Traders have been reluctant to make big commitments on the markets as the end of December approached and with that, the fiscal cliff — the automatic imposition of big spending cuts and significant tax increases set to take effect Jan. 1.
The worry is that with the U.S. economy already weak, the double-whammy of those measures could easily tip the country back into recession, taking other economies along with it.
Investors will also take in data showing that the U.S. economy continued to improve in December despite the uncertainty surrounding the potential fiscal crisis.
"The economy is going along in the three per cent clip now in the U.S. so it’s pretty solid," said John Stephenson, portfolio manager at First Asset Funds Inc.
"And the data has been improving over the last couple of quarters so I think, in general, things are looking better but the cliff is a worry and this indecision again heightens the political risk that now marks the U.S. economy."
The latest readings on U.S. job creation, new home sales and the American manufacturing and service sectors are all being released in this week.
And in Canada, the December employment report comes out at the end of the week.
Fiscal cliff concerns left the TSX losing some ground last week, down 69.58 points or 0.56 per cent while the Dow industrials fell 1.9 per cent.
The latest dip left the TSX up barely three per cent year to date.
Stock indexes held up in December with many traders convinced that Democrats and Republicans would reach a deal on raising more income and cutting spending, although likely at the last minute.
But pessimism increased as the Dec. 31 deadline approached and the two sides appeared as deadlocked as ever.
There was particular disappointment at the end of last week as a meeting Friday afternoon between President Barack Obama and congressional leaders yielded no new offers from either side.
And that means the collective patience of the markets could be wearing thin.
"If they can’t come to an agreement in three weeks time, or a month’s time, then I think all bets are off and the market heads substantially lower," said Stephenson.
On the economic front, the major report of the week comes out Friday when the U.S. Labour Department is forecast to report that job growth came in at 140,000 in December, down slightly from November's 146,000 read.
In Canada, Statistics Canada releases its December employment survey. Economists expect the agency to report that the economy cranked out a modest 5,000 jobs, a not surprising pullback after having generated more than 50,000 jobs in two of the previous three months.
Economists expect that data out Thursday will show the housing recovery continues in the U.S. New home sales are expected to rise to an annual rate of 380,000 units in November from 368,000 in October, a level not seen in at least three years.
The Institute for Supply Management is expected to report Wednesday that the manufacturing sector crawled out of contraction territory — but just barely. The index is expected to hit 50, the saw-off point between expansion and shrinkage.
And the ISM's non-manufacturing index, out Friday, is expected to show growing expansion, rising to 55 in December from 54.7 in November.Suggest a correction