If you’re a car dealer or a consumer, the news that the Federal Reserve cut its benchmark rate target by 0.5 points (or 50 bps) is music to your ears. It is as smooth and sweet as Steely Dan and a cold Mai Tai at The Rusty Pelican. But it doesn’t mean cars will become cheaper instantaneously.
I’ll start off this deep-cut Morning Dump with an explanation of what will and will not likely happen after the rate change. It’s mostly positive for those of us in the United States. If you’re in Europe, well, nothing is positive. It’s bad.
Video killed the FM radio star, but AM is here. Forever. In a rare moment of bipartisan agreement, legislators agreed that AM was too important, and rebuffed a push from automakers to allow them to remove the radio band from in-car entertainment systems.
And, finally, Waymo might be buying some new robotaxis to replace its… new robotaxis.
Rate Cuts! Rate Cuts! Rate Cuts!
The above image is a joke, of course, because the Federal Reserve is currently independent (mostly) from the President and Congress, so it can chart a course without having to worry about interfering with elections. This is probably a good thing, though a potential Trump administration could change this independence.
This is all to say that, unless you’re a trader with an active portfolio, most of what the rate cuts are good for in the short term are vibes and political talking points.
Why did the Fed do this? In theory, what the Fed has been trying to do is bring inflation down to a specific target and, yet, it hasn’t quite hit that target. On the other hand, the job market has been softening a lot, which is often a precursor of a recession.
Here’s exactly what Powell said:
Today, the Federal Open Market Committee decided to reduce the degree of policy restraint by lowering our policy interest rate by 1/2 percentage point. This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 percent.
Ok, neat. There’s the policy reasoning. We understand that there will possibly be short-term political ramifications. This is a car site! What about cars?
Last year I put down a bet that we’d be able to get above 16 million car sales in 2024, assuming we might get a rate cut in the summer or earlier. Specifically, I wrote “If the Fed holds off until later in the year it may not create that much relief for consumers.”
That’s what happened. Inflation returned a bit in the first half of the year and the Fed delayed the rate cut. Car sales were better, but still stagnant.
Now that we have a cut will there be a quick rush to the dealership? Maybe! But that’s not super sensible as a change in the Fed’s benchmark rate target will probably take a while to filter down to car sales.
“Many Americans have been holding off on making vehicle purchases in the hopes that prices and interest rates would come down, or that incentives would make a return,” said Jessica Caldwell, Edmunds head of insights, in a statement Sept. 16 ahead of the Fed’s announcement Sept. 18. “A Fed rate cut wouldn’t necessarily drive all those consumers back into showrooms right away, but it would certainly help nudge holdout car buyers back into more of a spending mood, especially coupled with some of the advertising messages that automakers typically push during Black Friday and through the end of the year.”
Even if rates don’t come down immediately, if other things become more affordable as rates on all sorts of things go down (including floating rate credit card debt) then people might feel spendier. And, while the rate cut does signal some concern about the economy, the general message was that the economy was strong enough to withstand a little nudge.
Still, it’s not like we’ll see 0% car financing for credit-risk customers anytime soon. Or, as Cox Automotive puts it:
It may take several weeks or even months for consumers waiting on lower auto loan rates to see any meaningful change. With auto loan performance still shaky, lenders will be reluctant to reduce the spreads they charge to compensate for risk. That means that auto loan rates are likely to be sticky on the way down. However, with the financial performance of consumers improving from lower rates on credit cards, auto loan performance should improve as well.
As proof of that stickiness, average auto loan rates have drifted slightly higher in September, while longer-term bond yields and mortgage rates have declined. The average new auto loan interest rate so far in September has averaged 9.63%, and the average used auto loan rate has averaged 13.95%.
What I’ll be watching for in October/November is an increase in 0-1.9% financing offers from automakers with captive finance arms that think they can roll the dice on more generous terms with the expectation of more rate cuts coming.
Everyone believes that there’s a huge portion of the market sitting on the sidelines just looking for a reason to get in the game. Maybe this is the reason?
Europe Car Sales, Especially EVs, Plummet
Car sales in the European Union were down 18.3% in August, which is the lowest amount since 2021 when there were fewer cars to sell. This is bad. Are EV sales good, at least? Nope, and only a fool would say that they are. In fact, they’re down 43.9% overall and down 68.8% in Germany, where subsidies have been pulled back.
This is super duper extra terrible because European automakers basically signed onto aggressive CO2 targets and invested in electric cars with the hope that:
- Consumers would buy these vehicles.
- Governments would help subsidize these vehicles.
If electric car sales fall then automakers are extremely hosed because they’ll have to stop making as many gas-powered cars or pay billions of dollars in fines. Oh boy.
Here’s what the European car industry group (ACEA) has to say about this:
We are missing crucial conditions to reach the necessary boost in production and adoption of zero-emission vehicles: charging and hydrogen refilling infrastructure, as well as a competitive manufacturing environment, affordable green energy, purchase and tax incentives, and a secure supply of raw materials, hydrogen and batteries. Economic growth, consumer acceptance, and trust in infrastructure have not developed sufficiently either.
As a result, the zero-emission transition is highly challenging, with concerns about meeting the 2025 CO2 emission reduction targets for cars and vans on the rise. The current rules do not account for the profound shift in the geopolitical and economic climate over the past years the law’s inherent inability to adjust for real-world developments further erodes the competitiveness of the sector.
This raises the daunting prospect of either multi-billion-euro fines, which could otherwise be invested in the zero-emission transition, or unnecessary production cuts, job losses, and a weakened European supply and value chain at a time when we face fierce competition from other automaking regions.
I asked last week “How Screwed Is The European Car Industry?” and the answer seems to be, at least if you listen to the industry: extremely.
Right now Europe has three ways to deal with this crisis, none of which they’re going to like:
- Say screw it, and let Chinese automakers flood the market with cheap electric cars.
- Tell Germany to get its head out of its ass and allow the EU to open up government coffers to spend money on incentives in the short term and investment in the long term.
- Say screw the environment, and relax rules/fines significantly.
I don’t know what they’re going to do.
If it were me, and as always I am thankful it is not me, I would negotiate a tariff deal with China that would allow for Chinese automakers to sell imported EVs under existing brand partnerships (i.e. VW can sell Baojun KiWi EVs as VW Polos or whatever and Dacia can sell Springs, et cetera) for a limited amount of time that gives Chinese automakers runway to plan/build new plants in Europe. Give the industry a two-year pause on C02 targets IF they invest that money in battery plants/EV production.
Everyone wins. But again, what do I know?
AM Radio Lives Again
The fate of AM radio has been up in the air (pun!) for a while. Automakers have been worried that AM radio is obsolete technology and it might cause problems for electric vehicles due to electromagnetic interference. Elected officials, especially Democrats, seem to be worried about the loss of a communication channel in an emergency. Republicans seem to also like AM radio because conservative radio stations are generally on AM bands.
In fact, our Pontiac Aztek’s best (only?) functioning audio source is the AM radio, and I listened to a lot of it while Jason and David slept in the backseat. I learned so many things and even listened to a man sing a song about how VP Kamala Harris was going to turn everyone gay.
It now seems like both the U.S. Senate and House will successfully pass a bill requiring AM radio in every vehicle.
Who could be against it? Well, The Verge found someone:
Critics say the bill could also add to the costs of producing EVs at a time when many manufacturers are struggling to rein in their costs.
“With a new mandate, [EV companies] will have to go through a significant powertrain redesign, vehicle redesign,” Albert Gore, executive director of the Zero Emission Transportation Association, said in an interview earlier this year, “because of the degree to which electric motor generates this [electromagnetic] interference.”
No, not that Al Gore! It’s apparently his son.
Waymo May Switch To Hyundais
Waymo has long planned to swap its hard-serving Jaguar iPace robotaxis for the Zeekr-based taxis pictured above. And then President Biden’s massive Chinese EV tariffs happened. What next?
According to South Korea’s Electronic Times, it might be Hyundai that gets that contract (translated):
According to industry sources on the 18th, high-ranking executives from Hyundai Motor Company and Waymo met more than three times at Waymo’s headquarters in the U.S. to discuss the contract manufacturing of robotaxis.
The meetings between the two companies are interpreted as a result of the interests of Waymo, which seeks to secure a stable supply of robotaxis, and Hyundai, which is looking to expand its new business.
This would make a lot of sense given that Zeekr taxis are now probably twice as expensive to import. What does Waymo say? Reuters got a quote:
Regarding the media report, Waymo said in a statement to Reuters: “We’ll decline to comment on speculation, but I can share that we are hard at work validating the 6th-generation Waymo Driver on the Zeekr platform and intend to introduce it into our fleet when ready.”
Time will tell.
What I’m Listening To While Writing TMD
I am not a Steely Dan fan, per se. I do not seek them out. I am not a Steely Dan hater and I’m usually quite pleased when a little Steely Dan comes on the radio to introduce a little yacht rock into the day. This morning the bluesier “Daddy Live In That New York City No More” came on the radio and it just felt right. I was taking my kid to school and remembering that my life is quite different than it was 10 years ago when I lived in Williamsburg.
The Big Question
How do you feel about the rate cuts?
Top photo: depositphotos.com
“How do you feel about the rate cuts?”
I feel good about them as they are likely to cause my dividend-paying preferred shares to go up.
My mortgage is also up for renewal next year. My current rate on my mortgage is 2.5%. Currently mortgage renewal rates are nearly 5%
But if rates keep dropping, I might decide to renew my mortgage instead of paying it off if rates are low enough by that time.
What amazes me the most about all of this interest rate and affordability discussion is how little historical context is brought up.
In the late ’70s mortgage rates were around or over 20%. Not a typo – twenty percent. My parents raised multiple kids through that era, and would probably tell you life is and has never been cheap (periods of “free money” / government stimulus not withstanding).
More recently (post 2008) we went through a period of having really cheap access to money, and got hooked on it. The company I worked for went through years and years of record earnings, but “out of an abundance of caution for the future” froze wages or only gave partial raises throughout that period. We were dealing with that crap with two kids in daycare (which has also never really been cheap). I’m so thankful to be free of that quagmire.
Everybody’s life is unique and we all travel our own path within the herd, and some do better and some do worse within the confines of the herd overall doing better or worse – believe me, I get that.
But, and maybe I’m just getting cynical as I get older, basically the way I see it all this half point drop is going to be is a line segment on a graph in the mid to distant future.
I hear this a lot. Yes, the interest rates were high. But that’s not the whole picture about a mortgage. In January of 1980, the median home price was about 4.4 times the median income. Today? It’s over 7 times higher than income. As the cost of a home has increased dramatically, even a small change in the interest has a big impact. Yeah, interest rates were high, but you could still buy a house. Today? Boy, it’s a lot harder. And this rate cut won’t change that for most people, especially the young.
Oh I only addressed part of the comment. I should say that yeah, the free money stuff definitely was us shooting ourselves in the foot. And a company that says “abundance of caution” is probably run by rich dickheads, so I feel for you. Glad you got out.
The median house price was 4.4x because of the high interest rates. The need for payments to be “affordable” kept the purchase prices low. Then money got cheaper and house prices went up accordingly.
The relevant question is what percentage of income were people spending on their mortgage/rent, and I’ll bet that value was much closer to the historical norm.
There are ebbs and flows to this, of course, and we’re hopefully nearing the end of a period of (possibly record) above the norm. Housing costs are starting to come down again, finally. Which will be helpful to the buyers, but I’d hate to be trying to sell a condo in Florida right now.
You also have to remember that the majority of households only had a single income in 1980. I’m not sure if your figure is accounting for household income but that could be a factor if they’re saying a home costs 7 times the average person’s income.
Also, consider the houses of the era. The number and type of appliances, the materials used. The overall size and the yards etc.
I get that we are focused somewhat at the lower income scale of things, but if you look at the higher income homes of the 1970s and 80s (and look at how averages work) and see what we have today in comparison there is a massive difference in what you get dollar for dollar.
Not saying you don’t have a point. You do. But living through the 70s and 80s, much was said about affordability then that is still being said now. It is different, but also the same.
“Out of an abundance of glee that no one else will hire you right now”