03/25/2012 06:00 EDT | Updated 05/25/2012 05:12 EDT

Improving U.S. economy, slowing China compete for centre of attention

TORONTO - Traders will be focused this week on reports from the world's biggest economies — with one eye on an improving trend in the U.S. and the other on signs of a slowdown in China.

Investors are closely watching for signs of a strengthening recovery south of the border, where economic data has largely outperformed market expectations over the past few months.

In Canada, economic news will be dominated by the gross domestic product report for January on Friday that is expected to show the economy grew by around 0.1 per cent, compared to a 0.4 per cent pickup in December.

That should put economic growth on track for a 2.5 per cent gain in the first quarter, improving on a 1.8 per cent pace in the fourth quarter of last year, said David Madani of Capital Economics.

"The main reason for this pickup in economic growth is much stronger export growth, reflecting an improving U.S. economy," he said.

U.S. markets are coming off a dour week after trading near four-year highs. The S&P 500 was down around one per cent for the week, after rising about 10.3 per cent for the year so far, and as much as 26 per cent from its October low.

The Toronto market was down marginally for the week, with a 0.25 drop as a 100-point gain on Friday largely made up for losses earlier in the week.

Candice Bangsund, a portfolio manager at CWM Investment Counsel Inc., warned there could be a further pullback in North American stocks in the coming weeks as markets have become a little overheated.

"We wouldn't be surprised to see a temporary pullback, and we would use that as a buying opportunity, because we do see further upside in the next few months," she said.

Investor sentiment in Canada tends to follow the U.S. because of the close economic ties.

Economic data coming out of the U.S. this week includes the S&P/Case-Shiller house price index, durable goods orders, a revision to fourth-quarter GDP, consumer sentiment and the Chicago purchasing managers index, which will offer a diverse portrait of the health of the economy.

U.S fourth-quarter GDP is expected to be revised higher to 3.4 per cent from the previously estimated three per cent.

The pickup in the U.S. stands in sharp contrast to signals coming out of China that have spooked some investors and raised concerns about the future demand for Canadian resources, which account for a majority of companies trading on the TSX.

"You can see China as the canary in the coal mine in some respects because if you see materials slowing there then that ultimately does filter through," TD Waterhouse's chief portfolio strategist Robert Gorman said.

Last week, soft Chinese housing data and a warning from miner BHP Billiton also stoked concerns about the outlook in the world's second-largest economy, which has shored up the global economy over the past few years.

"The Chinese numbers are being watched very closely," Gorman said.

The Chinese government has indicated that it plans to target growth to a lower 7.5 per cent growth instead of the eight per cent target it has been using since 2005. It also said it plans to focus growth on consumer spending rather than infrastructure spending, which would hurt Canadian resource companies.