In normal times, the Bank of Canada’s Business Outlook Survey gives markets a good indication of the macroeconomic climate through the eyes of businesses’ decision makers. While today’s reading was somewhat informative, in the sense that concerns still remained over the demand outlook and thus meant that firms sentiment towards CAPEX was nonexistent, it wasn’t completely representative of the current climate.
With the survey being conducted in the weeks between late August and mid-September, the results failed to show the impacts of the announced 28-day lockdown in Quebec and Ontario. The risk was always present with lagged data, however, given the limited negative contribution to the sentiment index provided by Ontario and Quebec, the -2.2 reading headline reading is someway off what would currently be felt by businesses today. In this light, the loonie just walked on by the release and focused more on the broad USD move currently underway in markets to continue rallying.
Key points from the release:
- The Overal Business Outlook Survey improved from -7.0 (revised to -6.9) in Q2 to -2.2, but this likely underreports the current situation as it doesn’t include the effects of the latest lockdown measures imposed in Canada’s two largest provinces; Quebec and Ontario. Given the fact that both provinces accounted for little of the negative sentiment reading, the likelihood that this index substantially overestimates current business sentiment is high (chart 1).
- Expectations of future sales increase from -35.00 to 39.00, predominantly reflecting the re-opening of the economy but remains capped by the uncertainty in demand conditions. Given that 47% of respondents reported lower sales in the past 12-months relative to the 12-month prior to that, rising expectations of future sales suggests demand conditions will recover most of the damage lost. However, the metric isn’t representative of the level of sales. Around 1/3rd of businesses reported that they don’t expect their sales levels to return to pre-virus levels in the next 12-months.
- Credit conditions were seen to have eased, owing to the credit facilities put in place by the Bank of Canada. Additionally, fiscal measures such as rent subsidies eased the burdens on the banking sector to provide loads in a riskier climate.
- Hiring intentions remain modest while investment intentions on average are non-existent. This won’t come as a surprise to anyone following the latest data from major economies. Labour markets are historically loose and demand conditions are highly uncertain. Despite 34% of firms experiencing some capacity pressures, and a further 10% experiencing significant capacity pressures, most firms see this as temporary and are willing to work through it without changing their level of production via hiring more workers – intensity of labour shortages is in negative territory (chart 8).
- Given that all of the above information is in line with the current market expectations, and the fact that the headline readings aren’t representative of the current business climate now lockdown measures have been tightened, the loonie traded numb to the release and continued to take its cue from the broad dollar move in markets.
Business sentiment has improved across all regions but remains negative
Regional Business Outlook survey indicator, contributions by region*
With improved demand, reports of labour shortages have increased
Loonie continues to trade with today’s momentum as BOS presents dated information to markets
Author: Simon Harvey, FX Market Analyst