MARKETS could be in for a reality check this week after recent key economic data presented a very muddled picture of an economic recovery, raising concerns that equity markets have been much more optimistic than reality would suggest.

The latest jobs data from the United States showed that employers had cut more far jobs than expected.

This was a further blow to investor confidence after other key manufacturing data in Britain and Japan released last week suggested the road to recovery will be a bumpy one.

The Dow Jones Industrial Average fell to its second straight weekly loss, European markets hit a four-week low, while Japan's main Nikkei average closed at its lowest in two months.

Stocks will face another major test this week as the US corporate earnings season kicks in, starting with the largest American aluminium producer Alcoa on Wednesday.

US retail data, which will provide a gauge of consumer sentiment, is due on Thursday.

Commodity stocks could also face some pressure after oil's retreat last week.

Analysts expect gains in the local market to be limited. Despite talks of a September sell-off, stocks have held on to gains and moved higher last month - the benchmark Straits Times Index (STI) was up 1.13 per cent.

Since slumping to a six-year low of 1,456.95 on March 9, the STI has gained 79 per cent as of last Friday's close of 2,604.53.

But it is too early to tell if a sell-off will take place this month. There could be limited buying activity this week ahead of the local earnings season, which will kick off next week with Singapore Press Holdings reporting its fourth-quarter results.

Investors will look out for signs of revenue growth in corporate earnings this quarter, given that previous quarters' results could have been boosted by cost-cutting measures and gains from the Jobs Credit scheme.

The Purchasing Managers Index, a leading indicator of manufacturing activity, is out today. Other data from the region includes Taiwan's trade data on Wednesday and Australian unemployment numbers out on Thursday.

'We see the STI capped at 2,800 for now as the market heads towards the year-end holiday season,' said DBS Vickers. 'After six months of gains and profiting from the stock market, we think investors will be unwilling to take up fresh aggressive positions on the market.'

The STI has failed to break through the 2,700 level after two months of trying, and this indicates that 'a short-term sell signal has emerged', said AMFraser Securities senior vice-president of research, Mr Najeeb Jarhom.

'With big caps so lightly traded in the past few weeks, the market needs to get fresh insights from upcoming GDP and earnings reports to know where it should be headed,' he said. Earnings growth and other economic data 'will have to keep on improving in order to justify STI at 2,900 and 3,000', he added.

yanghw@sph.com.sg