Financial markets turned positive last week, with weaker than expected inflation data pointing to an eventual end to rate hikes. However, the Fed is likely to hike rates by 50 basis points (bps) in December as planned, barring anything more dramatic by December 14th. We get the November employment and consumer price index (CPI) data ahead of the next decision.
The October CPI inflation report pointed to a moderation in core inflation in October, with both headline and core inflation falling year on year.
Consumer credit growth slowed in September on slower revolving credit growth. Auto loan performance continued to deteriorate as both severe arrears and default rates rose in September. While failure rates are very high, failure rates remain relatively low. Auto loan lending eased across most channels and lender types in October.
Used car sales fell in September and wholesale used car prices fell again. The Manheim Used Car Value Index is now down 10.6% year-on-year.
According to the University of Michigan, consumer sentiment declined in the first half of October. The Fed is more worried that inflation expectations will rise again.
Inflation slowed in October, used cars saw large falls in prices
According to the consumer price index, inflation slowed in October as core inflation slowed. The overall aggregated metric increased by 0.4%, although on a seasonally adjusted basis a rise of 0.6% was expected. Growth was flat from September.
Core CPI, which excludes food and energy, rose 0.3%, half the previous increase and less than the 0.5% expected. Energy prices moved in different directions in October, with gasoline rising but household energy falling. Both accommodation and food price growth slowed. Only a few categories saw accelerated price growth.
Used cars, car and truck rentals, and airfares all saw large declines. Vehicle prices once again moved in different directions in the CPI. They mirrored what we saw in the auto market, as new vehicles posted a slowing 0.4% rise in October, but used cars were down 2.4%. Year-over-year, core CPI slowed to a 6.3% increase. Headline CPI fell to 7.7% year-over-year from 8.2%.
Overall consumer credit growth is slowing, but auto loans have seen accelerating growth
The Federal Reserve reported that consumer credit growth, excluding home loans, slowed to $24.98 billion in September, compared to $30.19 billion in August. Credit card growth slowed significantly as non-revolving debt (auto and student loans) saw accelerating growth.
Auto loan performance is falling
Auto loan performance continued to deteriorate in October. Loans past due 60 days plus rose 0.5%, up 26.3% year over year. Of all auto loans, 1.73% were heavily past due, up from 1.72% in September and the highest since January 2010. Year-on-year, the gross arrears rate was 39 basis points higher.
In September, 6.69% of subprime loans were heavily past due, up from 6.66% the previous month. The subprime serious crime rate was 164 basis points higher than a year ago, and the October rate was the highest in the data series back to 2006.
Although severe defaults are high, defaults still do not translate into pre-pandemic defaults, but defaults increased in October. Loan defaults rose 4.6% from September and 19.6% year-on-year. The annualized auto loan default rate was 2.39% in October, down from 3.10% in October 2019.
Auto loan is loosening up across most channels and all lenders
Access to car loans was eased in October, according to Dealertrack’s Credit Availability Index. The Dealertrack Auto Credit Total Loan Index rose 0.2%. Lending eased across most lending channels and all lender types, with certified used loans (CPO) easing the most and banks the most easing across lenders.
Used car sales decline in October
Cox Automotive’s used car sales, which are based on Dealertrack estimates for the same stores, show that used retail sales are down 9% in October and are down 13% year-on-year. CPO sales in October fell 4% year over year as sales volumes rose 3% from September.
Using estimates of consumed range in retail days based on vAuto data, October ended with 49 days of range, up from 52 days at the end of September but higher than October 2021 which ended at 40 days. Using Manheim sales and inventory data, wholesale supply ended October at 28 days, higher than October 2021 at 20 days but flat from end-September.
Wholesale prices fall for the fifth straight month
According to the Manheim used car value index, wholesale vehicle values fell by a seasonally adjusted 2.2% in October. The drop left the index at 200.0, down 10.6% year-on-year. October’s unadjusted price change was down 2.1%, taking prices down 9.3% from a year earlier.
October’s Manheim Market Report (MMR) readings posted smaller-than-normal declines, remaining relatively steady throughout the month, culminating in an overall 2.2% decline in the Three-Year-Old Index over the past four weeks. All eight major market segments saw seasonally adjusted prices lower year-on-year. Small cars had the smallest decline at 6.1%, followed by vans and pickups.
Consumer sentiment falls in the first November reading
The University of Michigan’s first-November consumer confidence index fell 8.7% to 54.7 as current outlook and future expectations declined further. The expected inflation rates have risen slightly. Consumer opinions on vehicle buying conditions declined but were still the second-best readings since March. June was the all-time low in reading.
Jonathan Smoke is chief economist at Cox Automotive.