Why Yellen singled out the auto industry from other manufacturers

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April’s monthly auto sales

The Bureau of Economic Analysis will release light vehicle auto sales for April on Thursday, May 1. Last month, auto sales surged almost 7% year-on-year, to a seasonally adjusted annual rate of 16.3 million—well ahead of consensus expectations of ~15.8 million units.

 

Highlights from the March report

  • The light vehicle annualized selling pace for March, at 16.3 million, showed an increase of 1 million units over the previous month’s 15.3 million and an approximately 7% increase over March 2014.
  • Barring the 16.3 million pace recorded in November 2013, March’s selling pace is the highest since May 2007.
  • Domestic auto companies like Ford (F) and General Motors (GM) reported higher March sales of 3.3% and 4.1%, respectively, on an annual basis. Both Ford (F) and General Motors (GM) are part of the S&P 100 Index (OEF), which comprises the 100 largest companies in the U.S., ranked by market capitalization.
  • Record industry incentives have played a major role in the sales increase. According to TrueCar estimates, auto incentives averaged $3,719 for General Motors (GM) and $3,260 for Ford (F), which were at levels last seen in 2010.
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U.S. Federal Reserve Chairwoman Janet Yellen, in a speech at the Economic Club, particularly highlighted the performance of the auto industry, saying that it has led to a resurgence in manufacturing. To read more about Janet Yellen’s speech, please read the Market Realist series Janet Yellen’s speech hints on what the Fed dashboard looks like

Impact on bond investors

Auto sales are one of the most important consumer confidence indicators. Individuals only make high-value car purchases when confidence in personal finances is at a high. Secondly, individuals are more likely to use auto loans to finance cars when they’re confident about their future prospects. In a downturn, consumers are more likely to postpone big-ticket items like cars.

An increase in consumption would lead to GDP increases, all else equal. Economic growth is usually accompanied by increases in interest rates, all else equal. This would impact the prices of fixed income securities, as bond prices fall when interest rates increase. This would impact the prices of ETFs investing in fixed income securities like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK).

In the next part of this series, we’ll discuss the key factory orders report to be released on Friday by the U.S. Census Bureau, which has important implications for the manufacturing sector.

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