W/E August 9 Exp: 3405K Prior: 3417K

10:00 US Philadelphia Fed. August Exp: -12.6 Prior: -16.3

10:00 US Leading Indicators July Exp: -0.2% Prior: -0.1%

10:30 US EIA Natural Gas Storage Change W/E August 15 Exp: +82 Bcf Prior: +50 Bcf

4:30 US M1 and M2 Money Supply Prior: +18.5B

By Neils Christensen, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it

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