Daily Update: May 16, 2023

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

Auto Industry Faces Economic Uncertainty

Empty auto dealer lots may soon be a pandemic-era relic, but economic headwinds are threatening to disrupt the industry’s fragile recovery.

New US light-vehicle sales improved over year-ago levels for the ninth straight month in April, reaching 1.29 million units, according to S&P Global Mobility estimates. North American production, meanwhile, reached a 30-month high in March, the most recent month for which data was available.

The result, according to S&P Global Mobility analysts, is likely to be some downward pressure on pricing as affordability issues, rising interest rates and tighter credit conditions weigh on consumer demand.

Economic concerns are expected to limit the potential ratings upside of higher production for the US auto sector in 2023 and 2024, according to an April report by S&P Global Ratings. S&P Global Ratings credit analysts expect US auto sales to remain below pre-pandemic levels through 2025. Notably, credit metrics for automakers operating in the US are expected to stabilize to pre-pandemic levels in late 2023 as companies pursue strategies that preserve liquidity.

A separate S&P Global Ratings report on the global outlook for auto sales predicts that stronger-than-expected sales seen in the US and Europe early this year will not last through 2023. “Geopolitical instability, sticky inflation, and the usual delayed impact of tightening monetary policy on consumers' purchasing power could dampen auto sales momentum in the second half of 2023,” S&P Global Ratings credit analysts wrote.

In Europe, S&P Global Ratings analysts indicated the 2023 auto market could prove better than expected for manufacturers that choose to manage margin pressures through model-mix strategies and product launches, according to another April report. However, greater margin concerns could be coming for European auto manufacturers in 2024 as pricing pressures intensify. 

Meanwhile, many aftermarket auto suppliers face the risk of credit downgrades later this year, should economic conditions weigh on sales and EBITDA margins. S&P Global Ratings analysts estimated that about half of rated auto aftermarket suppliers had a moderate risk of a negative rating action under a stressed scenario focused on debt to EBIDTA and free operating cash flow, while 30% of suppliers faced a significant risk of a negative rating action.

One corner of the auto market expected to see rapid growth is electric vehicle sales as government policies help to support the expansion of EV sales in the US, Europe and China. The International Energy Agency in April forecast that EVs would account for about 18% of global auto sales in 2023, according to a report by S&P Global Commodity Insights. By region, the International Energy Agency forecast that EVs would have an about 12% market share in the US, 20% in Europe and more than 35% in China.

Today is Tuesday, May 16, 2023, and here is today’s essential intelligence.

Written by Christina Mitchell.

Economy

Despite Setbacks, Latin American Sovereigns Are Moving Past 'Original Sin'

Many Latin American sovereigns over the last few decades have enhanced their ability to support their government debt burdens by strengthening domestic financial markets and improving their sovereign debt profiles. In other words, they reduced their reliance on external markets and thereby mitigated "original sin" — that is, the inability to issue long-term local currency-denominated debt at fixed interest rates in domestic capital markets. However, worsening debt profiles amid elevated interest rates, weakened private-sector pension funds and low domestic savings could pose risks to sovereign ratings in the region.

—Read the report from S&P Global Ratings

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Capital Markets

This Week In Credit: Rising European Default Rates On The Horizon

Defaults could reach 3.6% by March 2024 from 2.8% in March 2023, according to S&P Global Ratings’ latest 12-month-trailing European speculative-grade corporate default rate forecast — with a prolonged growth slowdown or recession pushing the rate as high as 5.5%, in our pessimistic case. This week, Japan and China are at the forefront of a distinct Asia-Pacific weighting to economic releases, while Friday also sees the G7 summit kick off in Hiroshima. Meanwhile, on Tuesday, US retail sales will be the next key data point for markets to consider, as the outlook for US inflation remains uncertain.

—Read the report from S&P Global Ratings

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Global Trade

India Still A Bright Spot For LNG In A Subdued Market

The recent drop in the Platts West India marker to a near two-year low, expectations of a ramp-up in operations at Dhamra LNG terminal and the hot weather will likely keep spot LNG procurement supported in India, despite a rise in domestic natural gas production, industry sources told S&P Global Commodity Insights. "LNG procurement should mostly not be that much affected by domestic gas production because demand has also grown," a domestic Indian-gas source said.

—Read the article from S&P Global Commodity Insights

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Sustainability

Listen: Permitting Reform: An Exercise In Untangling 50 Years Of Scar Tissue

Streamlining the federal permitting process is key to both deploying more renewable and carbon-free energy and ensuring needed fossil fuel production for US and global markets. But how and when to update US permitting laws is the sticking point. S&P Global Commodity Insights industry editor Molly Christian spoke with Alex Herrgott, president and CEO of the Permitting Institute, on what leading permitting reform proposals before Congress could do for the energy sector and what else may be needed to improve the permitting process. Despite bipartisan agreement on key areas, including the need to limit timeframes for project reviews, the complexity and abundance of permitting laws mean Congress may have its hands full on this issue for years, Herrgott says.

—Listen and subscribe to Capitol Crude, a podcast from S&P Global Commodity Insights

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Energy & Commodities

Fuel For Thought: Oil Prices At Stake In Coming Battle For Ukraine

Ukraine has made no secret of its plans to launch a massive counter-offensive against Russia this summer. The expected battle looks like a critical moment for the direction of the war. Its outcome is likely also to be pivotal for the direction of oil and gas markets in 2023. Prices have normalized since the shock of Russian troops marching on Kyiv last year lit up crude and natural gas markets. Dated Brent was assessed by Platts, part of S&P Global Commodity Insights, at $129.515/b on March 9, 2022, a day after US President Joe Biden signed an executive order banning imports of Russian oil, gas and coal. The benchmark was last assessed at $75.31/b on May 12.

—Read the article from S&P Global Commodity Insights

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Technology & Media

Chip Designer MediaTek Looking Past Metaverse To 'Ambient Era' Of Computing

MediaTek Inc. has a long history of creating systems on chips (SoCs) for midrange and low-end phones, TVs and tablets, but the company noted during its 2023 Analyst Day on April 27 in Austin, Texas, that it wants to make a play for higher-margin opportunities built around a wave of connected devices tapping into the metaverse, artificial intelligence and advanced connectivity.

—Read the article from S&P Global Market Intelligence

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