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Optimistic signs of an economy gaining momentum

This is a light week for economic data in the lead up to the holidays. But even as activity slows down after a dramatic year in the markets, optimism is unquestionably on the rise.

Expectations have brightened over the last few weeks, getting a boost from the U.S. Federal Reserve's second round of quantitative easing, Congress's $858-billion (U.S.) package of tax cuts, and improving economic numbers.

Markets are close to locking in double-digit gains for 2010: 12 per cent for the S&P 500, 10 per cent on the Dow Jones industrial average, and 12 per cent for Toronto's S&P/TSX. Stocks haven't enjoyed these heights since before the collapse of Lehman Brothers in September 2008.

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A dozen brokerage strategists surveyed by Bloomberg are anticipating further gains for the broad S&P 500 next year. Their median estimate is for an increase of 6.7 per cent in 2011.

Yields on U.S. Treasuries are at their highest level since May, with the 10-year bond settling in at 3.34 per cent on Friday. The rise, in part, reflects a more upbeat economic outlook, as well as the realization that expanding U.S. debt will have to be funded and that inflation may reappear.

The Chicago Board Options Exchange Volatility Index, also known as the VIX, sank 10 per cent Friday to 16, its lowest point since April. The VIX became part of main street's vernacular this summer. As the barometer of market anxiety surged past 30 this spring, and then closed in on 50 in June, it seemed to be charting civilization's course to financial ruin. These days, the VIX is barely mentioned, even in detailed reports from economists and equity strategists.

The U.S. Conference Board on Friday said its index of leading economic indicators increased in November by the most in eight months. The rise is "an early sign that the expansion is gaining momentum and spreading," said Conference Board officials, but they remain cautious. "Looking further out, possible clouds on the medium-term horizon include weaknesses in housing and employment," said economist Ken Goldstein.

Most market watchers now think that the U.S. economy will manage to grow 3 per cent next year, nearly half as much more as they were forecasting a few months earlier.

On Thursday, U.S. durable goods orders are expected to show a decline for the second consecutive month, weighed down by weak orders for aircraft. But when the transportation sector is removed from the results, orders could show a 2 per cent rise, a positive signal in terms of capital spending by businesses. Consumer spending, meanwhile, is expected to have risen 0.5 per cent and income 0.3 per cent.

In Canada on Thursday, the latest GDP figures are expected to show a rebound for October, following September's dip.

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Despite the cavalcade of good news, stubbornly high jobless rates, sovereign debt loads and the troubled U.S. housing sector remain concerns. James Marple, senior economist with Toronto-Dominion Bank, warns that there could be as much as 21 months supply of housing in the U.S. market when homes in foreclosure are included. The housing industry is a key driver of the economy, and real estate accounts for roughly one-quarter of household wealth in the U.S. That means the U.S. consumer is not about to carry this recovery.

It will take another two or three years for the economy to grow sufficiently to bring some relief to housing and unemployment, he says.

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