TORONTO - The latest reading on consumer spending activity in the United States will likely set the tone for trading on stock markets this week.

U.S. retail sales for October are released Monday and economists expect to see a rise of 0.9 per cent following a drop of 1.5 per cent during September.

"It looks like that's going to be the big one," said Colin Cieszynski, market analyst at CMC Markets Canada.

Stock markets ended last week higher for a second consecutive week, largely on investor relief from indications that U.S. interest rates will stay low for an extended period.

Markets were also lifted by last weekend's G20 meeting where leaders made it clear that government stimulus measures will not disappear any time soon.

But critical to that growth on markets has been the hope that the end of recession will be followed by a strong recovery.

While retail sales are important in any economy, they're particularly important in the United States where consumer spending accounts for about 70 per cent of the economy.

And there are searing memories of what happens when consumer strength collapses.

"When the U.S. consumer got tapped out, that was one of the big things that led to the collapse of the housing market and that dragged down the whole banking system with it," observed Cieszynski .

"If we don't get the rebound in U.S. consumer spending, either we're in for a long, slow recovery or something else is going to have to pick up the slack, whether it's improved consumer spending in other parts of the world or corporate spending. Up to now it's been government spending has been trying to pick up the slack."

Cieszynski said there is optimism ahead of that retail report, based on other data from last week, pointing to a series of U.S. quarterly earnings reports from retailers that went down well with the market.

Wal-Mart, for example, beat earnings expectations but also reported that sale store sales moved down.

On the Canadian economic calendar, Statistics Canada releases the September reading on manufacturing shipments Monday. Economists expect to see a 1.5 per cent rise.

And the October consumer price index comes out on Wednesday. It is expected that inflation rose 0.1 per cent from the previous month.

In corporate earnings, Grocer Loblaw Companies Ltd. (TSX:L) is to issue its third-quarter results on Tuesday, followed by forestry company Tembec (TSX:TMB) on Wednesday.

North American indexes are up in the neighbourhood of 50 per cent since the lows of early March and some analysts think it's getting harder to improve much on that performance in the near future.

"What concerns us a little bit is that there is a consensus view forming out there and everyone is down on the U.S. dollar, everyone is up on gold, everyone is pro-equities and everyone is big time overweight emerging markets," said Paul Vaillancourt, director of asset allocation, Franklin Templeton Managed Investment Solutions in Calgary.

"We look at this, consensus view you know, the street all piling on to the same trades. That to us is kind of, a little concerning."

He points out there is also concern about how much of economic growth is due to government spending or stimulus induced growth, along with concerns about the timing of the withdrawal of that stimulus.

Vaillancourt said that after running up so sharply across the board, the market is becoming much more a stock pickers market.

He is still overweight equities in his portfolio but "with the thought to start in the next month selling into strength."

Vaillancourt thinks the market is in for some weakness, but likely not before the end of the year since in December "you have some window dressing that's going to happen at that point."

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