Why the auto market could be ‘the harbinger’ of when the Fed can pivot

By Joy Wiltermuth

“In real terms, prices have barely come down, but sales are up,” says the CEO of CoPilot. “That’s what scares the Fed.”

According to Pat Ryan, CEO and founder of CoPilot, a car pricing app, the Federal Reserve still needs to tame the booming auto market before the central bank can begin to relax its fight against inflation.

Rising interest rates have dampened the once-booming U.S. housing market, with 30-year fixed-rate mortgages nearing 7% this week, down from around 3.1% a year ago.

But higher borrowing costs, so far, have done little to temper U.S. demand for vehicles, one of the costliest items most households tend to finance.

Households have continued to spend during the pandemic, with the auto loan market now reaching $1.5 trillion, according to the New York Federal Reserve.

“The used car market is much stronger than I think people expected,” Ryan told MarketWatch. “Car prices for dealers are going down, but that’s not true for consumers.”

Manheim’s used vehicle value index through mid-October was down 10.4% (see chart) from a year earlier, raising hopes that the rapid pace of increases Fed rate cuts this year could dampen consumer demand.

The index tracks the prices car dealers pay for used cars at auction. But a look at average retail prices, or vehicles that stand out, shows a drop of just 3.7% from their high of $33,505 in March, according to data from CoPilot, which tracks sales. and pricing activity at auto dealerships nationwide.

“They’ve only come down enough to offset the increase in interest rates,” Ryan said.

He used the example of a typical monthly payment of $546 on a used car loan in March rising to $564 in October, given falling prices but also rising borrowing costs.

“In real terms, prices have barely come down, but sales are up,” Ryan said. “That’s what scares the Fed.”

Car sales increase

After arguing that inflation would be transitory, the Federal Reserve in March began rapidly raising its benchmark rate, which hit 3.75% to 4% this week, the highest in 15 years.

Auto loans are often for terms of six years or more and are based on Treasury rates, not the Fed’s short-term policy rate, which means that the central bank only indirectly influences the car loan market. The benchmark 10-year Treasury rate was 4.12% on Thursday, down from a low of 1.34% in December, making borrowing much more expensive for households and businesses.

Yet Fed Chairman Jerome Powell on Wednesday described inflation as “increasingly difficult” growth this year, with consumer demand keeping prices high, despite an easing of some supply chain issues. pandemic fueling shortages, including among automakers.

October sales rose 28% at Toyota Motor Corp. (7203.TO) and 32% at Subaru America (7270.TO) from a year earlier, but fell 10% at Ford Motor Co. (F) and 16% at Honda Motor Co., according to Automotive News, Edmunds said last month it expects U.S. new auto sales to fall 0.9% in the third quarter, year on year.

Powell’s comments followed the central bank’s decision on Wednesday to trigger its fourth straight interest rate hike of 75 basis points, as signaling rates could remain high for an extended period. He also reiterated his vow to bring inflation back near a 40-year high to the central bank’s 2% target.

“This market will be the one to watch from month to month,” Ryan said, saying the Fed hasn’t flinched even as the housing market has cooled significantly. “I think this will be the harbinger of when the Fed can begin to ease its stance on rates.”

Read: The Fed says it could raise interest rates at a slower pace, but the destination is now 5% or more

Related: Why an Arkansas town could provide a grim roadmap for America if car depots explode

-Joy Wiltermuth

 

(END) Dow Jones Newswire

11-05-22 1451ET

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