Source: The Canadian Press

Stock markets will likely have a tough time extending the strong growth of September into this month after data from the U.S. manufacturing sector reminded investors that the economic recovery remains choppy and job creation remains tentative.

That’s dull news for investors looking ahead to the major economic event for this coming week, the U.S. non-farm payrolls report for September. Canadian employment data for September will also be released on Friday.

“I think perhaps the overriding theme in the next few weeks might be mild disappointment just since good news seemed to have been priced in in recent weeks,” said BMO Capital Markets deputy chief economist Doug Porter.

“Of course, October is usually no treat for investors either. It’s usually got its fair share of extreme volatility.”

North American stock markets enter October trading with strong gains from September, which has the reputation of the worst trading month of the year.

Mostly positive readings from economic data on U.S. manufacturing, home sales and jobs resulted in the Dow Jones industrial average having its best September since 1939 with a gain of 7.7%. The TSX gained a more modest 3.8% for the month.

But sentiment weakened at the end of last week after the Institute for Supply Management’s manufacturing index fell to 54.4 last month from 56.3 in August, which indicated expansion but at a slower pace.

The employment component was also a disappointment, falling from 60.4 to 56.5.

“The headline number really wasn’t much different than what the market expected but of course much of the concern these days about the U.S. economy centres around if and when employment will gather a bit more momentum,” said Porter.

“And on that front some of the recent indicators haven’t been that positive and that includes the ISM report which showed nearly a four point drop in the employment indicator to its weakest level in six months.”

And Porter noted that factory employment had been “a bit of a rare bright spot in 2010 in the U.S.”

He said he is looking for a flat showing from the U.S. employment report, with a net gain of only 5,000 jobs.

The anemic expectations for U.S. employment growth reflect the fact that economic data in most parts of the world points to slower activity.

Just last week, Statistics Canada reported the domestic economy actually shrank by 0.1% in July.

“The bar has been set pretty low for the economy and I think that partly explains why even (with) lacklustre economic data through September, the market was still able to rally quite strongly,” said Porter.

“We’ve now come back down to the reality that we do face a long slog here for the U.S. economy.”

The employment situation is looking better in Canada and it is expected the economy cranked out a modest 10,000 jobs during September, compared to 35,800 during August.

The consensus also calls for the jobless rate to remain steady at 8.1%.

However, CIBC World Markets noted that recent jobs data hasn’t been quite as positive as it looked.

“The cutbacks and then addition of teaching positions in the last two months, had somewhat muddied the labour market picture,” it said.

“But excluding teachers, employment was actually down in August, for the first time this year. And putting July and August together, full-time employment fell over the period. More importantly with regards to the sustainability of job creation, private sector payrolls were trimmed for the second month in a row in August.”

While not especially wonderful news for job seekers, the employment data and last week’s GDP report could translate into good news for consumers since it could likely persuade the Bank of Canada to let up on interest rate increases.

So far, the bank has hiked rates three times this year, each time by a quarter point, leaving its key rate at 1%.

Porter believes the Bank of Canada will now pause and not resume increasing interest rates until at least 2011.

“A lot depends on whether the U.S. economy can improve or not,” he said.

“It’s obviously still quite a fragile recovery we’re seeing in the U.S. and the bank probably needs to be convinced that the U.S. recovery itself is on more solid footing. We actually think it will take a bit longer than that, it could be late in the first half of next year before they start raising rates.”