TORONTO - Data-hungry investors on both sides of the border will be keeping an eye on U.S. retail sales this week in the hope that the back-to-school shopping season inspired consumers to open their wallets.

RBC is predicting retail sales south of the border rose 0.2 per cent in August, said Paul Ferley, assistant chief economist at RBC Economics. This would compare to an increase of 0.4 per cent in July.

"I think there was some encouragement that retail spending stayed positive in July, so if we can get another increase in August there'll be some encouragement taken from that," Ferley said.

But "the fact that we're assuming the monthly rate slows a bit will keep market participants wary about the sustainability of the recovery," he added.

Wariness has characterized data-conscious markets for several weeks now, as investors bounce from cheering over good economic news to tearing their hair out over disappointing numbers.

However, the characteristically weak month of September — traditionally the worst month of the year on stock markets — has so far defied expectations. The S&P/TSX composite index is up 1.5 per cent so far this month, while the Dow Jones industrial average is up an even more impressive 4.5 per cent.

"Perhaps the weakness in September was pulled forward into August as people were talking about the double-dip (recession) and anticipating and seeing weak numbers coming out of the States," said Gavin Graham, global strategist at Excel Funds Management.

Markets have been boosted this month by upbeat readings on U.S. manufacturing and employment data, and the Bank of Canada confirmed investors' views that the Canadian economy is still relatively healthy by raising its key lending rate a quarter point to one per cent last week.

Investor optimism should continue into this week, said Doug Porter, deputy chief economist at BMO Capital Markets.

"September is always a month that's fraught with danger for equity markets, but so far it's been relatively good news globally because some of the U.S. data have been a bit better than expected," Porter said.

"Our view is that generally the economic numbers will have a bit of an upbeat cast to them over the next week, so it looks like the economic data should be mildly supportive for the equity market."

Porter said he expects a "mild rise" in U.S. retail sales, due out Tuesday, as well as a "relatively strong result" in Canadian manufacturing shipments for July, another key piece of data that's due to be released on Wednesday.

However, he cautioned that the manufacturing data may take a hit as the U.S., our biggest trading partner, imports fewer goods. This shift in the trade balance was highlighted last week, as data showed Canada's trade deficit with the world widened 50 per cent to a record $2.7 billion in July as exports to the United States fell 2.2 per cent and imports also declined.

RBC's Ferley said he expects manufacturing shipments rose 0.4 per cent in July even as exports to the United States declined. But he cautioned that Canada's manufacturing sector will face strong headwinds if the economy continues to weaken south of the border.

"That has a big impact in terms of output from the manufacturing sector," Ferley said. "It's on the external side right now that we see the main near-term risks for Canada."

Other data due out next week include Canada's existing home sales for August, expected on Wednesday, and the U.S. inflation numbers for August, due out Friday.

Economists expect Canadian home sales will be down 26 per cent year over year, with average prices down four per cent. U.S. inflation is forecast to rise by 0.3 per cent from July.

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