Markets set to rise on string of economic data amid concerns over Fed stimulus

TORONTO – Stock markets could be in for a positive week after a string of reports, capped off by strong recent jobs data, showed that the U.S. economic recovery is firmly on track.

A government report Friday reported that 203,000 jobs were created during November, adding to strong manufacturing and housing reports, better than expected third-quarter economic growth and improving consumer confidence.

On Thursday, traders will look at the U.S. retail sales report for November for further reinforcement on whether the Federal Reserve thinks the economy is strong enough to start cutting back on a key area of stimulus.

“If you believe these jobs numbers, you would think this would reflect better consumer spending in the month of November when these jobs gains took place,” said Andrew Pyle, associate director of wealth management at ScotiaMcLeod in Peterborough, Ont.

“If these numbers are correct, then we should see a very healthy November retail sales number.”

Economists are looking for sales to have risen by 0.6 per cent during the month.

“(But) if that number (is) to come in north of 0.6 per cent, if we saw retail sales gain one per cent, that would solidify the improved economic tone that we saw this week,” said Pyle.

While investors are happy to see this trail of positive economic data, the reports have raised concerns that the Fed could move soon to start tapering its monthly US$85 billion of bond purchases. In fact, speculation has risen that the Fed could move as soon as their next meeting on Dec. 18.

“Oh, it definitely keeps alive the concerns,” said Pyle.

“For sure, concerns have definitely risen in the wake of this (jobs) report and GDP report we saw earlier in the week. But I think I would still say the majority of economists on this street do not expect them to go.”

Talk of Fed tapering has cast a shadow on markets during the last half of the year. That’s because the massive amounts of asset purchases have kept long term rates low and supported a strong rally on equity markets.

Despite the relief over continuing signs of economic improvement, analysts are leery of forecasting an end-of-the-year rally, given the sharp runup that North American markets registered during October and most of November.

“I think what we have seen into this month has been the Santa Claus rally advanced,” added Pyle.

“Santa has come early and has gone up the chimney before we get to year end.”

The TSX and the Dow both finished last week in the red, with the Toronto market off 0.86 per cent and the Dow down 0.41 per cent. But gains from earlier in the autumn are still largely intact with the TSX up seven per cent year to date and the Dow ahead 22 per cent.

It going to be a very light week for economic data after last week’s flood.

The main event for Canada this week is housing starts data for November. Economists expect a slight dip, falling to an annualized rate of 195,000 after registering a 198,000 advance in October.

“New home construction is increasingly exerting a drag on economic growth,” observed CIBC World Markets economist Emanuella Enenajor in a commentary.

“That weakness in home building likely reflects concerns around affordability as well as the budding risks of higher long-term rates.”