Trends We're Tracking: Car Repossessions, the Banking Crisis, and Inflation
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Car repossessions tick up
The $1.7 billion industry involved with repossessing cars, trucks, and boats has seen a recent uptick in activity. Coming out of the pandemic, repossessions were down as relief measures helped to stave off delinquent payments and kept many afloat. As relief measures were reduced, there has been an increase in late payments and the repossession industry is thriving. Although determining the exact number of repossessions is tricky, data from Cox Automotive suggests that there was a 5.3% increase from 2021 with about 1.2 million in 2022.
High yield ferment favors active management
Tightening monetary policy and slowing economic growth are stirring up the high yield market. Last month, Barclays reported that $11.4 billion of bonds were downgraded to high yield in Q1 2023, which the firm noted was 60% of the dollar volume downgraded for the entirety of 2022. The bank expects downgrades to total $60-80 billion for 2023, accelerating in the second half of the year to produce the highest volume of downgrades since 2020, when ~$200 billion in bonds dropped to high yield. While “fallen angels” are increasing in number, the same report (perhaps counterintuitively) notes that upgrades to investment grade, or “rising stars,” are on pace to total $60-70 billion this year. While this churn is happening at the top of the high yield market, the lowest-rated borrowers are also struggling. S&P, for example expects U.S. high yield defaults to reach 4.0% by the end of the year versus 2.7% for the 12 months ended March 31, 2023. Notably, “distressed exchanges” are becoming an increasingly common tactic during defaults, which tend to weigh on recovery rates. Even with U.S. high yield finally justifying its moniker with yields-to-worst of ~8%, these late-cycle developments support an active approach to capture opportunities and avoid downgrades and defaults.
The banking crisis continued
The month of April saw waves in the banking sector as failing First Republic was sold to JPMorgan. The collapse of First Republic is the second largest bank failure in the U.S. In March the bank saw an outflow of $100 billion in deposits in the face of Silicon Valley Bank’s failure. During that time, First Republic was buoyed up by aid of $30 billion of deposits from other banks. Unfortunately, the series of quick rate increases by the Fed weakened the bank’s assets and drove customers away as they perused other avenues for yield. In the previous banking crisis, JPMorgan acquired Washington Mutual, the largest U.S. bank failure in history, and according to JPMorgan Chief Executive Jamie Dimon, the acquisition of First Republic marks an end to this part of the crisis. However, many are still shell-shocked by the fact that three of the four largest bank failures in history have taken place in the past two months, making many concerned for what lies ahead.
Higher inflation continues to plague U.K.
While countries around the world continue to battle elevated and persistent inflation, the U.K. is facing a steeper challenge as price pressures have been slower to come in. Consumer Price Inflation (CPI) in Britain remains in double-digit territory, the highest of western European countries, with an annual rate of 10.1% in March. While U.K. inflation has cooled from the 41-year high of 11.1% in October 2022, it remains well above levels in the United States and the Eurozone, at 5.0% and 7.0%, respectively. U.K. food and non-alcoholic drink prices were 19.1% higher in March, the highest increase since 1977 with items such as milk and sugar higher by roughly 40% from a year earlier. Stickier higher prices have put additional pressure on the Bank of England (BoE), with fears that that sustained inflation may lead to a prolonged shift in wage demands and longer-term consumer and business pricing. The BoE has responded to combat inflation by hiking interest rates at 11 consecutive meetings since December 2021. The central bank is expected to hike rates yet again, by 25 basis points at its May 11 meeting, bringing the key bank rate to 4.50%. Despite an approach similar to the Federal Reserve and European Central Bank, BoE action has been less successful at reining in inflation, while exposing its economy to the strain of higher interest rates and the risk of recession.
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