Investor sentiment this week was heavily influenced by trade headlines in the lead-up to high-level US-China negotiations that began Thursday. Pessimism dominated early in the week after the US blacklisted some Chinese technology firms and restricted visas for Chinese officials. Optimism returned after China offered to purchase more US soybeans and both sides signaled openness to an interim deal. All eyes will be on a Friday afternoon meeting between the US president and Chinese vice-premier, with some hope that (at a minimum) tariff hikes scheduled for October 15 will be avoided. Next week we’ll get an update on how the industrial sector is faring given the tariffs already in effect.
US manufacturing output contracted over the first half of the year under the weight of higher import tariffs and softening growth abroad. The sector regained some of that ground over the summer, and likely made a positive contribution to growth in Q3. However, recent indicators point to a loss of momentum toward the end of the quarter. The ISM manufacturing index fell to a cycle low in September with the new orders, production, and employment indices all signaling contraction. New export orders extended recent declines. The dim view provided by survey data coincides with another round of US import tariff hikes at the beginning of September. Actual production data should be less abysmal—payroll data showed total hours worked in the sector were flat in September—but it’s hard to be positive about the manufacturing outlook with more tariffs in the pipeline.
In Canada, the slowdown in manufacturing has been less pronounced. Sales volumes declined in June and July and are now flat relative to a year ago. But we expect a bit of an improvement in August with help from a rebound in the auto sector after shutdowns in July. Canada’s manufacturing PMI has held up better than the US ISM, with the former remaining above 50 (signaling expansion) and at a seven-month high in September. However, given the Canadian industrial sector’s tight integration with the US, we continue to watch for signs that weakness south of the border is creeping north. It’s likely the BoC is very focused on industrial readings too, especially since remarkably steady Canadian core inflation measures aren’t likely to influence policy ahead of its October 30 meeting.
