Canada’s Ivey Purchasing Managers Index (seasonally adjusted) came in at 49.7 in March. This was below the forecast of 55.9.
A reading below 50 indicates contraction in activity, while a reading above 50 indicates expansion. The March figure therefore points to weaker conditions than expected.
The March Ivey PMI data, coming in at 49.7 against a forecast of 55.9, is a clear bearish signal for the Canadian economy. This is the first reading below the 50-point threshold for contraction that we have seen in several quarters. For us, this suggests a potential economic slowdown that was not priced into the market.
We should anticipate weakness in the Canadian dollar over the coming weeks as a result of this negative surprise. This makes buying call options on the USD/CAD an attractive strategy to profit from a potential rise in the exchange rate. The market is now pricing in a significantly lower probability of a Bank of Canada rate hike this summer, a sharp reversal from just last month.
This economic outlook is also negative for Canadian stocks, which are sensitive to domestic growth. We should consider purchasing put options on S&P/TSX 60 index ETFs to hedge our long positions or speculate on a market downturn. Historically, when we saw a similar unexpected PMI contraction back in 2023, the TSX experienced a correction of over 4% in the following month.
The key is to watch for confirmation in the next major data releases, especially the upcoming labor force survey. If we also see weakness in job creation, it will validate this bearish PMI reading. This would likely accelerate the downward pressure on both the Canadian dollar and domestic equity markets.
