Canada: Manufacturing sales forecast to drop 1.8% m/m in March - TDS

Research Team at TDS, suggests that the economic backdrop in Canada is set to weaken further in March with manufacturing sales forecast to drop 1.8% m/m following a sharp decline in February.

Key Quotes

“Despite the historically cheap Canadian dollar, momentum has sputtered out for the industry as a slowdown in the United States dampens the demand for Canadian goods. This was reflected in March's trade data through the 4.8% monthly drop in exports and erosion of the Canada-US trade surplus. Employment data also predicts a slowdown in manufacturing with hours worked falling by 2.9% m/ m in March while the industry lost a combined 47k jobs in March and April. Motor vehicle sales look to be a source of weakness after a pullback in production data. Including February, the forecasted 5.2% decline in manufacturing sales represents the worst two-month period since January/February 2015.

Due to the further erosion of industrial prices in March (industrial prices were down 0.6% m/m), manufacturing volumes should be slightly stronger than the nominal print. However, due to the magnitude of the forecasted decline, the manufacturing sector will continue to be a drag on the wider economy and threaten to derail the Bank of Canada’s narrative of an export-led recovery.

USD/CAD has rallied over the past two weeks after marking a yearly low near 1.2556. While oil prices have firmed over this period, we argue that weaker risk sentiment and a shift in relative data surprises between the US and Canada have offset the impulse from higher oil prices. Notably, we point to a softer tone in some of the recent Canada data releases. March’s trade figures showed a record deficit, widening to C$3.4bn. Non-energy export volumes plunged, suggesting a weak tone from some of the March data releases. This comes against a backdrop of elevated market positioning with net spec positioning marking a new multiple-year high in May. As a result, we scope for further reduction in CAD longs with data likely to maintain a weaker tone.”