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Moody's Weekly Market Outlook Summary

Core Content Overview

Moody's Weekly Market Outlook provides insights into credit markets, economic indicators, and interest rate trends across the U.S., Europe, and Asia-Pacific regions. The report highlights the impact of rising interest rates on financial markets and corporate activity, as well as the effects on housing and consumer behavior.

Main Views and Key Information

U.S. Market Outlook

• Higher Interest Rates as a Self-Defeating Factor: Rising interest rates are helping to curb financial market overheating and business activity. This has led to a decrease in equity market exuberance, which in turn reduces consumer and business spending.

• Bond Yields and Issuance Trends:

  • Investment Grade (IG) Bonds: In 2017, U.S. IG bond issuance reached a record $1.508 trillion. For 2018, it is expected to fall by 6.7% to $1.407 trillion.
  • High Yield (HY) Bonds: HY bond issuance surged by 33% in 2017 to $453 billion. In 2018, it is projected to decline by 8.9% to $413 billion.
  • Default Rates: The U.S. HY default rate is expected to fall from 3.7% in April 2018 to 1.5% by April 2019.
  • Credit Spreads: Investment-grade bond spreads are projected to exceed 124 bp by year-end 2018, while high-yield spreads may rise to 425 bp. This reflects a tightening credit environment.
  • Mortgage Yields: The highest 30-year mortgage yield in seven years has led to a significant drop in refinancing applications. The effective mortgage yield reached 5.01% in late May 2018, up from 4.32% in the same period the previous year.
  • Housing Sector: The PHLX index of housing-sector share prices dropped by 11% in 2018, while the U.S. common stock market rose by 3%. This signals a slowdown in housing activity.
  • Home Affordability: The NAR's home affordability index fell by 7% in 2018, indicating that rising home prices and mortgage yields are outpacing income growth.
  • GDP and Economic Outlook: First-quarter GDP growth is tracking at 3.1% annually, but downside risks are present. The report suggests that the 10-year Treasury yield may follow the trend of housing sales.

Europe Market Outlook

• Euro Zone Inflation Rebound: Preliminary May CPI figures are expected to show a rebound in euro zone inflation to 1.4%, up from 1.2% in April. This is attributed to rising energy prices and a recovery in services inflation.
  • Energy Inflation: Expected to rise to 4% in May from 2.6% in April due to higher Brent prices.
  • Services Inflation: Likely to rebound to 1.3% in May after a drop to 1% in April, influenced by Easter-related distortions.
  • Core Goods Inflation: Projected to increase to 0.5% from 0.3%, although still below trend. Weakness in non-industrial goods inflation persists, mainly due to deflation in healthcare and declines in clothing and shoe prices.
• ECB Policy Outlook: The ECB is expected to gradually taper its asset purchase programme and potentially start raising deposit rates from the first quarter of 2019. However, further growth disappointments or a low core inflation rate could delay these decisions.
• Key Economic Indicators:
  • France: Job seekers at 3.40 million (SA), household consumption down 0.5%.
  • Germany: Retail sales down 0.3%.
  • Spain: Retail sales up 0.1%, GDP up 0.7% y/y.
  • Italy: Unemployment at 10.9%.
  • Euro Zone: Unemployment at 8.4%, preliminary CPI at 1.4%.

Asia-Pacific Market Outlook

• Japan:
  • Employment: The unemployment rate likely held steady at 2.5% in April, with a strong labor market and ongoing job creation.
  • Retail Sales: Retail sales rose 1.3% y/y in April, following a weaker trend in previous months. Domestic demand remains weak compared to last year.
  • Consumer Confidence: The consumer confidence index fell slightly to 43.4 in May, reflecting ongoing concerns about economic momentum.
  • Wage Growth: Annual spring wage negotiations were described as mediocre, despite a tight labor market.
• China:
  • Manufacturing PMI for May was 51.2, showing mild decline but still positive.
  • Concerns over export orders and U.S.-China trade tensions persist.
• India:
  • GDP growth is expected to accelerate to 7.7% in the March quarter, up from 7.2% in the prior quarter.
  • Consumption remains a key driver, with investment showing improvement after years of weakness.
• South Korea:
  • Consumer sentiment for May is expected to drop to 106.6, influenced by a weak labor market and trade tensions.
  • Retail sales in April are projected to grow 1.9% m/m, a positive surprise.
  • GDP for Q1 2018 is likely to be revised up to 1.1% from a prior quarter decline of 0.2%.

The Week Ahead

U.S. Indicators

• May Employment: Expected to show continued job growth, though the rate of increase may be slower than anticipated.
• PCE Deflators and GDP Revisions: These will be key focus areas for the week, with potential insights into inflation trends and economic growth.

Europe Indicators

• France and Germany Economic Data: Job seekers, retail sales, and GDP figures will be released.
• Euro Zone CPI and Unemployment: Preliminary CPI for May is expected to confirm a rebound in inflation, while unemployment remains stable.

Asia-Pacific Indicators

• Japan: Retail trade and consumer sentiment surveys.
• South Korea: Retail sales and GDP revisions.
• India and Thailand: GDP growth and foreign trade data will be released.

Summary

The report emphasizes that higher interest rates are beginning to have a dampening effect on financial markets and business activity. This is reflected in declining corporate bond issuance, tighter credit spreads, and reduced housing activity. While the U.S. housing market faces challenges due to rising mortgage yields, the broader economy shows resilience. In Europe, inflation is expected to rebound, which could lead to a tapering of the ECB's asset purchase program and a potential rate hike. In Asia-Pacific, Japan's labor market remains strong, but wage growth and consumer confidence are lagging. South Korea and India show signs of economic improvement, but concerns over trade and growth remain. Overall, the outlook suggests a cautious but positive trend in credit markets and economic activity, with risks of further slowdowns in certain sectors.