Why do lower auto sales still support lower bond prices?


Feb. 11 2014, Published 12:00 p.m. ET

Monthly auto sales

Light vehicle auto sales were released last week. The light vehicle annualized selling pace came in at 15.2 million in January. This was at about the same levels as in January 2013 but down from November and December’s readings of 16.3 million and 15.3 million, respectively. This reading includes both domestic and imported autos. Domestic sales comprise vehicles produced in the U.S., Canada, and Mexico. Imports are U.S. sales of vehicles manufactured outside the countries mentioned above.

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Vehicle sales are usually considered a bellwether for consumer sentiment and can also indicate the start or end of business cycles. An increase in consumer spending on discretionary big-ticket items like cars means the economy is beginning to pick up pace. So, due to the recent inclement weather, the indicator is hard to read as far as its impact on the overall economy.

Both Ford (F) and General Motors (GM) reported lower monthly sales, with cars and light vehicles numbers dropping 7% for Ford (F) and 12% for General Motors. Unusually cold weather was responsible for the poor vehicle numbers recorded in the month. February has started with similar weather patterns, so the bounce in February may not be very pronounced—if there is a bounce at all.

A temporary break in an uptrend

Vehicle sales had begun to pick up pace in the last quarter of 2013, coming in at 16.3 million in November and 15.3 million in December. February’s numbers will provide a more accurate picture of whether this trend will continue this year, given that inclement weather may have distorted the trend temporarily.

If vehicle sales increase in February, this will add to the list of indicators implying the economy is expanding. This in turn will further motivate the Fed to continue with its tapering of quantitative easing, which means gradually ceasing its purchase of agency-backed mortgage securities and longer-term Treasuries. This will cause money supply in the economy to contract and interest rates to rise, which will reduce prices for fixed-income securities.

Given the extreme cold weather in January, it’s likely that February will experience pent-up demand, which analysts would interpret as a bullish signal of consumer spending. Other indicators, such as the PMI, offer much more insight into the economy across industries. Learn more in Part 5 of this series.


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