THE CANADIAN PRESS -- TORONTO - The Toronto stock market could be in for further losses this week and may test the lows of the year after major disappointments in manufacturing and job creation deepened pessimism about the strength of the U.S. economy.
Investors will have ample opportunity to dwell on last week's poor data since the quarterly earnings season has concluded, while there is a dearth of top-drawer economic data this week. The major piece of economic news, Statistics Canada's labour force survey for March, comes out on Friday.
The TSX ended last week down two per cent amid a major readjustment in expectations for employment growth in the U.S. The economy created just 54,000 jobs in May, well below the reduced expectations that followed an employment report from payrolls firm ADP earlier in the week.
"In the short term it's like any other piece of news that we have seen in the last few weeks; it's going to give motivation to those that have been looking to take some profit and will give further motivation to those that believe this is a time to be shorting equities," said Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough, Ont.
"It coincides with a deteriorating pattern for the major indices over the last four weeks. I think the mood on the street is that the headwinds are real, (including) the headwinds from higher gasoline prices, which clearly are showing up in this jobs report."
Further depressing investors going into this week is a reading on the U.S. manufacturing sector last week that still showed expansion during May, but at a much slower rate than April.
Last week's showing left the TSX 5.65 per cent down from the highs of early March before the earthquake and Tsunami in Japan depressed markets globally.
And Pyle thinks the market could easily unwind further.
"If you look back at the early part of April, we have now been snaking down, suggesting that we had priced in too much good news into the markets with respect to the economy, whether U.S. or globally," he said.
"So I think I would be saying to clients, this erosion in sentiment and valuation could continue into the summer for sure. it could take 10 per cent of total value off (from the highs of March)."
Investors will also likely be taking in some glum Canadian employment numbers at the end of the week.
BMO Capital Markets observed that job creation was hampered during May by a variety of factors, including terrible weather that caused serious flooding in some areas, a drop in auto production which reflected a Japanese industry still tied up in knots, sub-par U.S. job creation and the fact that the strong showing in April was helped along by pre-election hiring.
It expects that the Canadian economy created about 5,000 jobs last month, against the 58,300 in April.
The other major economic event of the week is Monday's federal budget but traders aren't expecting any surprises there.
"The majority Conservatives' 2011-2012 budget is expected to contain no material changes from the one presented in March," observed a commentary from RBC Dominion Securities.
"New wrinkles may include modest changes to the path of the deficit, compensation to Quebec for harmonizing its sales tax with the federal government, and an end to public subsidies for federal political parties."
The major U.S. piece of economic data is the Federal Reserve's so-called Beige Book, a measure of economic conditions across the country.
"Worth noting will be comments from manufacturers and other firms on whether the recent slowdown in activity and hiring intentions is a temporary response to supply chain disruptions arising from Japan's tragedy or a more long-standing problem related to high gasoline prices," said BMO Capital Markets senior economist Sal Guatieri.
"Also of note is whether banks are starting to loosen the reins on still-tight lending standards, or becoming even more cautious."