Briefing highlights
- Why auto sales are stalling
- Stocks, loonie, oil at a glance
- HSBC plans jobs cuts: report
- U.S.-China trade talks to resume this week
- What analysts are saying today
- Required Reading
Why auto sales are stalling
With a car in every driveway, vehicles lasting longer and so many other modes of transportation, how will the auto market fare?
While economists don’t expect that market to crash – and please pardon the use of the word – they do expect a more modest pace of gains.
And that, of course, will make a difference to consumer spending and ripple through the economy.
“For many Canadians, vehicles are the second-largest purchases they’ll make in their lifetime, after their home,” said Toronto-Dominion Bank senior economist Brian DePratto.
"Both auto sales and production have been coming off the boil of late, particularly in Canada," he added in a recent report.
Auto sales in Canada have generally slumped for about the last 18 months, the latest reading showing a decline of almost 4 per cent in September from a year earlier.
Source: Bank of Nova Scotia, DesRosiers Automotive Consultants Inc.
"An early Labour Day weekend drove part of the month’s weakness with the traditionally strong sales weekend attributed to August," said Rebekah Young, Bank of Nova Scotia's director of fiscal and provincial economics.
"Preliminary estimates also suggest fleet sales were relatively flat in September, therefore did not provide much of an offset to the decline in retail performance," she added.
“Another major headwind to sales was the spike in financing costs in mid-September, with the 10-year government bond increasing by over 40 basis points over August’s low. Rates remained elevated, albeit below this peak, for the remainder of the month.”
Ms. Young also noted that “cash-constrained” buyers may have been holding back, waiting for the Bank of Canada to possibly cut interest rates later this month, which isn’t a sure thing, by the way, though some market players expect that.
“Otherwise, continued strength in job and wage growth should partially offset some of the headwinds facing consumption as the year advances,” Ms. Young said, adding that so far this year, auto sales are running at an annual pace of 1.94 million, on a seasonally adjusted basis, which is close to Scotiabank’s projection for the year.
TD's Mr. DePratto sees three "persistent trends" that will push down sales, though those sales will still be "historically elevated."
First off, our cars are lasting longer, so we don't need to buy new ones as frequently.
Source: CIBC World Markets, DesRosiers Automotive Consultants Inc.
"Second, auto loan amortizations have lengthened significantly in recent years, with 84-month terms increasingly common," Mr. DePratto said
“This has expanded consumer purchasing power, but at the cost of a longer-time ‘underwater’ on the purchase, making a trade-in at five years (for example) a costlier proposition,” he added.
"Of course, people can’t use the same car forever, but, together with lengthened service lives, longer loan terms stretch out the replacement cycle, moderating near-term demand for vehicles."
Source: Toronto-Dominion Bank
Even "more persistent" is the third issue: We're getting older, and we're more "concentrated" in big cities like Toronto, Montreal and Vancouver.
"For urban dwellers, the availability of substitutes, such as public transit, walking/cycling, taxis/ridesharing, etc., also suggests a lower ‘need’ for auto ownership and potentially longer replacement cycles compared with their non-urban counterparts," Mr. DePratto said.
As for getting older – people, I mean – that generally means many seniors have less “wear and tear” on their autos.
But this doesn't all mean that Mr. DePratto expects a "dramatic correction" in sales.
“The sales data to date is hardly indicative of ‘overconsumption’-type behaviour seen ahead of the 1990s downturn, and both healthy labour markets and favourable borrowing costs should provide a base of support,” Mr. DePratto said.
"It is more to suggest that the trend of recent years, of only modest growth in this important part of the consumption basket, should continue," he added.
"Sales growth in line with or slightly below population growth is the best assumption. Don’t expect this sector to accelerate any time soon."
Also citing longer-lasting vehicles, CIBC World Markets senior economist Royce Mendes suggested we may be seeing more of used-car salespeople.
"Cars that stay on the road for longer mean that more Canadians can afford one, even if it’s not exactly brand new," Mr. Mendes said.
“Past interest rate hikes have seen new auto sales flounder, given the impacts on affordability, but used car sales have seen more signs of life. Should job growth slow and the economy decelerate in the quarters to come, more Canadians could be turning to used cars for their next purchase.”
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Markets at a glance
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Economists see U.S. slowdown
From The Associated Press: U.S. economists think President Donald Trump’s trade war with China will contribute to a sharp slowdown in economic growth this year and next, raising concerns about a possible recession starting late next year. The latest survey by a panel of 51 forecasters with the National Association for Business Economics shows they expect growth, as measured by the gross domestic product, to slow to 2.3 per cent this year from 2.9 per cent in 2018.
GE to freeze pension plans
From Reuters: General Electric Co. said it is freezing the pension plan for about 20,000 U.S. employees with salaried benefits, as the industrial conglomerate looks to cut its huge debt pile. The action also includes supplementary pension benefits for about 700 employees in the country. The moves are expected to reduce GE’s pension deficit by about US$5-billion to US$8-billion and net debt between US$4-billion and US$6-billion.
ECB cites challenges
From Reuters: Euro zone banks face increased profitability challenges as the economic cycle matures and a prolonged period of low rates chips away at margins, the European Central Bank said, outlining key risks for the sector in the coming year. Said the ECB: “The three most prominent risk drivers expected to affect the euro area banking system over the next three years are: economic, political and debt sustainability challenges in the euro area; business model sustainability; and cybercrime and IT deficiencies.”
Unilever to cut plastics use
From Reuters: Consumer goods giant Unilever vowed to halve the amount of new plastic it uses over the next five years, by shifting to more recyclable and alternative materials and refillable options to meet consumer demand for less waste. The company, which sells Ben & Jerry’s ice cream, Dove soap and Knorr soup, said it would achieve this target by cutting its use of plastic packaging by over 100,000 tonnes and accelerating its use of recycled plastic.
Morale slumps
From Reuters: Morale among investors in the euro zone dropped in October to its lowest level in more than six years as stimulus measures taken by central banks failed to allay recession fears, a survey showed. The Sentix research group said its investor sentiment index for the euro zone dropped to -16.8 in October from -11.1 in September.
German orders drop
From Reuters: German industrial orders fell more than expected in August on weaker domestic demand, data showed, adding to signs that a manufacturing slump is pushing Europe’s largest economy into recession.
What analysts are saying today
“Reports in the media over the weekend appear to suggest that the U.K.’s biggest bank, HSBC is about to embark on further deep cuts to its work force in the weeks and months ahead. The story in the [Financial Times], if confirmed, would add to the 4,700 job losses already announced earlier this year and could well be announced later this month when the bank announces its latest Q3 numbers on [Oct. 28]. Amongst a lot of the major investment banks, HSBC has been one of the few to be reluctant to wield the axe as aggressively as some of its rivals, probably due to the fact that its scale and profitability has meant that it hasn’t felt the need to be as aggressive, especially in Europe where its cost base is much higher.” Michael Hewson, chief analyst, CMC Markets
“Chinese and U.S. officials are due to resume trade talks this week, though prospects for a breakthrough are slim. Over the weekend, a Chinese official told Bloomberg an offer from the Chinese side is not going to include commitments to reform its subsidy policy or industrial policy, which makes prospects for a deal that much slimmer.” Elsa Lignos, global head of foreign exchange strategy, Royal Bank of Canada
“Sterling is soggy and remains a core short. The economy is running out of steam, the [Bank of England’s monetary policy committee’s] mood has shifted and uncertainty levels remain high. Arguments about [European Central Bank] policy contrast with inactive fiscal policy, growth is slowing: The euro’s glacial downtrend looks like remaining intact, while the anchor around global bond yields will go on supporting the yen.” Kit Juckes, global fixed income strategist, Société Générale
“[West Texas intermediate] crude opened the week quietly around US$52 a barrel. With the supply-side shock being fully digested following the Aramco drone attacks, trading on oil markets will likely be demand-oriented. Hence, a further slide toward the US$50 level is just a matter of time provided the fading optimism regarding the U.S.-China trade negotiations, low [purchasing managers index] numbers across the globe and the slowing economic activity.” Ipek Ozkardeskaya, senior market analyst, London Capital Group
“Gold is likely to remain range-bound ahead of this week’s high-level [U.S.-China] trade talks. Gold’s bullish trend will likely be supported on fresh stimulus bets from global central banks and optimism that we will not see a broader trade deal this week, just a de-escalation in tariff threats and possibly an extended trade truce. Trade jitters are likely to remain for the foreseeable future and that should help keep gold rising higher. Edward Moya, senior market analyst, Oanda
Required Reading
Ottawa to probe possible abuse
The federal department responsible for the Temporary Foreign Worker Program is promising to investigate "all allegations of abuse” while the B.C. government has ordered a sweeping review of its practices governing the trucking industry,” Kathy Tomlinson reports. The moves come after a Globe and Mail investigation revealed how some companies based in the province are using untrained foreign drivers, putting lives at risk across the country.
Big quarter for tech sector
Canada’s technology sector had one of its strongest showings for venture- and growth-capital financing in the third quarter, as large funds continue to seek bigger investments in private companies, Sean Silcoff writes.
Activity surges in ‘maple’ bond market
Low borrowing costs and strong investor demand have led to a rush of activity in the “maple” bond market, as global public-sector entities tap the Canadian debt market for cash. Alexandra Posadzki reports.