The Daily Prophet: Autos Tank, Bonds Rally and Dollar Finds Fans

Connecting the dots in global markets.

The hand-wringing over weakness in the auto industry and the poor quality of loans made to car buyers came to a head today. Ford Motor and Fiat Chrysler posted big declines in sales for March and those at General Motors rose less than forecast as heavy incentive spending failed to keep struggling sedan and compact models from plunging.

This was not a case of sell on the rumor/buy on the news for stock investors. Auto-related stocks took a hit across the board, weighing on the S&P 500 and other major indexes. The weakness in the auto industry speaks to a broader narrative, which is one of a consumer increasingly stretched and unable to carry the economy despite surveys suggesting confidence is the highest in years. Commerce Department data on Friday showed that U.S. consumer spending rose less than forecast in February even as wage growth improved. Although overall household debt remains just below its 2008 peak, it’s substantially above the 2013 trough, according to Bloomberg Intelligence.

Subprime car debt is becoming the latest problem area in finance, with consumers falling behind on most of their loans, Morgan Stanley analysts said last week. U.S. subprime auto lenders are losing money on car loans at the highest rate since the aftermath of the 2008 financial crisis as more borrowers fall behind on payments, according to S&P Global Ratings. Losses for the loans, annualized, were 9.1 percent in January, up from 8.5 percent in December and 7.9 percent in the first month of last year,  according to the ratings firm. 

New York Federal Reserve President William C. Dudley was blamed for tanking the bond market when he joined a parade of policy makers at the end of February who said that traders were too complacent about a likely interest-rate increase in March. He was right, and the Fed did boost rates. Now, Dudley is being credited for sparking a rally in the bond market. Yields on 10-year Treasuries fell today to their lowest since February after Dudley -- who is also vice chair of the Fed’s policy setting Open Market Committee -- said late last week that the central bank might begin shrinking its balance sheet this year or in 2018, possibly pausing rate increases in the process.

Although last quarter’s 3.50 percent drop in the Bloomberg Dollar Spot Index was one of its worst in recent years, it ended on a high note by posting its biggest weekly gain since the period ended March 3. The rally continued today, and strategists have started to raise their forecasts again. Morgan Stanley said in a report today that it sees the dollar rising toward 118 yen "in the near term" from about 111 now. Wells Fargo also sees the dollar rising versus the yen. Bank of America Merrill Lynch reiterated its long-dollar recommendation, saying "an opportunity to re-engage may be at hand." Among the biggest losers against the greenback today were the British pound, Canadian dollar and Australian dollar.

Judging by the headlines, it wouldn’t appear to be a good time to invest in emerging markets, while political upheaval is on the rise from South Korea to South Africa to South America. Yet, investors are showing few concerns. The MSCI Emerging Markets Index of stocks rose today even as major indices such as the S&P 500 fell. Beyond just betting that the turbulence will be contained, investors are emboldened by a surge in corporate earnings forecasts and economic growth that far outstrips expansion in developed countries, according to Bloomberg News’s Srinivasan Sivabalan and Ahmed A. Namatalla. Economists predict that growth gap, which widened last year for the first time since at least 2010, will expand in the next three years, meaning a bigger middle class and greater opportunities for businesses. That makes it easy to overlook the political risks. Take India, where both the Sensex and NSE Nifty 50 Index closed at all-time highs, after capping their best quarter since 2014.

The news out of China’s corporate bond market isn’t getting any better. Seven companies have defaulted on a total of nine bonds onshore so far in 2017, the most ever for a first quarter, according to Bloomberg News’s Judy Chen. Besides the number of defaults, what’s notable is that most of them depend on heavy industry and construction -- a clear sign of the struggles facing China’s old economic model. While it’s still far from a crisis point, the defaults underscore policy makers’ efforts to reduce the liquidity that had propelled the bond market until late last year. Stable economic growth prompted the People’s Bank of China to start curbing leverage in money markets in August, and borrowing costs have spiked as a result. 

The Reserve Bank of Australia meets in a few hours to set monetary policy, and all 26 economists surveyed by Bloomberg News expect no change in the benchmark interest rate of 1.50 percent. That’s not to say that the meeting won’t be of interest. The nation’s currency, known as the Aussie, is a bellwether for commodity currencies worldwide and has been the best-performing this year in a basket of major exchange rates tracked by Bloomberg by gaining about 4.16 percent. Traders will closely parse the statement released by the central bank for clues as to demand for such raw materials as iron ore, especially from China.

Oil Traders Looking at the Wrong Inventory Data: Jason Schenker

Bond Markets Looking More Perilous by the Day: Charles Lieberman

Zombie Companies Threaten to Eat Asia’s Future: Michael Schuman

Money Markets’ $1 Trillion Exodus Is Having Far-Reaching Effects

Debt Market Lures Billions as Verizon, GM Pursue Pension Trade

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.