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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides insights into credit markets, economic indicators, and market trends across the US, UK/Europe, and Asia-Pacific regions. The report highlights the long-term outlook for profits, credit spreads, and bond issuance, as well as the performance of the homebuilding sector and upcoming economic data releases.

Main Views and Key Information

Long-Term Profits Outlook

• Expected returns from riskier assets influence US Treasury bond yields. Lower expected returns from these assets lead to lower Treasury yields.
• The Blue Chip consensus forecasts a lower average annual profit growth for 2016–2022 compared to 2011, with profits expected to grow at 3.2% versus 5.3%.
• The ratio of profits to GDP remains historically high, with the consensus projecting profits to reach 10.6% of GDP for 2016–2022, compared to the 9.0% average from 1985–2007.
• The 10-year Treasury yield is expected to average 2%–3% for 2016–2022 due to historically low inflation expectations and continued fiscal restraint.

Credit Market Outlook

• Credit spreads for investment-grade bonds are expected to fall below 165 bp by year-end 2016, while high-yield credit spreads may approach 700 bp.
• The US HY default rate is forecast to rise from 3.6% in February 2016 to 5.5% in January 2017.
• Builder credit spreads are currently 452 bp, lower than the historical high yield average of 582 bp, indicating improved credit quality in the sector.
• Homebuilder debt is seen as relatively secure, with EDFTM (Expected Default Frequency) measures for builders at 0.55%, compared to 0.58% for the overall high yield market.
• The 75th percentile EDF for builders is 1.09%, significantly lower than the 3.67% for the broader high yield market.

High-Yield Bond Issuance

• US$-denominated investment-grade bond issuance increased by 17.5% in 2015 to $1.297 trillion, while high-yield bond issuance declined by -19.5% to $289 billion.
• For 2016, investment-grade issuance is expected to rise by 8.7% to $1.442 trillion, while high-yield issuance may fall by -19.3% to $290 billion.

Housing Market Trends

• Homebuilding remains depressed despite a steady but slow construction recovery.
• New home sales reached 502,000 units in February, up from January's decline, with multi-family construction showing signs of shifting toward single-family.
• Homebuilder stocks have lagged since 2012, despite revenue growth. The growth in homebuilder revenues slowed from 21% in 2014 to 10% in 2015.
• Consumer demand for housing is limited by low real income growth, job creation in low-paying sectors, and elevated underwater mortgages and student debt.
• Foreclosures and delinquencies are still a drag on housing activity, though they have improved from 9.7% in 2009 to 3.4% in 2016.

The Week Ahead

US

• University of Michigan Consumer Sentiment – March Preliminary (10:00 am EST): Forecast at 92.2, indicating strong confidence.
• Existing Home Sales – February (10:00 am EST): Forecast at 5.34 million, with a 9% YoY increase.
• New Home Sales – February (10:00 am EST): Forecast at 502,000, up from January's decline.
• Durable Goods Orders – February (8:30 am EST): Projected to decline by -2.5% overall, -0.3% excluding transportation.
• GDP – Fourth Quarter (8:30 am EST): Forecast at 1.0%, with consumer-led growth expected for 2016.

Europe

• UK Public Finance – February (12:00 am GMT): Forecast at -£8.2 billion, indicating a deficit.
• Germany Producer Price Index – February (8:00 am GMT): Forecast at -2.5%, showing continued price declines.
• Germany House Price Index – February (10:45 am GMT): Forecast at 2.8%, with construction activity boosting growth.
• Spain Lending by Credit Institutions – January (9:00 am GMT): Forecast at -3.5%, with tight credit standards and ECB stimulus expected to improve.
• Spain Foreign Trade – January (9:30 am GMT): Forecast at -€1.7 billion, indicating a slight trade deficit.
• Italy Balance of Payments – January (10:00 am GMT): Forecast at -€1.6 billion, with current account deficit expected to reverse.

Asia-Pacific

• Market Data includes credit spreads, CDS movers, and bond issuance trends.
• Moody's Capital Markets Research has published commentaries on various topics including OXY, Valeant, USB, DB, STANLN, ECB, risk rise, Barclays, F, M&A, Apple, Greece, PNC.

Conclusion

The report underscores the historically low expected returns on corporate profits, which may lead to lower Treasury yields and narrower spreads for lower quality debt. The homebuilding sector shows improved credit quality but slow growth in sales and profits. Upcoming economic data will provide insights into consumer sentiment, housing activity, and broader economic trends across the US, UK, and Europe. Fiscal restraint and low inflation expectations are key factors shaping the credit market outlook.