LIVE MARKETS- Looking under the hood at car tariffs

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LOOKING UNDER THE HOOD AT CAR TARIFFS

As auto stocks fell again on Friday, Morgan Stanley's chief U.S. economist Michael Gapen's note estimated the potential fallout from 25% tariffs on new cars and parts announced by U.S. President Trump late on Wednesday.

Gapen sees tariff policies adding upside risks to inflation and downside risks to growth. And he sees already high uncertainty staying elevated after reciprocal tariff news due on April 2.

If the tariffs are permanent it could add 20-30 basis points to 2025 inflation he says while higher prices could cut car unit sales. And, from recent experience Gapen sees tariffs dragging on domestic industrial production as well as GDP growth.

To be sure, Gapen says there are still unknowns such as the duration and degree of potential exemptions or carve-outs.

But for now he estimates a boost to imported car prices of 19%-22% assuming full pass-through to consumers. This is below 25% since cars from Mexico and Canada are partially produced in the US, exempting some content.

For domestically produced cars he sees price push of 2%-5% from more expensive imported manufactured parts, he said.

On top of new car inflation, he sees pressure from the used car market since soaring new car prices may drive more consumers towards used cars, increasing demand and prices there too.

And pricier cars also suggests higher car insurance costs, also impacting inflation.

However, if "US producers decide to absorb part of the cost pressures or non-US producers reduce pre-tariff prices to keep market share, the final inflationary effect will be less important."

But without margin compression, he says MS equity analysts estimate a rise in average monthly auto loan payments from $750 to $830 or $840.

This implies affordability - loan payments as a share of disposable income - "will get even worse than the peak in late 2022, when supply chain dislocations were pushing car prices."

So this could imply a car unit sales reduction of about 5% to 7.5%.

General Motors GM.N shares were down ~1.5% on Friday after losing 7.4% on Thursday and 3% on Wednesday. Ford was down ~2%% on Friday following the prior session's 3.9% drop.

(Sinéad Carew)

FOR FRIDAY'S EARLIER LIVE MARKETS POSTS:

SOME SHOCK ABSORBERS THAT COULD LIMIT TARIFFS' INFLATION IMPACT - AT LEAST, A LITTLE - CLICK HERE

TGIF: HOT INFLATION AND A COOLING U.S. CONSUMER - CLICK HERE

STOCKS DROP MORE THAN 1% EARLY AS INVESTORS DIGEST DATA - CLICK HERE

INDIVIDUAL INVESTOR BEARS HAVE BEEN ON QUITE A RUN - AAII - CLICK HERE

RUSSIA-UKRAINE CEASEFIRE WOULDN'T SHIFT INVESTORS OUT OF DEFENCE STOCKS, MS CLIENTS SAY - CLICK HERE

EUROPEAN OUTPERFORMANCE EVEN EXTENDS TO TARIFF STOCKS - CLICK HERE

U.S. TARIFFS SIMILAR TO BREXIT (SORT OF) SAYS BOFA - CLICK HERE

STOCKS STEADY - CLICK HERE

EUROPE BEFORE THE BELL: LOWER AGAIN - CLICK HERE

MORNING BID: TARIFF CARNAGE RUMBLES ON - CLICK HERE