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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides a comprehensive review and analysis of credit markets, focusing on economic indicators, M&A activity, and credit rating trends. The report also outlines key events and forecasts for the upcoming week in the US, UK/Europe, and Asia-Pacific regions. Contributors include leading analysts from Moody's Capital Markets Research and Moody's Analytics, offering insights into market dynamics and economic conditions.

Main Points

• Special Events in Late-Cycle Mode: The report highlights that special events, such as M&A activity and equity buybacks, are indicative of a late-cycle economic environment. These events often signal potential credit risks and may lead to more downgrades than upgrades.

• M&A Activity and Credit Ratings: M&A activity in 2015 reached record highs, driven by low borrowing costs, stable equity markets, and weak organic growth prospects. This has led to more credit downgrades than upgrades, reflecting the aging nature of the recovery.

• Credit Spreads and Defaults: High-yield bond spreads are expected to remain elevated, with the average EDF metric suggesting a spread of around 850 bp. The US HY default rate is forecast to rise to 4.2% by November 2016 from 3.2% in December 2015. Investment-grade bond issuance is expected to decline slightly in 2016, while high-yield issuance is projected to drop significantly.

• Equity Buybacks and Dividends: Companies are increasingly using equity buybacks and dividends to boost shareholder returns, which can lead to credit rating downgrades. The number of downgrades from equity buybacks and dividends increased from 2014 to 2015 but remained below previous cycle highs.

• Equity Infusion and Upgrades: The number of credit rating upgrades from equity infusions has declined over the past few years, indicating a less robust recovery. This trend is expected to continue in 2016.

Key Information

• M&A Trends: US M&A activity reached $3.336 trillion in 2015, the highest on record. Previous peaks in 2000 and 2007 were followed by recessions, suggesting a correlation between M&A activity and economic downturns.

• Credit Market Outlook: The report forecasts continued volatility in credit markets, with high-yield spreads expected to remain above 800 bp and investment-grade spreads to narrow slightly.

• Economic Indicators: The report outlines several key economic indicators for the upcoming week, including existing home sales, durable goods orders, retail sales, and GDP growth for various countries.

Economic Forecast Highlights

The US

• Existing Home Sales (Dec): Expected to rise after a sharp decline in November. New regulations and mortgage availability are likely to support this trend.

• Durable Goods Orders (Dec): Forecast to be flat to negative, indicating weak business investment. The energy and mining sectors are expected to have a prolonged negative impact due to falling commodity prices.

• FOMC Policy Decision (Jan 26): The Fed is expected to keep its policy rate in the range of 0.25%–0.50%. Inflation expectations may influence future rate decisions.

• GDP (Q4 2015): Expected to grow 0.9% in the fourth quarter, but weak consumer spending, business inventories, and exports may limit growth.

• Consumer Sentiment (Jan Final): Projected to rise to 93.3, but recent financial market turbulence and global concerns may dampen near-term confidence.

Europe

• Euro Zone – Leading Indicators (Dec): Expected to rise to 109.1, suggesting a potential acceleration in the recovery. However, geopolitical tensions and economic slowdowns in China and Russia may pose challenges.

• France – Consumer Confidence (Jan): Likely to remain weak, with the index expected at 97. Concerns about GDP growth and unemployment persist, although the economy is recovering slowly.

• Italy – Consumer and Business Confidence (Jan): Business confidence is expected to remain high, but weak export demand and subdued industrial activity may limit overall recovery.

• Spain – Retail Sales (Dec): Projected to grow 4.6% year-over-year, supported by strong household spending and a recovering economy.

• Germany – Ifo Business Climate Index (Jan): Expected to rise to 109, reflecting improved sentiment despite a slight decline in December.

• Russia – Industrial Production (Dec): Likely to contract by -3.7% year-over-year, due to weak retail sales and limited export opportunities. Unemployment is expected to fall to 5.7%, but pressures from a weak labor market and fiscal constraints may keep it elevated.

Summary Table