Canadian Manufacturing Sales Jump

Daily Forex Fundamentals | Written by RBC Financial Group | Jul 16 08 13:57 GMT |

Manufacturing sales jumped another 2.7% in May, once again trouncing expectations for a more modest a 0.5% rise. This marked the strongest gain since March 2007. Sales were 1.3% slower than a year earlier, an improvement from the 5.5% year-over-year decline in April. On a volume basis, eliminating the impact of price changes, sales rose at a more moderate 0.2%, building on April's solid 1.1% gain.

The manufacturing report showed broad-based strength with 16 of 21 sub-sectors posting gains in May. The big increase was in the petroleum and coal products industry - sales rose 9.2% - accounting for about one-half the monthly rise. Higher prices were largely responsible for the industry's strong gain. Primary metals sales also rose strongly, up 3.1%. The motor vehicle sector saw sales slip marginally, meaning that sales excluding motor vehicles, parts and accessories posted a 3.1% rise. Inventories posted a solid 1.3% increase, the third consecutive monthly rise, due in large part, to price increases.

After a tough first quarter, manufacturing sales picked up pace in April and May, although, on a volumes basis, they posted a marginal 0.9% annualized decline relative to the first quarter, an improvement from the solid 12.2% annualized drop recorded in the period from January to March.

The firming in manufacturing activity in the second quarter is consistent with the Bank of Canada's view that the domestic economy is continuing to "expand at a solid pace". More worrying is the outlook for inflation with the Bank highlighting the risk that the inflation rate may climb above 4% in early 2009 on the back of elevated commodity prices.

While the domestic economy looks poised to support a rebound in GDP in the second quarter, the merchandise trade numbers point to net exports acting as a drag on the pace of growth. On balance, Canada's economy is set to continue to grow at a sub-potential pace in the quarter. Against a backdrop of an economy that is growing at rates that are below potential but with upside risks to the inflation outlook, the Bank of Canada is likely to stay to the sidelines, holding the policy rate at 3%.

RBC Financial Group
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