TORONTO - Stock markets will tread carefully this week after data at the end of last week showed job creation in the United States drying up amid more worries about the bond insurance industry.

But there is momentum going into this week -- North American indexes finished solidly higher for a second week in a row following a dismal January that erased all 2007 gains and then some.

The TSX and the Dow industrials both shed about five per cent during January while the Nasdaq fell 10 per cent.

However, "two weeks is not enough to go crack the champagne and say `That's it,''' observed Andrew Pyle, investment executive with Scotia McLeod in Peterborough, Ont.

"But if we could see this trend continue for the next four weeks as we go through February, then I think you will see confidence really rebuild as we get into the end of the quarter. The lower volatility steady growth in equities is really what people  want to see right now and you need at least four more weeks of this.''

And that's going to be an uphill slog.

Expectations had been modest for U.S. job creation last month, about 55,000.

Instead, the non-farm payrolls report indicated that job growth actually declined by 17,000 during the month, deepening worries the U.S. is in a recession or slipping into one.

"It's going to weigh on them,'' said Pyle, noting the report came out two days after other data showed the U.S. economy grew at an annualized rate of only 0.6 per cent in the fourth quarter, "as close as you're going to get to zero ... so the economy is stalled.''

"And probably in the first quarter we're going to see negative growth and when you start to see these kind of job losses, then you know that consumer spending is likely to turn negative or at least growth rate in consumer spending is going to turn negative. And that means the headlines will be filled with: `That's it, we're in the middle of a recession.'''

Pyle said if the Fed can continue to continue to aggressively ease interest rates -- as it did just last week with a 50 basis point in the key funds rate to three per cent -- then damage to equities will probably be short-lived.

He also thinks any recession would be relatively short-lived.

"I think what it means is that with that kind of stimulus coming in the pipe, you probably are not going to see more than a couple of quarters of negative growth, if that.''

Markets will remain extremely skittish on dangers facing the big U.S. bond insurers.

That's because these insurers, best known for insuring municipal bonds, also back up securities that have plummeted in value on a massive number of mortgage foreclosures.

And banks that have already written down the value of these securities by billions of dollars could be forced to take even more huge writedowns.

On Friday, rating agency Moody's Investors Service warned that it expects to downgrade some bond insurers, though the company did not specify which companies might see their ratings change.

And there were reports that U.S. banks Citigroup Inc., Wachovia Corp. and six top European banks have banded together to work with New York State Insurance Superintendent Eric Dinallo to bail out struggling bond insurers.

The report should be encouraging to investors who had feared that such major insurers as Ambac Financial Group Inc. and MBIA Inc. would not be able to attract enough capital to avoid downgrades from ratings agencies.

"If (downgrades) were to happen, yeah that's going to have catastrophic effects for the entire equity markets,'' said Pyle.

"You cut your nose to spite your face if you don't buy into a rescue package of some sort.''

There isn't much in the way of economic news to move markets this week.

The main event for Canadian markets happens on Friday when Statistics Canada releases its January jobs report.

"The market is looking for about 10,000,'' said Pyle, after the economy shed about 3,000 jobs during December.

"It's really difficult now because we know Ontario is suffering, we know the housing market is slowing ... it's interesting to look at what happened to Canada in the last few months of last year in terms of  output -- if you look at the oil and gas industry, output wasn't good.''