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Why Canada's manufacturing sector is so depressing Add to ...

These are stories Report on Business is following Monday, March 2, 2015.

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Whither manufacturing
The latest measure of Canada’s manufacturing sector is somewhat depressing.

Currency traders think so, too, knocking down the loonie in the wake of today’s RBC Canadian Manufacturing Purchasing Managers’ Index.

The index, released along with several around the world today, showed the lowest level in the survey’s history, though it goes back only to the fall of 2010.

Still, it marked the first time in two years that that the measure fell below the key 50 mark, which separates contraction from expansion, falling to 48.7 in February from January’s 51.

Today’s findings – they ended almost two years of “sustained expansion” - come, of course, amid the oil shock that has prompted companies to slash their budgets and, in some cases, their work forces.

“February’s data reflect the hit to confidence from the oil price shock with the weakness most evident in the energy-intensive regions of the country,” said chief economist Craig Wright of Royal Bank of Canada, which does the survey with Market and the Supply Chain Management Association.

It’s what behind the slump that’s depressing, though the drop is not dramatic.

“A number of manufacturers, especially intermediate and investment goods producers, cited lower demand from clients in the oil and gas sector,” the group said as it released its numbers.

“Lower levels of new work and reduced production volumes contributed to a fall in manufacturing payroll numbers if February,” it added.

“Staffing levels have now declined for two months in a row, and the rate of job shedding accelerated to its fastest pace in almost 4 ½ years. That said, a number of firms noted that payroll numbers had been lowered through hiring freezes and the non-replacement of voluntary leavers.”

On a regional basis, the provinces of Alberta and British Columbia saw the “steepest deterioration” in business conditions, while Ontario saw a “slight upturn.”

Among the findings:

Volumes of new work fell at a “moderate pace,” the second-fastest rate in the history of the survey.

New export sales fell by the “most marked” in three years, though some manufacturers saw the benefits of the weaker dollar and stronger U.S. economy.

Input buying fell at a “survey-record pace.”

Input prices rose as the loonie tumbled, meaning that “average cost burdens rose at a sharp pace.”

SCMA chief Cheryl Paradowski said today’s reading is a “clear signal that substantial parts of the Canadian manufacturing sector are struggling in the face of falling worldwide spending on energy sector projects.”

Tim Moore, Markit’s senior economist, stressed in an interview that the February slump was not a “sharp decline.”

Along with the latest reading on Canada’s current account deficit, the RBC findings helped knock down the Canadian dollar.

“So I think the market is cautious here,” said chief currency strategist Camilla Sutton of Bank of Nova Scotia.

Most observers believe Canada’s factory sector will perk up as the impact of the weaker currency filters through and Americans start buying more of our exports.

The C.D. Howe Institute’s monetary policy council noted that loonie-manufacturing lag just today.

“Several members of the council felt that a lower exchange rate and lower oil prices would be a clear positive for manufacturing,” the group said in its statement.

“However, some members argued that positive effect of a lower exchange rate on manufacturing could take several years to occur,” it added.

“Others felt even that was too optimistic and expressed doubt that a temporary cut from already low interest rates would make a tremendous difference in that respect.”

Canada's economy is forecast to chug along at an annual growth pace of somewhere in the area of 2 per cent.

Indeed, tomorrow morning’s report from Statistics Canada is expected to show that economic growth slowed in the fourth quarter of last year to somewhere between 2 per cent and 2.5 per cent, annualized.

That would mark a decline from the third quarter’s 2.8 per cent.

How do you solve a problem like …
Today is the 50th anniversary of the premiere of The Sound of Music. So:

On Greece: Better beware, be canny and careful. Baby, you’re on the brink.

On the Canadian dollar: So long, farewell, auf wiedersehen, goodbye.

On what Alberta’s Jim Prentice should be singing amid the oil slump: I simply remember my favourite things, and then I don’t feel so bad.

On Ontario’s finances: Nothing comes from nothing. Nothing ever could.

On the euro zone: A dream that will need all the love you can give.

And on the Greece election pledges: And that brings us back to Doh!

Bell fights ruling
Bell Media is going to court to fight a regulator’s decision that would bring American Super Bowl ads to Canadian television, The Globe and Mail's James Bradshaw reports.

Bell today filed a motion for leave to appeal with the Federal Court of Appeal, claiming a Jan. 29 decision by the Canadian Radio-television and Telecommunications to ban broadcasters from swapping their own signals and ads in place of American feeds when carrying the Super Bowl “impairs Bell Media’s rights and interests.”

The practice, known as “simultaneous substitution,” has long irked some viewers but has been a major revenue generator for conventional television stations that carry popular American programs, and none is more lucrative than the Super Bowl. While the CRTC ruled that the practice should continue on other shows, it heeded complaints from audiences who wanted to see flashy American ads during the big game.

The CRTC also banned “simsub,” as it is often called, for specialty channels, which affects other live sports programming on networks such as Sportsnet, owned by Rogers Communications Inc., and Bell-owned TSN.

Davis in merger deal
One of the world’s largest law firms, U.S.-British giant DLA Piper, is finally making a move into Canada with a deal to merge with Vancouver-based Davis LLP, The Globe and Mail's Jeff Gray reports.

The move will see Davis, a respected mid-tier Canadian firm with more than 260 lawyers and expertise in infrastructure, mining deals and development, rebranded as DLA Piper (Canada) LLP and become part of a global firm with 4,200 lawyers around the world.

Davis, founded in Vancouver in 1892, becomes the latest law firm in the jittery Canadian legal market to give up its name in exchange for the appeal of the global reach and heft of an alliance with an international behemoth.

Landlords strike deal
Two of Canada's largest landlords have moved quickly to snap up 11 of their best leases from Target Canada for what it describes as a premium price, underlining their urgency to take back control of their retail space.

Oxford Properties Corp. and Ivanhoe Cambridge Inc. have come together to make a deal with Target Canada as it winds down its operations under bankruptcy protection, The Globe and Mail's Marina Strauss reports.

The proposed purchase price for the leases, which include the store in Square One Shopping Centre in Mississauga, Ont., is being withheld but is “at the high end of the value range,” according to new court documents.

Bets against loonie rise
Speculators are raising their bets against the Canadian dollar.

Short positions hit $2.9-billion (U.S.), according to the latest report from the U.S. Commodity Futures Trading Commission, the highest level since last April.

The numbers were released Friday, but were measured last Tuesday.

So, said Scotiabank's Ms. Sutton, they do take in the surprise comments from Bank of Canada Governor Stephen Poloz, which sent the loonie higher.

Remember, markets had been anticipating a second interest rate cut from the Bank of Canada this week.

But that changed after Mr. Poloz said the “insurance” he took out with the shock January rate cut was “appropriate.”

Markets took that to mean there wouldn’t be a second cut this Wednesday, though many observers still expect the central bank to cut again at some point, bringing its benchmark overnight rate to just 0.5 per cent.

While the loonie short positions are higher, they’re still not near the exceptional levels of early last year.

And Ms. Sutton, for one, is surprised that they’re not higher given “all the bearish news” of late on the Canadian economy.

A rise in short positions tends to add to the pressure on a currency, and observers expect the Canadian dollar to sink further from its current level of around the 80-cent U.S. mark.

“Shorts have increased during seven of the last nine weeks,” noted Kevin Hebner, JPMorgan Chase & Co.’s chief foreign exchange strategist.

“There could be more to come as the CAD is the second worst-performing G10 currency year-to-date (after the EUR),” he added, referring to the loonie and the euro by their symbols.

We can expect the loonie to follow last week’s ups and downs with more of the same this week, by the way.

“BoC Governor Poloz’s less dovish speech gave the loonie a boost, though most gains were given back by week’s end,” senior economist Benjamin Reitzes of BMO Nesbitt Burns said today.

“Between the slew of data and BoC policy announcement, there’s plenty of catalysts for a volatile week for the Canadian dollar.”

Foreign investors shy from Canada
Canadian stocks are losing some lustre.

International investors dumped $3.5-billion of Canadian equities in the fourth quarter of last year, Statistics Canada said today, as stock prices fell by 2.2 per cent.

It marked the first time for overall divestment since early 2013, the statistics agency said.

Having said that, 2014 as a whole marked the highest level for such foreign investment in five years.

Where bonds are concerned, foreign investors snapped up $3.7-billion in debt in the final three months of last year.

When you add it all up, foreign investors bought just $300-million in Canadian securities in that period, bringing such investment to the lowest in six years.

Canada’s current account deficit, meanwhile, which marks the broadest measure of trade, widened by $4.3-billion to $13.9-billion in the quarter, Statistics Canada said.

That came as oil prices slumped.

“The falling C$ was already telling us that the collapse in oil was going to significantly impact the Canadian current account, but the news is worse than expected for Q4,” said economist Nick Exarhos of CIBC World Markets.

“All told, a worse-than-expected reading on Canada’s external position, but we’re likely to see further deterioration as lower average selling prices for crude work their way through,” he added in a research note.

“Little market reaction expected, but longer term a reason to stay short the loonie.”

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