Morning Commentary: Kicking the Tires on Cars and the Economy

Foreign Exchange - Morning Commentary
Kicking the Tires on Cars and the Economy
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
One of the hottest parts of the economy is the used car market, which tells us a lot about the COVID-19 shock.

A confluence of supply and demand forces has created a shortage of used cars. On the supply side, the multi-month shutdown in auto production created a shortage of new cars that spilled over into the used car market. Additionally, the weak economy discouraged car owners from trading up to a new car. On the demand side, the COVID-19 crisis has caused people to avoid public transportation and ride-share services in favor of used cars.

These used car supply and demand shifts impacted both inflation and real activity. Over the months of July and August, used car prices rose a combined 7.7%, marking the biggest two-month increase since 1969. Used car and trucks make up 2.75% of CPI, which means used car prices added 0.2% to the overall index. This is a material impact when inflation is as low as it is. Used car sales have also contributed to the V-shaped recovery in goods consumption, as sales fell a cumulative 31% from February to April but subsequently rebounded 68% over the next two months. Granted, some of these growth numbers are distorted by base effects, but the absolute level of sales was higher in June than it was pre-pandemic.

However, this boost is largely a one-off for the economy in terms of growth and inflation, as a peaking and cooling off of the used car market is already taking place. Inventory levels are starting to normalize, as auto manufacturers skipped their usual summer shutdowns. Additionally, the Mannheim Used Vehicle Value Index shows that used car inflation is already slowing, a leading sign of weaker retail prices.

More broadly, the used car industry, like many other retail industries, benefited from fiscal stimulus. With those benefits fading, a pullback in the pace of the economic recovery and inflation post-reopening is to be expected. To this point, July and August data shows a slowdown in real spending on used cars, foreshadowing what could be in store for the rest of the economy without further fiscal aid.
  • The White House is sending mixed signals on fiscal stimulus. On the one hand, Treasury Secretary Mnuchin reportedly told Speaker Pelosi that President Trump wants a comprehensive package. On the other hand, White House spokesperson Alyssa Farah later said, “We’ve made very clear we want a skinny package,” although she later said the White House was “open to going with something bigger” while maintaining opposition to the Democrats’ $2.2 trillion proposal.
  • Canada reported a blockbuster jobs number, with the country adding 378.2K new jobs against market consensus for 150.0K new jobs. Notably, full-time jobs made up the vast majority of the jobs gain as they accounted for 334.0K of 378.2K new jobs. Looking ahead, there are concerns around the sustainability of job gains due to the virus surge, but this jobs report is clearly a positive, and the Canadian dollar’s sharp appreciation today reflects this.
  • Negative virus headlines continue to come out of Europe. Spain has put Madrid in a 15-day state of emergency, France has issued a maximum alert for three more cities, and German cases have topped 4,000 for a second day. London’s mayor has also indicated that new lockdown restrictions are inevitable. On the economic front, U.K. data came in significantly weaker than expected, as August GDP, industrial production and construction output all missed estimates. Looking forward, there is likely to be a sharp deceleration in economic activity if government support programs are allowed to expire.
  • Early voting has skyrocketed, with more than 6.6 million voters already casting their ballots. The number of people that have voted in Wisconsin, Virginia and South Dakota already exceeds 20% of the total voters in 2016. According to data, Democrats have returned ballots at roughly twice the rate of Republicans.
  • China returned overnight from its weeklong holiday on a positive note. The Shanghai Composite stock index was higher by 1.6%, and the Chinese yuan appreciated by ~1.4%. These positive moves were aided by China’s PMI data beating expectations. Overall, economic data continues to skew positive and supports the narrative of an economy on firm footing.
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