Stocks could find direction from key economic growth, employment data

Investors will receive guidance this week from some top-drawer economic data, including key reports on Canada’s economic growth and the U.S. job situation.

Investors will receive guidance this week from some top-drawer economic data, including key reports on Canada’s economic growth and the U.S. job situation.

The main event for Canada on a holiday-shortened week will be on Wednesday when Statistics Canada releases its snapshot of economic growth in January.

Economists are expecting Canadian gross domestic product grew by 0.5 per cent during the month compared with December.

That would be a slight dip from the month-to-month growth reported in December but a vast improvement from January 2009 when the economy shrank, rather than grew, in the midst of a global recession.

Sal Guatieri, senior economist at BMO Capital Markets, says 0.5 per cent growth in GDP in January would be a “nice start” for the first quarter of 2010.

“Bottom line is, it looks like the economy slowed little if at all in the first quarter after the strong five per cent pace of the fourth quarter,” Guatieri says.

BMO Capital estimates the Canadian economy grew at an annualized rate of 4.7 per cent in the three months ending March 31, compared with a decline of 7.0 per cent in the first quarter of 2009.

January economic performance was boosted by solid increases in manufacturing and wholesale sales — both were up more than two per cent in real terms.

The January increase would suggest that during the first quarter the economy could match the strong performance from the end of last year.

And unlike the U.S. economy — which grew at an annualized pace of 5.6 per cent in the fourth quarter — the strong rise wasn’t hugely dependent on government stimulus.

“The stimulus has helped but the economy seems to be firing on pretty well all cylinders right now,” said Guatieri.

“Business spending has lagged a little bit but a recent survey suggests that will come back fairly strongly this year. We are seeing exports and manufacturing stabilize if not turn up recently because of the upswing in global demand and despite the strong Canadian dollar. And the domestic side just continues to rip along, consumer spending is up on big ticket items, especially automobiles (and) the housing market remains very strong.”

The only downside with more evidence of continuing solid economic growth is that it could encourage the Bank of Canada to raise interest rates from historic lows near zero sooner than thought.

“The risks have definitely swung 180 degrees from a possible delay in bank tightening until late this year, even into next year, to a possible move before mid year, which represents the bank’s current pledge to begin raising rates,” Guatieri said.

“We think the bank will hold to that pledge but it is conditional and if the data remain very strong, if we do continue to see upside surprises on inflation, there is a chance the bank will start raising rates before mid year and more aggressively in the second half of the year than we currently anticipate.”

The other key report comes out Friday — when both Toronto and New York stock markets will be closed for Good Friday.

The U.S. Labour Department’s non-farm payrolls report for March is expected to show that the economy added about 190,000 jobs during the month.

That would be the first triple digit increase in jobs since November, 2007. But the lion’s share of that March gain would be attributable to massive temporary hiring to conduct the U.S. census.

“The focus will be on the private sector now,” said Guatieri. “We need jobs to sustain consumer spending.”

Meanwhile, the Toronto market finished little changed at the end of a volatile week that finally saw a framework for to help Greece deal with its debt crisis.

The S&P/TSX composite index drifted 0.74 of a point lower on Friday at 11,957.37.

Still, as the first quarter draws to a close the main index is up around 1.5 per cent year to date, which could translate into a tepid single digit gain for the year against a background of weak economic recoveries in most countries.

“Frankly, that’s kind of been our view of what we were going to see this year,” said Norman Raschkowan, chief investment officer at Mackenzie Financial Corp.

And as companies get set to release first-quarter earnings, he’s surprised that earnings expectations, particularly in the U.S., have continued to rise “even as you see evidence of a tepid economic environment.”

“I’m surprised we haven’t seen estimates come down a bit but the economy has been pretty solid and with Canada and the U.S., GDP estimates also have been moving higher.”