In an otherwise quiet week for economic data, traders will take in the latest reports on U.S. housing starts and sales figures for new and existing homes.
Economists expect housing starts rose by 0.3 per cent last month, while existing home sales gained 0.7 per cent and new home sales climbed by 1.4 per cent.
Monthly American housing data was generally discounted for years as a market negative amid sliding sales and plunging prices. But data has markedly improved since the end of 2011.
"If we do get confirmation that the U.S. housing market is truly turning, then I think it would actually help support the equity markets simply because that’s been the missing ingredient all along in this recovery," said Doug Porter, deputy chief economist at BMO Capital Markets.
"And if housing really does begin to turn, then it could give some added oomph to this U.S. recovery."
A revival of the U.S. housing sector has been a long time coming.
The sector has subtracted from U.S. gross domestic product for the past six years in a row.
"And of course, for a couple of those years, subtracting is just putting it lightly," said Porter.
"It’s been a consistent downward pull on the economy for years now."
But he said it looks like the housing sector will actually add to U.S. economic growth this year.
One reason a turnaround in housing is eagerly anticipated is that it would also send a positive signal about the American employment situation.
"The two go hand in hand," added Porter, "and it’s one of the reasons why job growth has been so mediocre is that because construction has been flat on its back and, of course, the reason why construction has been flat on its back is because the housing sector has been struggling to turn around."
The Toronto market could certainly use a catalyst to restart a rally that seemed to run out of steam after almost five months over the past three weeks. The TSX closed a handful of points lower last week, adding up to a third consecutive weekly decline, leaving the TSX still up 4.5 per cent for this year to date.
That is in sharp contrast to the U.S. market, where the Dow industrials are up more than eight per cent year to date.
"Given the run that we have had, there is the potential for what I’ll call sober second thought at this stage of the game because things look pretty good, much as expected," said Bob Gorman, chief portfolio strategist at TD Waterhouse.
"But the sentiment — maybe just a little too positive."
Investors will also keep a close eye on rising government bond yields.
Yields have risen as a reflection of the more positive economic outlook and a feeling that the European debt crisis has calmed down now that Greece has received its second bailout.
Just in the past week, the yield on the Canadian 10-year government bond is up 0.24 of a point to over 2.24 per cent. U.S. yields have also bounded ahead, with the 10-year treasury up 0.6 of a point from the lows of last September to 2.3 per cent at the end of last week.
"People are less fearful, hence prepared to take on more risk and so you have a switch from lower risk assets to higher risk," said Gorman, who added the higher yields have had a very positive effect on Canadian insurers.
Insurers have been hit hard by low interest rates and stock market losses since the 2008 financial crisis.
But recently, "these stocks that have done nothing for ages started moving," said Gorman.
"This is the first time we have seen any meaningful backup in bond yields that would provide them with some relief. The yield goes higher and this is important for insurance companies because it effects their earnings in a material way."
For example, Great-West Lifeco (TSX:GWO) gained 4.2 per cent last week while Manulife Financial (TSX:MFC) ran up 12.2 per cent.
Meanwhile, the major Canadian economic report this week is the January read on retail sales.
The consensus calls for a 1.7 per cent rise, reflecting a 15 per cent jump in vehicle sales in January.
"Our consumers did not get hit as hard during the recession....there’s just no pent-up demand in Canada," said Porter.
"The Canadian consumer is still pretty sluggish, but for January at least, we had one banner month (in auto sales) and that will show up in the retail sales result."