Morgan Stanley: Will July Auto Sales Benefit From June's Momentum?

As fuel prices continue to rise, analysts at Morgan Stanley are predicting July auto sales will remain strong.

In a note to clients on Thursday, Adam Jonas speculated that July auto sales will benefit from June's momentum “spilling over,” given attractive dealer incentives and ideal credit conditions.

Jonas is predicting July's Seasonally Adjusted Annual Rate (SAAR) will be 16.9 million. Granted the figure is slightly below June SAAR of 17 million, but it is well above the year to date run rate of 16.3 million.

Jonas uses a proprietary leading indicator known as the “MS Leading Indicator of U.S. Light Vehicle Sales,” which takes in to account the ratio of Used Vehicle CPI to New Vehicle CPI, the Index of Consumer Expectations, the Fed Funds rate, the ratio of Motor Fuel CPI to All Items CPI and the Willingness to Lend.

The leading indicator declined month over month in July to 93.85, from 94.23 in June, due to a slight decline in used vehicle prices relative to new vehicles and consumer expectations falling for the second straight month.

Jonas notes that the indicator is a better gauge of direction rather than magnitude, in addition to being a predictor of future retail demand and not fleet demand.

Jonas is expecting General Motors' (NYSE: GM) July unit sales to rise 11 percent year over year, while Ford's (NYSE: F) July unit sales are expected to rise seven percent from a year ago. As a whole, the industry is expected to show a seven percent unit sales growth. Chrysler is expected to show the highest growth rate with July unit sales rising 18 percent.