Stock markets could be in for more gains following solid U.S. economic data

TORONTO – The rally on stock markets that propelled North American indexes higher during January could find further momentum this month in the wake of solid economic data from the U.S. at the end of last week.

And the Canadian dollar could find some lift if the employment report for January comes in better than expected.

The S&P/TSX composite was up a shade over two per cent in January while the Dow industrials jumped about 5.75 per cent as corporations delivered some better than expected earnings reports and U.S. politicians avoided the so-called “fiscal cliff” with a compromise on taxation and an extension of the debt limit. There were also signs that China’s economy is reviving.

Sentiment was further improved on Friday as the U.S. non-farm payrolls report said the American economy created 157,000 jobs in January. The number of jobs created in November and December was also significantly revised upward, with a total of 127,000 more jobs created than initially thought.

And the Institute for Supply Management said its index on manufacturing showed greater than expected expansion, coming in at 53.1 in January, up from 50.2 in December to the highest level since April.

A similar Canadian index also showed marginal improvement for the first time since October, rising one-tenth of a point to 50.5 last month.

Those reports helped take some of the sting out of other data that showed the U.S. economy contracted during the fourth quarter by 0.1 per cent.

The TSX lost some ground last week, down 0.36 per cent, partly because of selling pressure on BlackBerry, the company formerly known as Research In Motion Ltd., (TSX:RIM), after it rolled out its new BB10 product last Wednesday.

However, New York bounded higher and the Dow industrials gained 0.81 per cent, closing above the 14,000-mark for the first time since late 2007.

But there are some headwinds. A major one could turn out to be one of the less-publicized aspects of the agreement that saved the U.S. from going over the so-called fiscal cliff at the beginning of this year.

Part of the deal brokered between Republicans and Democrats called for top earners to pay more in taxes.

The deal also saw the re-imposition of higher Social Security payroll taxes that will take a big chunk of cash out of the pockets of U.S. consumers. The tax increased to 6.2 per cent from four per cent.

“That’s probably something in the order of $125 billion out of wage earners’ pockets,” said Robert Gorman, chief portfolio strategist at TD Waterhouse.

“This is going to have an effect on consumer spending and in particular, consumer spending for the basics, the mass merchandisers, all sorts of things.”

For example, someone earning $35,000 would take a $700 hit, while someone earning $50,000 would have $1,000 less after tax money, and so on.

Gorman said the consequences of those higher taxes will show up as early as this week as U.S. retailers start to issue preliminary results for January sales.

Meanwhile, economists had expected Canadian hiring activity to be paused last month after blowing past expectations in December, but the economy created more than 31,000 jobs.

“We think employment growth will slow to just 5,000 in January and that will push up the jobless rate to 7.2 per cent,” said Benjamin Reitzes, senior economist at BMO Capital Markets, adding that the slowdown in the housing sector is partly responsible for the softening.

Hiring in the construction sector saw a big gain in December “and that’s not really consistent with what we’re seeing in housing. So as housing cools, I expect that sector to cool as well,” Reitzes said.

Elsewhere on the TSX, BlackBerry is expected to remain volatile after losing ground last week in the wake of the launch of its new BB10 product. The stock closed up slightly Friday after tumbling 17 per cent in the previous two sessions, partly on profit taking but also because availability has become an issue as U.S. customers won’t be able to get the BlackBerry Z10 until March, a month later than in Canada.

“And the U.S. is the biggest single market. So that is an issue at least in the short term,” said Gorman, observing that some analysts have cut back their anticipated sales in the coming quarter because of this.

“At the end of the day, it’s now about execution. They have a great device now. They have to get it into the hands of the users and make a buck.”

Traders will also be looking to earnings reports from big Canadian corporations this week.

Suncor (TSX:SU), Canada’s biggest integrated oil company, hands in results Tuesday. Analysts are calling for adjusted earnings of 76 cents per share on revenue of $9.5 billion. A year ago, the company posted results of 91 cents a share on revenue of $10.1 billion.

“Often, there’s a fair bit of volatility in some of the oilsands producers (and) it wouldn’t surprise me to see a little softness there,” added Gorman.

You can have issues associated with downtime for maintenance and so on which can make the earnings on a quarter to quarter basis a little volatile.”

Other notable companies reporting include discount airline WestJet (TSX:WJA) on Wednesday while BCE Inc. (TSX:BCE), insurer Manulife (TSX:MFC) and Shoppers Drug Mart (TSX:SC) hand in earnings on Thursday. Telecom Telus Corp. (TSX:T) reports on Friday.




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