Canada’s Ivey Purchasing Managers Index (seasonally adjusted) fell to 49.7 in March. This was below the forecast of 55.9.
A reading below 50 indicates contraction in activity, while a reading above 50 indicates expansion. March’s result moved the index into contraction territory.
The March Ivey PMI report has delivered a surprise, dropping to 49.7 against an expected 55.9 and falling into contraction territory for the first time in several months. This signals a potential and unexpected stall in the Canadian economy. We must now adjust our strategies for increased downside risk and volatility in Canadian assets over the next few weeks.
This weak economic data directly challenges the Bank of Canada’s recent hawkish tone, which was concerned with services inflation that was running at 3.2% year-over-year in January 2026. Consequently, we see a higher probability of the central bank pausing, or even signaling future rate cuts, which should put downward pressure on the Canadian dollar. We are considering call options on the USD/CAD pair to capitalize on this expected currency weakness.
The outlook for Canadian equities has also soured with this report. A contracting purchasing manager’s index suggests a future decline in corporate earnings and economic activity. From our vantage point in 2025, we recall how a similar PMI slump in mid-2024 preceded a 5% pullback in the S&P/TSX Composite Index, suggesting we should look at buying put options on broad market ETFs.
Given the shift in monetary policy expectations, we anticipate that yields on Canadian government bonds will fall. The market has quickly repriced the odds of a summer rate hike, with derivatives markets now indicating less than a 15% chance, down from over 50% last week. This makes going long on Canadian bond futures an attractive position, as their value will increase if interest rates decline.
The wide miss between the forecast and the actual PMI figure is likely to spike implied volatility across Canadian markets. This presents an opportunity for option sellers who can collect richer premiums, but it also makes buying protective puts more expensive. We will be watching the VIXC, Canada’s volatility index, for signs of sustained fear before adding significant new short positions.
