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Troubling data on the Canadian manufacturing segment

The problem with data is lag, let’s say that Canadian manufacturing companies believe that the CAD is going to stay at the 1.05/95 level, it changes their pricing perspective both in Canada and abroad, but this expectation as to interest rate takes time to be absorbed. The same also applies to exogenous events – such as the Japanese Tsunami of a few months ago.


(source: StatsCan)
April 2011 saw a 1.3% reduction in manufacturing sales, by no means “end of the world” and to a certain extent represents a walk back of the previous month’s increase, so conclusions are hard to draw, especially when one sector is responsible for the bulk of the pull back: namely transport. In the case of April the shortfall is not only Aerospace (11.6%) but also automobiles (8.6%) and parts (5.4%) that are to blame for the drop off. Energy manufacturing was also to blame but marginally (2.3%), while food 1.8%, machinery 3.2% and chemical 1.7% added to the positive side of the equation.

Far more serious is the rise of inventories and the inventory to sales ratio (never a good thing) while surprisingly order books we also rising (especially if aerospace is removed). So while the strong CAD (which by the way is now back to near parity – thanks to weaker oil prices – WTI near $94 this AM). It remains that the segment is going through a difficult phase – and this despite a very accommodative monetary policy.

Adding to this situation wholesale trade was also lower this month.

(source: StatsCan)


This may explain why the BoC is hesitating in moving more aggressively towards higher interest rates, they see some weakness in the manufacturing sector (although it accounts for less than 30% of GDP today Vs around 40% a decade ago). Overall the market is now discounting any BoC interest rate increase for 2011 – and Q1/12 is looking tight. Of course this could all change quickly, but market suspicions are that the BoC is very concerned with the international situation, and takes the view that raising rates now to reduced them in two months would send a worse signal than being “overly cautions”.


One reality that has been of concern of the BoC has been the weakness – and over leverage of the European banks especially with regards to the Greek and Portuguese bond exposure.

(Source: Early Warning)

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