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As U.S. stocks extend gains, reason for caution Add to ...

Benchmark U.S. equity indexes have been modestly adding to their earlier gains as the close approaches - with the S&P 500 up about 15 points and the Dow 152. That bodes well for the TSX on Monday, when U.S. markets are closed for the Fourth of July holiday.

Much of today's enthusiasm for stocks has been linked to the surprisingly strong June U.S. manufacturing data released this morning, as it has added credibility to a growing consensus that the U.S. economy will see better growth in the second half. U.S. auto manufacturer data this afternoon, showing a 10 per cent jump in sales from a year ago for both GM and Ford, has kept investors in a positive mood even though figures came in below forecast and GM tempered its forecast for the industry this year.

Not to end off the week on a negative note - particularly as we celebrate our nation's birth on this side of the border - but there's certainly some need for caution in reading too much into the one economic report from the Institute for Supply Management. The index of manufacturing activity rose to 55.3 in June from May's 53.5 - but note that May had been the slowest rate in 20 months.

Some of the components of the report weren't particularly reason for celebration. Production edged up just slightly to 54.5 from 54, and new orders were up just a tad to 51.6 from 51 in May. Similarly, new orders saw just a small move higher.

RDQ chief economist John Ryding, as quoted by Patti Domm of CNBC, suggests that the manufacturing report should be taken as a sign of less deterioration than a meaningful indication of a pending surge of activity in the U.S. economy. Note that May's ISM figure had taken a deep dive, which is why the June report is being met with such relief.

"The details of the report were far less strong than the headline index as 1.1 point of the 1.8-point gain in the overall index came from an inventory build by manufacturers and customer inventories are much closer to being at desired levels than they have been in over two years," he wrote in a note.

"Easing inflation pressures likely reflect lower energy prices and a pullback in some industrial commodity prices (but at 68, these input cost pressures are still very significant). We score this report as arguing strongly against a further deterioration in growth but more agnostic between the view that the economy is in a soft patch from which it will strengthen (our baseline forecast) and the view that the expansion pace of growth has downshifted to 2 percent-2.5 percent," he wrote.

All eyes will now be on next week's U.S. jobs report.

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