Monday Musings: May 3, 2021

May 03, 2021


Public Trust Credit Team
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A butterfly flaps its wings… and a semiconductor shortage constrains auto production through 2023

The financial press has written a fair amount about the disrupted consumer purchasing habits during COVID-19 including coverage of the dramatically heightened demand for consumer electronics. Recent articles have provided some anecdotal evidence that points to a downstream impact. Auto production slowed dramatically during the worldwide lockdowns, and now many of those auto companies cannot increase production due to a bottleneck in semiconductor availability. According to industry experts quoted in Forbes, the much-lauded “just-in-time” production model is partially to blame for the shortage. Without baking in a larger margin for production spikes and accepting the commensurate expenses for warehousing components, the auto industry failed to anticipate a strong rebound in demand for new cars. Ironically, the company expected to be the least impacted is Toyota, the originator of “just-in-time” production. Numerous auto producers have commented on disrupted supply chains with some analysts estimating that production will be constrained through 2023. That said, other analysts believe that the disruption will be shorter-lived, potentially concluding this calendar year.
The shortage of semiconductors is flowing through other sectors, as well. In the auto rental market, large purchases of new fleets are not possible, so rental companies are instead holding onto their fleets nearly twice as long or purchasing used cars at auction. The slower pace of sales and dealer floorplans purchases (the method dealers use to purchase new vehicles from manufacturers) will impact the lending institutions that finance these transactions. Many of these transactions are eventually packaged into securitized products including asset-backed commercial paper (ABCP) and asset-backed securities (ABS). Credit quality will not be a concern, but we expect there could be a temporary decline in supply from the impacted vintage years going forward. In fact, ABCP investors will likely feel the reduction in securitized transactions before other fixed-income investors since many of the assets in those conduits are auto loans and leases or auto floor plan financings that are temporarily warehoused before being packaged into ABS tranches.

A double-dip recession hits the Eurozone

Eurostat, the statistical office of the European Union, reported last week that GDP declined by 0.6% in the first quarter of 2021 in the euro area and 0.4% in the E.U. The euro area and E.U. reported -0.7% and -0.5% for fourth quarter 2020 GDP respectively which was preceded by a robust rebound in the third quarter last year of +12.5% (euro area) and 11.7% (E.U.). The National Bureau of Economic Research (NBER) does not formally define a category referring to a double-dip recession. However, the market view is that a double-dip recession comprises two periods of economic contraction followed by a short-lived recovery and then another recession period. In this instance, the curvature of GDP data takes shape akin to the letter W (considered a W-shaped recovery). It appears the increased containment measures relating to COVID-19 infections have impacted economic growth in the area. 
That said, IHS Markit reported that its Eurozone manufacturing purchasing manager index (PMI) survey registered 62.9 in April, a new record high and well over the 50 mark which signals expansion. The figure suggests considerable increases in output and new orders from the participants surveyed. Much of the global economic recovery is predicated on both containment and vaccinations for COVID-19. Over the weekend, data reported by Bloomberg shows enough vaccinations administered in the E.U. for approximately 16.9% of the population compared to 38.2% in the United States. The economic recovery in the Eurozone is anticipated to gather momentum as vaccinations continue to increase across the region with consumer consumption and business activity expected to increase throughout the year. The European Central Bank (ECB) anticipates a solid economic rebound during the second half of 2021 due to relaxed containment measures from increased vaccinations within the region. The ECB now forecasts real GDP growth to reach 4% for full-year 2021.   
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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