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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides insights into credit markets, focusing on bond yields, credit spreads, default rates, and issuance trends. It also includes economic forecasts for the US, Europe, and Asia-Pacific regions.

Main Views

1. Bond Yields and Credit Spreads

• Lower bond yields have helped prevent wider credit spreads.
• The 10-year Treasury yield has fluctuated due to political uncertainty and economic expectations.
• As of early May 2017, the high-yield bond spread averaged 383 bp, which is below historical averages, suggesting potential for widening in the future.
• Historically thin spreads are more likely to widen than narrow one year out, as seen in the past data.

2. Default Rates

• The US high-yield default rate is expected to average 3.0% for the three-months-ended April 2018, down from 4.5% in April 2017.
• Moody's Credit Policy Group suggests that default rates are not necessarily a sign of deteriorating credit quality, but rather a reflection of market conditions.

3. Bond Issuance

• US dollar-denominated investment-grade (IG) bond issuance rose slightly in 2017, reaching $1.417 trillion.
• US dollar-denominated high-yield bond issuance increased by 16.3% to $397 billion, though still below the $435 billion peak of 2014.

4. High-Yield Spreads and Recession Forecasting

• Historically, high-yield spreads exceeding 700 bp were seen as a signal for recession.
• However, the current recovery has shown two such peaks (775 bp in October 2011 and 839 bp in February 2016) without resulting in an economic downturn.
• This suggests that high-yield spreads are not a reliable recession indicator in the current economic environment.

5. Economic Outlook for the Week Ahead

The US

• Inflation remains a concern for the Fed, but rate hikes are still expected in June.
• The unemployment rate is expected to remain stable, with a median projection of three 25-basis point hikes for 2017.
• Housing starts are expected to rebound in April, while industrial production may show modest gains.
• Jobless claims are forecasted to rise to 247,000 in the week ending May 13, which is slightly above the prior four-week average.
• Philadelphia Fed manufacturing survey is expected to show a decline from 22 to 17.3, indicating continued weakness in manufacturing conditions.

Europe

• UK retail sales are expected to improve in April, but remain below the 2016 average.
• Inflation is expected to rise due to global commodity prices and utility price hikes, with the core CPI likely increasing to 2.8% y/y.
• Labor market data is expected to show modest employment growth but no meaningful wage increases, due to exit uncertainty and weak bargaining power.

Asia-Pacific

• Japan's GDP is expected to rise to 0.8% q/q in the first quarter of 2017, driven by global demand and yen depreciation.
• Industrial production in Japan is expected to show positive growth, but domestic demand remains weak.
• Australia's unemployment rate is forecasted to drop slightly to 5.8%, with employment growth expected to increase by 1.2% y/y.
• Philippines GDP is expected to rise to 6.9% y/y, supported by private investment and consumption.
• Indonesia's central bank is expected to keep the policy rate steady at 4.75%, as inflation pressures remain within target.
• Malaysia's GDP growth is expected to increase to 4.6% y/y, driven by export gains, especially in electronics and palm oil.
• Hong Kong's trade deficit is expected to narrow to HK$30.2 billion in April, due to strong export growth and China's investment recovery.
• Singapore's GDP is expected to increase to 2.7% y/y, with services and manufacturing driving growth.

Key Information

• High-yield spreads have widened over time due to increased perceived risk, not necessarily due to a shift in bond ratings.
• Fiscal stimulus is unlikely in 2017 due to political uncertainty and economic hurdles.
• Interest rates are expected to remain stable in the near term, with the Fed likely to raise rates gradually.
• Economic indicators for the week include jobless claims, retail sales, industrial production, and monetary policy decisions in various countries.
• Moody's Analytics is responsible for distributing Moody's Capital Markets Research materials, which are not investment advisory services.

Contributors and Contact

• John Lonski: Credit Markets Review and Outlook
• Njundu Sanneh: Ratings Round-Up
• Tomas Holinka: Moody's Analytics/Europe
• Katrina Ell and Emily Dabbs: Moody's Analytics/Asia-Pacific
• Editor: Dana Gordon

Additional Resources

• Full stories and analysis are available in the Moody's Credit Outlook publication.
• Moody's Analytics provides economic data and market insights across global regions.