U.S. auto sales set to weather rate hike
Wednesday, June 30, 2004 5:34:14 PM
SAN FRANCISCO (AFX) -- An interest rate hike seems to be a foregone conclusion at this point, but that doesn't mean auto sales, fueled by years of cheap financing, are careening toward a cliff
In a briefing with reporters earlier this week, GM's director of market and industry analysis Paul Ballew said the world's top car and truck maker can comfortably handle a 50-basis point hike in short-term interest rates
"We can manage through it," he said. But he declined to comment on what GM would do with its zero percent down financing program if the Fed raised short term rates even higher. Shares of GM moved slightly lower Wednesday ahead of the Fed announcement, off 26 cents at $46.56
Though maintaining these programs will cost more in a rising rate environment, Jesse Toprak, Edmunds.com's director of pricing and market analysis, doesn't foresee any of the major manufacturers changing their approach. "Overall, we're not going to see a dramatic effect unless we start to see interest rates move up more than 100 basis points," he said
But even a moderate increase would shift buying patterns. "We should see a steady revival of leasing as consumers are probably going to do a bit less financing," Toprak added
Leasing has declined dramatically in the past few years from 25 percent of new vehicle sales at the end of the 1990's to around 14 percent currently, according to Edmunds.com
Scott Sprinzen, credit analyst at Standard & Poor's, wasn't nearly as sanguine with his outlook. He predicted a Fed rate hike, along with other factors, would hurt auto manufacturers' profits and have an "adverse effect on sales mix." "We believe rising interest rates, declining off-lease volumes, and the lengthening of consumer auto loan terms will all dampen the recovery," he said
Standard & Poor's said it expects rates will continue to inch higher and also foresees a tapering off of gasoline prices. But the ratings agency maintained that there's increased risk that comes into play should either one rise substantially
Rod Lache, an analyst at Deutsche Bank, was even more bearish, maintaining his "sell" rating on number two U.S. carmaker Ford
"We continue to believe that this time, rising interest rates may hit the industry harder than commonly perceived," he told clients in a note. Consumers shop for cars and trucks based on what they can afford, Lache explained. Hence, manufacturers have been able to sell higher priced models like SUVs despite the tough economic climate
Much like banks, GM and Ford will also be on guard for any impact on their vital lending operations. With their auto operations' bottom line under pressure quarter after quarter, Wall Street will scrutinize their finance operations as much as any activity down on the dealer's lot
Before the Fed's announcement scheduled for 2:15 p.m. Eastern, Ford , Honda and Toyota all traded slightly lower
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