Traders look to latest reading on economy after jobs shock, earnings reports

TORONTO – Traders will likely be cautious this week as investors try to decide if a huge miss on job creation expectations last month indicates the U.S. economy has run into a rough patch.

Also, the fourth quarter earnings reporting season kicks into gear and investors will take in reports from major financial institutions and other market bellwethers, including General Electric and chip giant Intel.

There was a big surprise on markets at the end of the week when data showed the U.S. economy cranked out only 74,000 jobs as opposed to the 200,000 that economists had forecast.

Traders struggled to find a concrete reason for the huge miss as expectations had ratcheted higher in the wake of a steady stream of recent positive economic data.

“All of the recent data has been so good that everyone thought that this was a slam dunk,” said Wes Mills, chief investment officer at Scotia Asset Management.

“And so this is going to raise doubts across the board and clearly sentiment is going to take a hit on this. The U.S. had a huge year (in 2013), so maybe we spend the first half of the year consolidating that and we need further evidence before we take things higher.”

The jobs data also raised doubts about what the Federal Reserve might do about continuing to wind up its key stimulus program, the monthly purchase of bonds.

The central bank decided in December to cut the key stimulus program from $85 billion a month to $75 billion, making further cuts contingent on economic performance, particularly the job market. The change came into effect this month.

It is a relatively light week for economic data so traders will look to the release mid-week of the Fed’s latest reading on the economy. That regional economic survey — the so-called Beige Book — comes out on Wednesday afternoon.

Meanwhile, traders anticipated earnings reports from a variety of financial heavyweights this week, including JPMorgan Chase, Wells Fargo and Bank of America.

This earnings season follows a strong 2013 where the S&P 500 rocketed about 30 per cent, helped in large measure by Fed stimulus. Now investors want to see if strong earnings and revenue can cement that gain.

“Admittedly, the increase in stock prices last year was not necessarily on earnings growth. It was certainly much more multiple expansion than it was based on rising earnings growth,” said Gareth Watson, vice-president at Richardson GMP Ltd.

“So . . . what we really need to see to justify higher valuations is rising revenue growth.”

Traders will be interested to see how the U.S. financials are benefiting from rising long-term interest rates and a powerful housing recovery.

General Electric is of particular interest as the company’s reach extends from manufacturing to financials.

“So you look at (GE) or 3M or any number of these companies. These are decent proxies on the global environment for that sector,” added Mills.

“But the bellwethers keep changing. You used to be able to look at Cisco Systems for networking on a global basis and now it’s kind of irrelevant. And Microsoft has management changes and so . . . we’ll keep an eye on the biotechs, some of the techs, the Googles are good leading indicators on advertising and search.”

The flood of corporate earnings in Canada generally lags the States by a few weeks but traders will take in earnings from communications giant Shaw Communications (TSX:SJR.B) on Tuesday.

Elsewhere on the economic calendar, there are no major Canadian releases.

In the U.S., traders will look to U.S. retail sales for December. Economists looked for a 0.1 per cent rise, down sharply from a 0.7 per cent jump the previous month as the weather helped depress auto sales.

“If poor weather was a factor in preventing customers getting to car lots, some will have struggled to reach the shopping malls as well,” noted CIBC World Markets economist Andrew Grantham.

“And with the rising prominence of November’s sales season pulling spending away from December, core retail sales could have struggled to post meaningful growth as well.”

The TSX had a strong week, rising 198.67 points or 1.47 per cent, paced by gains in the mining sectors, which were the worst TSX performers last year.

The Dow ended the week flat.

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