Toronto stocks are likely to rally this week on Friday's spectacular US jobs data but it may not be long before the flip side of the strong figures sinks into investors' minds - the possibility of higher US interest rates.
Canada's main equity market surged almost 150 points on Friday after the US economy generated three times as many new jobs as expected in March, according to government figures.
Data showed US nonfarm payrolls rose 308,000 in March, far above forecasts for a gain of about 103,000.
January and February's figures were also revised upward, signalling that the long hoped for pickup in the US labour market may finally be at hand.
"In the short run right now, it's a little bit of euphoria," Peter Chandler, a director at Canaccord Capital, said of the market's reaction to the figures.
"The market's obviously relieved that we finally got a good figure and so we're getting a relief rally."
The Toronto Stock Exchange's S&P/TSX composite index closed up 146.67 points, or 1.7 percent, at 8,798.75 on Friday. It ended the week with a gain of 3.4 percent.
But Chandler said the story may be different once market players catch their breath.
"I just don't think this is the beginning of a powerful new move up in the market," he said. "A little more of a sober note will take hold ultimately. This is another affirmation, and probable confirmation, that the Fed's accommodative stance has now come to a close."
The US Federal Reserve has held its key interest rates at four-decade lows while awaiting convincing signs of an employment recovery.
Most market players had expected the US central bank would stay on hold through this year, especially with the presidential election coming up in November. But, after the jobs data, financial markets concluded an interest rate hike is firmly back on the table, possibly as early as the summer.
"It's changed the rate picture for what people may have been thinking prior to the release," said George Vasic, director and strategist at UBS. "Our view is that August is still the soonest they are likely to hike."
Portfolio manager John Kinsey at Caldwell Securities said the resurgent US labour market - and the positive implications for the Canadian economy - may inspire the Bank of Canada to put its own rate-cutting campaign on hold.
The Canadian central bank has cut its rates twice this year and primary dealers polled earlier this week had forecast another cut on April 13.
Analysts still expect stock markets to hold firm next week on optimism about first-quarter corporate profits.
The absence of major warnings from companies ahead of the upcoming earnings season has led investors to hope for happy surprises in the wake of strong fourth-quarter profits.
"Expectations are very high and I think, on balance, they're going to be very good," said Kinsey. "So if the economy looks good and the earnings look good, although the market is high, it's quite possible that it can push higher.