Federal Reserve Chairman Ben Bernanke said he is letting up on the monetary gas pedal. That hasn’t done much yet to affect U.S. auto sales that may have accelerated in June to the fastest pace in 66 months.
Rates charged for new-car loans didn’t budge from near-record lows after the Fed began signaling a tapering of its bond-buying as the central bank adjusts to an economy that’s following the auto industry’s rebound. Bernanke’s comments triggered a jump in mortgage rates and a stock-market slide.
“The market is very strong and we seem to be doing well despite what’s going on,” George Magliano, senior economist at IHS Automotive in New York, said by telephone. “Is the market going to be immune to the selloff of the stock market and the rising mortgage rates? I find it hard to stay as strong in the face of these things. We’ll probably back off a little bit and then pick back up.”
Sales of new cars and trucks probably accelerated last month to the fastest pace since December 2007, according to a survey of analysts by Bloomberg News. The projected growth in June, which analysts say was led by Nissan Motor Co. (7201) and Ford Motor Co. (F), keeps the U.S. on track for its best annual sales in six years.
The central bank’s moves and volatility in stock markets and mortgage rates will test the confidence of consumers to keep buying new cars and trucks. Yet some of the fundamental reasons for the sales surge remain.
Rates for new-car loans remain low. There’s pent-up demand from Americans replacing the oldest vehicles ever on U.S. roads. U.S. automakers are producing their best cars in a generation, so better vehicles are in showrooms everywhere. What’s more, a weakening yen is enabling Japanese carmakers to cut prices or add features.
Bernanke said last month that the Fed will probably taper its $85 billion monthly bond-buying program later in 2013 and halt purchases around mid-2014, citing a slowly improving economy. Still, most members of the central bank committee don’t expect to begin raising the benchmark lending rate out of its lowest-ever range of zero to 0.25 percent until 2015.
“If the incoming data supports the view that the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of purchases,” Bernanke said during a June 19 press conference. “However, any need to consider applying the brakes by raising short-term rates is still far in the future.”
That’s positive for new-car loan interest rates, which averaged below 2.5 percent for 36 months and 2.7 percent for 60 months through the end of last month, according to Bankrate.com.
The bond market, stock market and mortgage rates, on the other hand, were far from steady in anticipation that the Fed may begin to back away from buying $40 billion per month in bonds backed by such loans.
The average 30-year fixed mortgage rate surged almost half a percentage point to above 4.6 percent, the highest in two years, New York-based Bankrate.com said on its website. The belief that higher mortgage or rent payments are coming can deter spending or blunt Americans’ growing confidence in their employment and financial security.
Government bonds tumbled from Australia to Portugal and Treasury yields rose to a 20-month high after Bernanke’s press conference, and the Standard & Poor’s 500 Index (SPX) fell almost 5 percent in the four trading days that followed before rebounding.
Those are the sorts of jolts that can dent consumer confidence. Ford’s head of the Americas, Joe Hinrichs, told reporters June 27 that industry sales may have slowed the preceding week and pinned it on the Fed’s signals.
Analysts didn’t see it putting much of a dent in the results for all of June. They’re projecting that U.S. light-vehicle sales climbed 7.1 percent to 1.38 million last month, the average of 10 estimates in the Bloomberg survey.
The annualized industry sales rate, adjusted for seasonal trends, may have risen to 15.6 million, the average of 17 estimates, from 14.4 million a year earlier. That would be the highest monthly pace since 15.8 million in December 2007, according to researcher Autodata Corp.
The prospect of rising interest rates will have a “longer term” impact on auto financing and discounting, John Mendel, head of U.S. sales for Honda Motor Co. (7267), said in an interview.
“This is going to remain one of the bright spots in the economy,” Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc. “The pent-up demand is really strong, and the Fed’s not going away.”
Auto lending has accelerated as the U.S. market rebounds to a pace of more than 15 million sales this year, from a 27-year low of 10.4 million in 2009. Lenders have been drawn to autos because U.S. borrowers often need a vehicle to look for or get to a job. If payments are skipped, cars and trucks can be repossessed faster than homes.
U.S. auto sales increased for the initial year of Federal Reserve tightening five of the last six times, Brian Johnson, a Chicago-based auto analyst with Barclays Plc, said in a May 31 report.
“We expect rising interest rates to have little effects on consumers’ ability to finance a new vehicle,” Johnson wrote. The monthly payment on a $25,000 car would increase by about $11 for each percentage point increase in the interest rate, which he said is “not overwhelming by any means.”
Ford, which has gained the most U.S. market share this year, probably led American automakers this month with a 12 percent increase in sales, the average of 11 estimates. The Dearborn, Michigan-based company is adding capacity to build 200,000 more vehicles annually in North America on demand for F-Series pickups and Fusion sedans, and most of its regional assembly plants also are taking shorter summer shutdowns.
Nissan probably led all automakers with a 13 percent increase in U.S. sales, the average of eight estimates. The Yokohama, Japan-based company’s deliveries surged 25 percent in May, triple the industrywide increase, after cutting the price of seven models, including its top-selling Altima sedan.
The price cuts from Nissan were the first sign of a Japanese automaker taking advantage of the weakening yen, which put the rest of the industry on watch as a test for pricing discipline, John Krafcik, chief executive officer of Hyundai Motor Co. (005380)’s U.S. unit, told reporters last month at an award ceremony in Detroit.
Combined sales for Hyundai and its affiliate Kia Motors Corp. (005380) may have slipped 1.7 percent in June, the average estimate of seven analysts. The Seoul-based carmakers have trailed industrywide sales growth in every month since September as they contend with production constraints and more competitive U.S. automakers.
The Fed’s tightening is “probably going to make things a little tougher, but that said, the economy’s getting stronger,” Krafcik said. “We’ve got some pretty extraordinary financing deals in the market right now.”
Chrysler Group LLC probably increased U.S. deliveries by 8.2 percent, the average of 10 analyst estimates. The Auburn Hills, Michigan-based carmaker entered June having boosted sales for 38 consecutive months. Reid Bigland, the company’s U.S. sales chief, told reporters June 28 in Chelsea, Michigan, that Chrysler would extend the streak another month by reporting a June gain.
General Motors Co. (GM), fresh off the industry’s best showing in a closely watched quality survey, may have sold 2.1 percent more vehicles in June than a year earlier, the average of 11 estimates. The Detroit-based automaker passed Toyota Motor Corp. (7203) and led J.D. Power & Associates’ Initial Quality Study for the first time.
Toyota sales probably rose 6.2 percent, the average of eight estimates. The Toyota City, Japan-based company sees stable rates for auto buyers in the near term, said Bill Fay, group vice president for U.S. sales.
“Autos have really led this economy,” Fay said in a June 14 interview on Bloomberg Radio. “Interest rates are low and the affordability of these cars is very good. There are a lot of dynamics that all are coming together that are bringing people back into the market, and we expect that to continue through the second half of the year.”
Honda and Acura brand deliveries may have climbed 10 percent, the average of eight estimates. Competitors may have a tougher time offering no-interest financing that Tokyo-based Honda Motor doesn’t offer, Mendel said in a telephone interview.
“If you’re a manufacturer that depends on zero percent financing to do your business, that proposition is going to get more and more expensive,” he said.
Volkswagen AG (VOW), based in Wolfsburg, Germany, may post a 0.9 percent drop in combined sales for its VW and Audi brands in June, the average of four estimates.
Even if the Fed begins to pump the brakes, to borrow Bernanke’s metaphor, the U.S. auto market previously expanded with rates well above current levels, said Melinda Zabritski, a credit analyst at Experian Automotive.
“You might have some of that initial knee-jerk reaction just like you see with gas prices” when rates do rise, she said in an interview. “When gas prices hit a peak, you get that initial knee-jerk reaction and large SUVs drop, and then they come right back up again the next quarter.”
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