Investors to focus on growth figures, European debt

The Toronto stock market could be in for a quiet week as trading winds down ahead of the Christmas-New Year’s holidays.

The Toronto stock market could be in for a quiet week as trading winds down ahead of the Christmas-New Year’s holidays.

But investors will look forward to key economic reports during the week to see how the Canadian and U.S. economies fared during the last months of 2010, along with data on Canadian inflation.

In addition, developments in the European debt crisis will also focus investor attention.

The main TSX index finished lower last week as fresh worries about sovereign debt punished commodities because of concern about demand. Prices for oil and metals also moved lower as nervous investors moved to the safe haven status of the U.S. dollar.

A stronger U.S. dollar makes commodities like oil, which are priced in greenbacks, less appealing to buyers who use foreign currencies.

Statistics Canada releases its November reading on the Consumer Price Index on Tuesday and it could provide an indication on what the Bank of Canada will do about interest rates in 2011.

“That’s because last month’s CPI was a bit of a surprise on the high side,” said Doug Porter, deputy chief economist at BMO Capital Markets.

“We’ve been sort of used to a diet of lower than expected consumer price reports for most of this year and bang, out of the blue we get this, a little bit of a jolt higher. And I think the market will be very curious to see if that was a one-off fluke or was actually the start of a higher trend for inflation.”

The indications have been the Bank of Canada won’t be raising rates until at least mid-2011 to deal with a slowing economy.

However, Porter noted that “opinions are all over the place on that one.”

“If inflation is coming in higher than expected, it likely would bring forward the schedule of when the bank will begin to raise rates.”

The agency releases its reading on October gross domestic product on Thursday and economists expect a rise following a dip during September.

“We’re looking at a 0.2 per cent rise, most of the early indications that we have for the month were OK to good,” he said.

“You might hope for more after sort of the sour month we had in September but that seems to be what Canada is settling into is a relatively modest growth path.”

Such a month over month increase would translate into annualized economic growth of about 2.5 per cent, lower than other economic recoveries.

And Porter thinks it will be hard for the economic recovery to improve all that much as long as the United States economic growth remains tepid, despite recent data pointing out the share of total exports that go to the U.S. has come down over the years.

There have been some encouraging signs recently from the U.S.

“Certainly consumers are spending again,” Porter noted.

“It looks like housing may be stabilizing at admittedly weak levels but it looks like it’s stabilizing. Unfortunately, we did get that lousy jobs report for November for the U.S.”

Investors will have the opportunity to see just well the U.S. is performing when the final revision to third quarter gross domestic product data is released on Wednesday.

Porter said he expected to see the report revised upward for a second time.

“Initially it came in below (an annualized rate of) two per cent, then revised to 2.5 per cent and now people are thinking it might be as high as 2.8 per cent,” he said.

“So, normally that’s a good sign when revisions are moving up. ”

Meanwhile, the European debt crisis will likely continue to cast a shadow over yearend trading following two significant developments last week.

Moody’s Investor Services said it might downgrade Spain’s public debt while cutting Ireland’s credit rating by five notches to Baa1 from Aa2 and warned of further downgrades if the country cannot regain control of its debts and tame its deficit.

But the Spanish economy is far bigger than Ireland, raising concerns about whether the European Union could bail out the country if necessary, given the (US$1 trillion) size of its current bailout fund.

“If the levies are breached with Spain, we’re into a whole new ballgame in terms of the stability fund in Europe,” said Porter.

“They would have to up it or have a new and different route to try and grapple with this problem but I think this issue is going to continue to linger on the markets throughout 2011 because the reality is when Europeans are being saddled with huge debt and slow growth, it’s just not a problem that can be fixed in a short period of time, it will take years of effort.”