Analysts, Economists, and Traders Watch Used Car Market
Analysts predict where inflation indexes are heading by closely examining where used car prices are projected to be in a few months.
Market-moving information has unexpectedly emerged from the pricing of used vehicles and dealership trade-ins. Analysts, economists, and traders focus on an obscure indicator known as the Manheim Used Vehicle Value Index.
Morgan Stanley’s investment bank Robert Rosener, a senior U.S. economist, said, “I’ve never spent so much time looking at it.”
Likewise, “I don’t believe I’ve ever spent as much time chatting about used vehicle pricing in my life,” says the author.
According to the company, the Manheim index offers a monthly update on the pricing of used vehicles that are sold at wholesale auctions.
And, with the used car market growth, partly because of a chip shortage for new cars, the index provides critical information for investors attempting to answer a vital question: when is the best time to buy a car?
What exactly is going on with inflation?
Price increases for goods and services have increased by more than 5% in only one year, the highest growth rate in more than a decade.
This is an essential issue for almost everyone on Wall Street, and it is particularly true for hedge funds. A high inflation rate poses a significant risk to bond investors because, over time, it reduces the real-world return on the monthly interest payments they receive.
When it comes to stock market investors, inflation is particularly important because, in the past, it has led the Federal Reserve to raise interest rates, which has caused stocks to plummet.
The Federal Reserve has said on many occasions that the current increase in prices is “transitory” and that it is a consequence of the exceptional shortages that have plagued the economy due to the epidemic.
And, at the moment, a scarcity of cars is a major contributor to the rise in the Consumer Price Index, which serves as a crucial gauge of inflation in the United States.
The manufacturing of new automobiles has been restricted.
Last year, factories came to a grinding stop as a precaution against the spread of the coronavirus among autoworkers, who conduct their jobs in close quarters.
And restricted supplies of computer chips, which were caused by similar shutdowns at electronics factories, have stopped automakers from returning to regular production this year.
As a result, purchasers have rushed to the secondhand market, causing prices to skyrocket.
According to the Bureau of Labor Statistics, which publishes the Consumer Price Index, prices for used vehicles and trucks increased by 45 percent in June compared to the same month the previous year.
Although the rate of increase has dropped somewhat since then, used vehicle and truck prices were still up almost 32 percent from a year earlier in August.
Used vehicle costs are usually not a significant contributor to inflation, but the recent spike has altered that.
Analysts were well aware that if they could somehow forecast where used vehicle prices would be in a few months, they would have a decent idea of how high inflation would be in the coming months.
“Will this one component, which has contributed significantly to total inflation in the first half of the year, drop down as much and as quickly as it has in recent months?”
Brett Ryan, an economist at Deutsche Bank, stated that he is now carefully monitoring used vehicle pricing on a monthly basis.
“Manheim is the most knowledgeable advisor.”
For many years, Manheim was a subsidiary of Cox Enterprises, a privately owned corporation headquartered in Atlanta that derives its name from the Pennsylvania town where the business was founded.
Approximately 80 wholesale auction locations are located across the nation, where dealers, rental agencies, and businesses that manage large vehicle fleets gather each year to purchase and sell more than five million automobiles.
After the data from each of those sales has been distilled into an average, certain modifications have been performed to smooth out any peculiarities in the mix of automobiles sold in a particular month.
(Without this, vehicles unloaded by a Mercedes-Benz dealer, for example, or a large rental business might distort the results.)
That the Manheim index covers wholesale prices paid by dealers, which determines what customers are charged a few months later, is a feature that analysts find particularly appealing.
As a result, Manheim is considered a leading predictor of consumer prices, often providing a two- to three-month head start on the figures that appear in the Consumer Price Index (CPI).
According to Manheim, wholesale prices rose 8.3 percent in April, the most recent month for which data is available.
In comparison to the previous year, they were up 54 percent.
In June, used vehicle costs increased by 10.5 percent over the previous month, according to the Consumer Price Index, released every two months.
On the other hand, Manheim’s prices began to grow more slowly and eventually began to decline. They saw a 1.3 percent decline in June. Consumer prices fell by 1.5 percent two months later, just as they had predicted.
Manheim prices have continued to decline, indicating that customers may expect more reductions in costs in the future.
According to Jonathan Smoke, chief economist for Cox Automotive, which owns the auction company, the index has been published since 1997, but it has never garnered as much attention as it has done this year.
While Wall Street’s obsession with used vehicle pricing is relatively recent, it is common for financial events to cause analysts to scramble to study data that they had previously not heard of.
Everyone’s attention was drawn to a set of so-called ABX indexes during the financial crisis of 2007 and 2008 because of their ability to monitor the price of default insurance on packages of subprime mortgages.
These indices plummeted when investors realized that a significant portion of their investments would not be reimbursed.
When the European debt crisis started in 2010, academics’ attention was drawn to a hitherto obscure collection of statistics generated by the European Central Bank, known as Target 2 data, which had previously been overlooked.
These figures monitored the balance of loans and obligations across European central banks. They served as a convenient shorthand for estimating how much money was being sucked out of the banking systems of highly indebted nations such as Greece and Spain.
Similarly, when the pandemic began, financial researchers were forced to get acquainted with the measures that allowed them to monitor the rate at which the virus was spreading, often referred to as the R number, to evaluate the likelihood of economic disruption.
Even though the Manheim index shows signs of a slowing in inflation, there are some grounds to believe that vehicle prices will remain high over the next several months.
According to Carfax, flooding caused by Hurricane Ida caused damage to an estimated 200,000 vehicles from Louisiana to New York state.
As a result, used vehicle inventories may become even more scarce while new buyers are encouraged to enter the market.
In addition, the chip scarcity continues to sabotage manufacturing plans:
All three major automakers — Toyota, Ford, and General Motors — have announced facility closures or output reductions in the last month.
However, in the long run, the most important issue economists are asking themselves about vehicle costs is how far they might decrease, turning the tide on inflation.
According to Mr. Rosener of Morgan Stanley, “if we see used vehicle prices reverse back next year, we’re going to be talking about an outsized negative impact that used car prices could be having.”
“That’s where you’re going to see data like Manheim continuing to have a prominent position.”
Is the Bubble Popping after 19 months or is it a slow faint?
USED CAR PRICES DOWN??? (CAR MARKET BUBBLE POPPED)
%code1% USED CAR PRICES DOWN??? (CAR MARKET BUBBLE POPPED)