The auto and housing sectors are two parts of the economy that are highly sensitive to interest rate changes. In light of the Fed’s dovish pivot at the start of the year, culminating in 3x25bps of interest rate cuts, we would expect activity in both sectors to surge. Falling mortgage rates have allowed building permits and housing starts to bounce from their lows at the start of the year (top-left chart). However, auto sales have not responded. Looking at the top-right chart, we can see that auto-loan rates have been peaking and only now have started to roll over.
Tariffs are the likely culprit that have clogged the transmission of monetary easing to lower auto-loan rates. New cars are often financed by manufacturers, so while monetary easing lowers the cost of capital for these manufacturers, the distorting impact of tariffs is playing a larger role in the overall costs of a car. Consequently, the inventory-to-sales ratio for auto makers has plunged. Given car sales have stagnated (even as prices for new cars have stayed constant for more than 5 years), this means auto-makers have actively reduced their inventory levels to cyclical lows in expectation of continuing weak demand. We are not seeing the same signs in the housing sector, where the median number of months to sell a new home (as a proxy for inventory-to-sales) remains very low. Therefore while external trade headwinds remain, we expect US auto stocks to continue to underperform US homebuilders.
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Source: Bloomberg, Macrobond, Variant Perception