Canada’s S&P Global Manufacturing PMI eased to 52.9 in May from 53.3 previously. The reading remains above the 50.0 threshold, indicating continued expansion in manufacturing conditions, albeit at a slower pace than the prior month.
The May data point extends the sector’s growth streak while suggesting a modest loss of momentum. No further sub-index details were provided alongside the headline PMI figure.
Impact on Central Bank Policy and Currency
The drop in Canada’s manufacturing PMI to 52.9, while still expansionary, signals a clear loss of momentum in economic growth. This cooling is significant ahead of the Bank of Canada’s upcoming interest rate decision on June 10th. We believe this data will reduce the probability of any hawkish language from the central bank.
This slowing growth, combined with recent softness in WCS oil prices which have fallen to around $74 per barrel, creates headwinds for the Canadian dollar. We see an opportunity in buying put options on the CAD/USD pair to position for a potential depreciation in the coming weeks. This provides a defined-risk way to bet against the loonie as the economic picture softens.
Market Strategy and Outlook
We also anticipate the bond market will continue to price out any remaining chance of a near-term rate hike. This makes futures on the 2-year Government of Canada bond attractive for long positions, betting on yields to fall further. The 2-year yield has already dipped 5 basis points to 3.85% in early trading, and we expect this trend may continue.
For the S&P/TSX 60 index, the outlook is now more mixed as slower growth could pressure corporate earnings. While a less aggressive central bank is supportive, the PMI data, conflicting with April’s sticky 2.9% inflation rate, creates uncertainty. We are therefore looking to purchase straddles on index options to position for an increase in volatility.
The key takeaway is the conflict between strong lagging data, like the April jobs report which added 40,000 roles, and this more timely, forward-looking PMI report. The deceleration in manufacturing is the newer piece of information guiding our strategy. We will prioritize trades that benefit from a more dovish central bank and a potentially weaker Canadian dollar.
