Canada's Ivey PMI: Tentative Stabilization Amid Trade War Scars and Inventory Risks

The May 2025 Ivey Purchasing Managers' Index (PMI) for Canada edged up to 48.9, marking a marginal improvement from April's 47.9 but remaining below the neutral 50 threshold. While this slight rebound signals a potential pause in the manufacturing sector's contractionary spiral, the data underscores lingering vulnerabilities tied to trade-war fallout, rising input costs, and fragile inventory dynamics. Investors must parse these crosscurrents to position portfolios for sectors poised to weather—or capitalize on—the ongoing uncertainty.

The PMI Rebound: A Fragile Pause or Turning Point?

The May reading reflects a partial stabilization in Canadian manufacturing, with production and new orders contracting at a slower pace. However, the sub-50 score confirms the sector remains mired in contraction for the second consecutive month. Key drivers include:
- Trade Policy Uncertainty: Ongoing U.S.-China trade tensions and U.S. tariffs on Canadian steel/aluminum continue to disrupt supply chains and deter investment.
- Input Cost Pressures: Raw material prices rose for the eighth consecutive month, driven by tariffs and global commodity volatility. Steel and aluminum costs surged, with 45% of companies reporting higher prices.

Trade-War Lingering Effects: Input Costs and Supply Chain Strains

The May data reveals a stark trade-off between cost absorption and profit erosion. Companies are increasingly passing tariff-driven costs to customers, with suppliers describing tariffs as a “tax” to be transferred. This dynamic has fueled inflationary pressures:
- The Prices Index (tracking input costs) remains elevated at 69.4%, moderating slightly but still signaling rapid price increases.
- Key Sectors Affected: Transportation equipment, chemicals, and electrical components face shortages and rising costs. For example, rare earth components and electronic parts are in short supply, exacerbating production bottlenecks.

The U.S. tariff policy—such as doubling duties on steel imports—has further strained cross-border supply chains. Canadian manufacturers, particularly those reliant on U.S. exports, face dual pressures: weaker demand from tariff-sensitive buyers and higher material costs.

Inventory Adjustments: A Double-Edged Sword

The May PMI highlights a critical inflection point in inventory management:
- Inventories Index: Dropped to 46.7%, entering contraction for the first time since February . This reflects the end of “pull-forward” stockpiling ahead of tariffs.
- Customer Inventory Levels: Reported as “too low” by 10 industries, suggesting potential demand-driven restocking later this year—if global trade tensions ease.

However, risks remain:
- Delayed Restocking: Companies may delay replenishing inventories until trade policies stabilize, prolonging the contraction.
- Geopolitical Risks: China's restrictions on rare earth exports and ongoing U.S.-EU trade disputes could further disrupt supply chains.

Investment Implications: Navigating the Crosscurrents

Investors should focus on sectors insulated from tariff volatility or positioned to benefit from an eventual inventory recovery:

1. Sectors to Consider:

• Industrial Equipment: Firms with diversified supply chains or exposure to domestic demand (e.g., Canadian companies like Hexagon AB or Magna International, though the latter faces U.S. auto tariff risks).
• Plastics & Rubber Products: These sectors reported production growth in May and are less dependent on steel/aluminum.
• Logistics & Supply Chain Management: Companies like Purolator or Canada Post could benefit if global trade normalizes and restocking accelerates.

2. Sectors to Avoid:

• Export-Heavy Industries: Transportation equipment and primary metals remain vulnerable to weak global demand and counter-tariffs.
• Tariff-Affected Materials: Steel and aluminum producers (e.g., ArcelorMittal Dofasco) face persistent margin pressure.

3. Macro Plays:

• Currency Exposure: The Canadian dollar's sensitivity to trade flows could create opportunities in currency-hedged ETFs.
• Inflation-Protected Bonds: Rising input costs may warrant allocations to Treasury Inflation-Protected Securities (TIPS).

Conclusion: Positioning for a Volatile Road Ahead

The May Ivey PMI offers a glimmer of hope but underscores the manufacturing sector's fragility. Investors should prioritize defensive positions in supply chain-agnostic sectors while maintaining flexibility to pivot if trade policies improve. The path to recovery hinges on resolving tariff disputes and stabilizing global demand—until then, caution and sector specificity will be rewarded.

This analysis underscores the need to balance risk mitigation with opportunistic bets. Monitor tariff negotiations closely, and favor companies with pricing power or diversified revenue streams to navigate the choppy waters ahead.