Bank of America’s senior North American automotive equity research analyst John Murphy joins Seana Smith and Madison Mills on Catalysts to examine the auto sector and how the Federal Reserve’s interest rate cut could affect car buyers.
The Federal Reserve is expected to cut 100 basis points by the end of the year, with its first 50-basis-point cut on Wednesday, which Murphy says is “about a $20 drop in the monthly payment.”
The analyst says a key factor of the rate cuts for the auto sector is a boost in consumer confidence: “Consumer confidence has been dented with rates being high, inflation being high, and then sort of some other noise in the world right now.
He says the average price of a car pre-pandemic in 2019 was $35,000 with an average monthly payment of about $550, compared to a $47,000 average price and $730 monthly payment today.
For more expert insight and the latest market action, click here to watch this full episode of Catalysts.
John Murphy, senior North American automotive equity research analyst at Bank of America, discusses the auto industry and the potential effects of the Federal Reserve’s interest rate cut with Madison Mills and Seana Smith on Catalysts.
By year’s end, the Federal Reserve is predicted to reduce interest rates by 100 basis points; on Wednesday, it made its first reduction of 50 basis points, which Murphy claims translates to “about a $20 drop in the monthly payment.”. “.”.
A major driver of the rate cuts for the auto industry, according to the analyst, is an increase in consumer confidence. “Consumer confidence has been dented with high rates, high inflation, and then sort of some other noise in the world right now,” the analyst says. Therefore, I believe there may be a significant release of pent-up demand if rates and consumer confidence both rise. “.
Murphy notes that there might be a slight delay in the rate reduction. He clarifies that when the rates decrease, lenders “will probably pass them pretty directly on to the consumers” in the case of auto loans.
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Murphy points out that the affordability issue plaguing the auto industry is probably not going to be significantly alleviated by reduced rates. Prior to the pandemic in 2019, he claims, the average cost of a car was $35,000 with an average monthly payment of roughly $550; today, that figure is $47,000 with a monthly payment of $730.
In order to enhance affordability for consumers in the long run, we must prioritize a smaller variety of automobiles. Thus, there should be more crossovers and, occasionally, sedans that are affordable for this wider range of consumers. That’s going to be crucial in this situation. “.
The analyst describes the difficulties faced by manufacturers of electric vehicles (EVs) in convincing drivers of internal combustion engines (ICEs) to switch to electric vehicles. “There are still a lot of obstacles standing in the way of increasing the penetration of electric vehicles if you don’t develop a better product at a lower cost and can’t persuade the mass market and average consumer that they need to switch to this powertrain. “.
As his top sector picks, Murphy mentions Ferrari (RACE) and auto dealers such as AutoNation (AN) and Asbury Automotive (ABG).
Click to watch the entire Catalysts episode here for more expert analysis and the most recent market movement.
The author of this piece is Naomi Buchanan.
