Markets opt for caution ahead of U.S. economic data

The Toronto stock market will likely start the week off little changed as traders look for reassurance that the American economy's sharp first-quarter contraction was a blip due to severe weather and that growth should come in strongly in the April-June period.

Traders are awaiting two key reports in the U.S. this week -- the Institute for Supply Management's June reading on the manufacturing sector, which is being released on Tuesday, and the government's employment report for June, out Thursday.

In addition, investors are anxious to see the run of second-quarter earnings from corporate America that will start coming down the pipe in early July.

"I think that's what investors are waiting for," said Sid Mokhtari, market technician at CIBC World Markets.

"If the results are not that good, we will get some sort of a negative response from the equity markets."

The Toronto market ended last week with a slight loss, down 14 points as investors opted for caution amid doubts about the pace of growth in the American economy. The Dow industrials shed 95 points or 0.56 per cent.

Investors were rattled last week by a much greater than expected U.S. gross domestic product contraction of 2.9 per cent in the first quarter.

Markets initially shrugged off the data on expectations the American economy would jump ahead in the second quarter as the deterioration was largely blamed on severe winter weather. But concerns resurfaced Thursday as a new report showed a worse than expected reading on consumer spending and consumption.

There was also concern about whether the American economy can take the strain of higher interest rates. Remarks from St. Louis Federal Reserve president James Bullard led to speculation that the U.S. central bank could hike as soon as the first quarter of 2015.

"I think that people were getting a bit ahead of themselves in general," said David Watt, chief economist at HSBC Bank of Canada, adding he has been cautious about the U.S. economy in a setting where the Fed is backing away from the stimulus that has been in place since the financial crisis of 2008.

"I think now we're seeing signs that, like a young child or someone who has been bedridden for a while, your first few steps are halting and uncertain and that's sort of what we have been thinking about the U.S. economy."

However, the ISM report is expected to echo what has been seen lately in other manufacturing surveys, steadily rising expansion.

"You certainly do get the sense that globally, the factory sector is not necessarily doing fantastic, (but) at least doing better than it has been," said Watt.

"In the U.S., they're competitive, their currency is competitive, labour costs are more competitive than a number of other nations, and it's a sector that has been held back for so long that they are starting to see some signs of recovery."

Expectations for the employment data are modest. Economists looked for the U.S. economy to continue to crank out jobs at a pace of around 200,000 in June, with the jobless rate holding steady at 6.3 per cent.

"You almost have to think we're not going to get that typical cyclical recovery where jobs just take off dramatically," said Watt. "I think we are going to get comfortable with the idea that maybe 200,000 is the new 300,000 in terms of jobs."

Canadian jobs data for June won't be released until Friday, July 11, because of the Canada Day holiday on Tuesday, when the TSX will be closed. It is also a short trading week in the U.S., with markets closed Friday, July 4, for Independence Day.

Meanwhile, the Canadian dollar had a stellar week, rising about 1/2 of a cent to a six-month high around 93.5 cents US. The currency has soared about 1 1/2 U.S. cents in June on rising commodities and stronger than expected inflation data, which raised expectations that the Bank of Canada could raise interest rates sooner than thought.

However, the resiliency of those gains will be put to the test Monday when Statistics Canada releases its reading on economic growth for April. Economists expect the agency to report gross domestic product grew 0.3 per cent in April, which would translate into annualized economic growth of about 2.4 per cent.

A commentary from CIBC World Markets said wholesaling and retailing likely drove the gains in April after winter weather depressed growth in the January-March period.