06/30/2013 06:00 EDT | Updated 08/30/2013 05:12 EDT

More market volatility ahead: traders weigh economic data, Fed stimulus moves

TORONTO - Stock markets are likely entering the second half of 2013 trading with increased volatility as traders look to a number of key reports.

The data will not only provide a gauge on economic health, but also how they will affect U.S. central bank decision making in starting to wind up a key stimulus program.

Traders will look to the latest reading on the manufacturing and service sectors, with the week capped by jobs reports for June from both Canada and the U.S.

The TSX finished higher last week, up 1.11 per cent while New York's Dow industrials ran ahead 0.74 per cent.

However, for the first six months of the year, the main Toronto index is still down 2.45 per cent. The Dow industrials are ahead 13.77 per cent for the year.

The performance last week capped a volatile month on markets after Federal Reserve chairman Ben Bernanke said the central bank could move to taper its US$85 billion of bond purchases every month if economic conditions are favourable.

Markets took that to mean the Fed would definitely start tapering as early as September, wrap it up by the middle of next year and even start raising rates sooner than thought.

"Monetary policy is a very blunt instrument but it tends to have a big, big impact," observed Robert Gorman, chief portfolio strategist at TD Waterhouse.

"And just hints of a change give rise to big changes."

One of those big changes was a huge spike in bond yields as traders pondered the effect of the Fed easing up on its massive bond purchases. The benchmark U.S. 10-year Treasury had rocketed from 1.7 per cent at the beginning of May to over 2.6 per cent after Bernanke's announcement.

But markets started to calm down last week after Fed officials went out of their way to suggest that the markets had misinterpreted Bernanke's message. At the end of last week, the yield had backed down to around 2.52 per cent.

"Having fired the shot across the bow, I think they’re going to be careful about doing anything that would push things back up significantly in the short term given the shock that’s already been given (to the market)," Gorman said.

Bernanke emphasized in his remarks on June 19 that any move to taper those bond purchases were dependent on how the economy is performing and this week's reports will be carefully scrutinized for how they will affect Fed thinking.

"People will use that and say, they're going early, they're going late, not going to do it," said Sadiq Adatia, chief investment officer at Sun Life Global Investment.

"And that's why you're going to see more volatility because of that. People will be watching that economic news and saying, what does that mean now about what the Fed says."

The week kicks off with the Institute for Supply Management's manufacturing index for June. Economists expect that the sector moved back into expansion mode last month, moving from 49 in May to 50.5 in June.

Economists also expected to see greater expansion in the non-manufacturing, or service sector, index from the ISM. The consensus called for the index to rise to 54.1 from 53.7 in May.

The key event comes down Friday. The U.S. government's employment report is expected to show the economy created 165,000 jobs, following a gain of 175,000 in May. The jobless rate is forecast to dip to 7.5 per cent from 7.6 per cent.

"It will likely require two or three months of meaningful progress towards seven per cent to trigger tapering (of bond purchases)," said a commentary from BMO Capital Markets.

The Canadian dollar also had a tough June, reflecting the rising greenback and higher U.S. bond yields, losing about 1.5 cents during the month. It's not likely to find much support from what is expected to be a fairly weak jobs report.

Economists believe Statistics Canada will say that the economy cranked out only about 5,000 jobs during June, following a surprisingly strong gain of 95,000 during May with the unemployment rate unchanged at 7.1 per cent.

It's a shortened trading week in Canada and the U.S. with the TSX closed Monday for Canada Day while U.S. markets are shuttered Thursday for Independence Day.