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Smoke on Cars

Auto Market Weekly Summary


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New auto tariffs on Europe and Japan were postponed while tariffs on steel and aluminum from Canada and Mexico were lifted, eliminating some uncertainty but not all. Retail sales remain weak, pointing to a softer economy, but housing and interest rates, which fell, appear less of a drag. Still, auto loan rates are high.

Tariffs: New auto tariffs on Europe and Japan, which could have started on June 2, were postponed by up to six months, and the tariffs on steel and aluminum from Canada and Mexico were lifted. The latter move paves the way for USMCA to be ratified, which will remove some but clearly not all uncertainty. For more commentary on our view of the postponement of Section 232 tariffs on the EU and Japan, click here.

The most certainty we can draw from both of these moves is that used car prices will see normal depreciation this summer and will not repeat what we saw last year. Therefore, the Manheim Index will likely see moderating year-over-year gains for the next six months.

Retail sales: Retail sales were weak in April and point to much weaker economic growth in Q2. Consumers are spending more at the pump due to higher gas prices, but spending less on autos, apparel, health and personal care, electronics and appliances. Digital sales saw declines, while general merchandise, food and beverage and restaurants posted gains.

Construction: New residential construction appears to be moderately improving, which should make housing less of a negative drag on growth. More information on April home sales becomes available this week to see if lower mortgage rates are leading to higher sales.

Interest rates and credit: Interest rates fell last week with the negative turn in trade negotiations with China, but auto loan rates are at 9-year highs. New data show that auto credit remains available, but its composition is shifting. Auto lending increased in Q1, driven by more used-car loans and more new-car leases. As a result of the shift, subprime is seeing gains despite higher rates and rising subprime delinquencies.

Looking ahead: This week, April new and existing home sales are reported and, minutes from the recent Fed meeting become available.

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