Source: The Canadian Press

Economic data will set the tone for trading on stock markets in the early part of the new year as investors return from Christmas-New Year holidays and get set to take in the latest gauge on the American manufacturing sector and employment reports in Canada and the United States.

“Absolutely, we’re going to come back to full volumes this week, we’re going to come back to economic navel-gazing,” said Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough, Ont.

“You could see a lot of pentup buying coming back. I still think there’s a lot of cash on the sidelines and the cash has been waiting for indicators and the indicators are positive. Cash will, or should, come back into the market.”

The TSX begins 2011 trading on Tuesday, a day after American markets.

Toronto’s main index ended 2010 about 14% higher than it started, amid expectations of a continuing economic recovery.

The latest look at the U.S. economy comes out Monday when the Institute for Supply Management releases its December index on the manufacturing sector.

Economists expect the sector to show slightly greater expansion from November, rising to 56.9 from 56.6.

However, hopes are high that the widely watched barometer will perform even better after a gauge of manufacturing in the U.S. Midwest came in much better than expected late last week.

The Chicago purchasing managers index climbed to 68.6 in December, up substantially from November’s reading of 62.5 and higher than the reading of 61 that economists had expected.

“I would think the whisper number is obviously elevated after the Chicago numbers,” added Pyle.

“And I think this is going to give economists a shot at a rethink going into the first quarter, that obviously businesses in the States are feeling a lot more optimistic about the outlook and about what is happening.”

The major report for the week comes out on Friday — the U.S. non-farm payrolls report for December.

Economists expect that the American economy added 125,000 jobs last month, a big improvement over the 39,000 positions created during November but well below what it is normally seen during an economic recovery.

“If you look at the last expansion that we went through, we had average gains of about 150,000 per month,” said Pyle.

“So this would just put us on the average, it would not get us into what most people consider the normal range for a recovery, which would be somewhere between 200,000 and 400,000 per month.”

But Pyle observed that other data released last week gives a reason for optimism that job growth is accelerating.

The U.S. Labour Department said last Thursday that applications for jobless insurance dropped by 34,000 to 388,000 last week, the lowest number since the week of July 12, 2008.

“That’s not an insignificant development in the labour market,” he said, observing that the data will have no bearing at all on Friday’s data.

“But let’s assume the consensus is right and we get about 150,000 next week, it does suggest that there’s a hope that we will get into that 200,000-plus range at some point, perhaps in the first half of next year if you believe the claims numbers.”

In Canada, economists expect the economy cranked out another 20,000 jobs during December, on top of the 15,200 created during the previous month. Statistics Canada issues its report for December on Friday.

“Employer surveys such as Manpower Inc. and the Ivey Purchasing Managers Index show that labour demand is picking up amid improving U.S. economic prospects in the wake of (stimulus measures) and the grinding climb in commodity prices to now 26-month highs,” said BMO Capital Markets senior economist Michael Gregory in a commentary.

However, the unemployment rate could increase to 7.7% from 7.6% as more discouraged job seekers try to get back into the workforce.