Traders will see the latest reading on the health of the U.S. manufacturing and service sectors, the latest regional economic survey from the Fed and the May employment data for both the U.S. and Canada.
The TSX and New York indexes lost ground last week as investors weighed the chances that the U.S. central bank will start to let up on its bond purchases. The Toronto market fell 23 points while the Dow industrials gave back 188 points or 1.22 per cent as cracks started to show up in a rally that has gone on practically non-stop since late last year.
Under its third round of quantitative easing, or QE3, the Fed currently spends US$85 billion a month on Treasurys and mortgage-backed securities to keep interest rates low and encourage lending.
Speculation started growing after Fed chairman Ben Bernanke said May 22 that the Fed may decide to taper its purchase program within its next few policy meetings if the U.S. economy gains steam.
So, on the one hand investors are relieved that economic conditions are improving, but not happy that a more positive environment means an end to stimulus measures that have given U.S. equity markets huge gains this year, with the Dow industrials up a good 15 per cent year-to-date. The TSX has risen only about 1.8 per cent.
"There usually comes a time in a cycle when good economic news no longer is good news, or necessarily good news, for equities," said Doug Porter, chief economist at BMO Capital Markets.
"I personally don't believe we are at that point yet. But the day will come and . . . it's important to remember that the only question about the Fed ending QE is when, not if. There will definitely be a day when they end it. It's just a matter of whether it’s nine weeks from now or nine months or nine years. We are sort of in the nine-month camp."
The week kicks off with the Institute for Supply Management's read on the manufacturing sector.
There have been worries that the index could slip below the 50-mark, signalling a contraction, but traders were encouraged Friday as an important regional reading on manufacturing blew past expectations.
The Chicago Purchasing Managers Index for May came in at 58.7, higher than the 49.9 reading that had been expected and a big improvement from the 3.5-year low of 49 posted in April. Any reading above 50 indicates expansion and economists have forecast the ISM index to come in at 50.5.
The Fed's regional economic survey, the so-called Beige Book, will be released Wednesday afternoon.
"I think what the market will be watching for is any sign that the Fed is on the ground getting more upbeat about the economic outlook," said Porter, "and they will just be watching for signs from the field that conditions are improving across the board and I suspect that the beige book could send that message."
Expectations are muted for the employment data.
The U.S. economy has been unable to crank out a steady addition of at least 200,000 jobs a month and the consensus estimate for May is 165,000.
But Porter said the total isn't telling the whole story, because of government spending cuts. He says the public sector typically adds 10,000 or 20,000 jobs a month but, instead, there have been losses of that magnitude.
"The thing that's been different this cycle from other cycles is the public sector has consistently weighed on the job tally (and) that’s not normal in a cycle," Porter said.
"Private sector hiring has actually been not far away from a typical cycle."
Porter also isn't looking for a great showing in Canadian job creation last month.
"It's been one and a half steps back for every step forward on the job market so far this year and we haven't seen any real improvement in the unemployment rate either over the last year."
Porter noted that the resource sector hasn’t been a big job producer recently as some energy companies have cut back on plans to expand.
"And of course the one great ace in the hole for the Canadian job market in recent years has been construction and that area is starting to move lower (reflecting a slowing housing sector)."
Economists expect the Canadian economy created about 20,000 jobs during May, but BMO is forecasting 10,000 new jobs.