What happened
Shares in vehicle maker Ford Motor Company (F 7.46%) were down by more than 6% as of midday Monday. The move follows news that China is reimposing COVID-19 restrictions after recently relaxing them and the rise in interest rates in response to a disappointing inflation report on Friday.
Given the importance of China to global auto supply chains, it's no surprise that the market decided to sell off. The news is doubly disappointing after Friday's consumer price index report, which showed year-over-year consumer price inflation running hot at 8.6% in May.
In response to the inflation report and the news from China, the market took the benchmark U.S 10-year Treasury yield up to 3.3% -- for reference, it started the year at 1.76%. The higher interest rates are, the more expensive it is to borrow money to finance buying large-ticket items like housing and automobiles.
NYSE: F
Key Data Points
So what
Rising inflation and rising rates matter to Ford. Inflation pushes up costs, and rising rates choke off demand for vehicles. Rising rates may also put pressure on profitability at Ford Credit. Ford offers vehicle-related financing and leasing activities that help support demand for its vehicles. It's a highly profitable operation, generating $46 billion in earnings before taxes over the last 20 years and $4.7 billion in 2021 alone.
One metric used to measure Ford Credit's credit quality is its loss-to-receivables (LTR) ratio, which compares loan losses (retail net charge-offs) to finance receivables, so a low LTR is good. Fortunately, Ford Credit's LTR stood at just 0.08% in the second quarter compared to 0.22% in the same period last year. However, with rates rising, it could put pressure on loan losses in the future, particularly given the current low rate.
Now what
It's almost impossible to predict inflation and interest rate movements, and they can change course when least expected. Moreover, the lockdowns in China and the war in Ukraine are part of the reasons for the soaring inflation causing rising rates. However, both issues could be resolved in due course, so it's far too early to count Ford as a victim of an inexorably rising rate environment, particularly as underlying demand for vehicles remains strong.
