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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides a detailed analysis of credit market trends, economic forecasts, and key financial indicators for the US, Europe, and Asia-Pacific regions. The report highlights the implications of high debt levels, the potential impact on interest rates, and the outlook for economic activity and consumer confidence.

Key Findings

Record Debt to GDP Ratio

• The US nonfinancial-sector debt to GDP ratio reached a record high, with a yearlong average of 253% in Q1-2017, up from 255% in Q4-2016.
• This ratio is significantly higher than the 230% seen at the end of 2007, just before the Great Recession.
• The debt burden is more severe in 2017 due to lower interest rates compared to 2007, which had higher rates for key instruments like the 10-year Treasury yield, fed funds rate, and mortgage yields.

Debt Composition

• US government debt has surpassed household sector debt as the largest component of nonfinancial-sector debt.
• In Q1-2017, US government debt stood at $15.898 trillion, compared to $14.801 trillion in household debt.
• The share of private-sector debt to GDP has decreased from 168% in 2007 to 152% in Q1-2017, while public-sector debt increased from 62% to 101% of GDP.

Fiscal Constraints

• The high ratio of federal debt to GDP (85% in Q1-2017) limits the scope for additional fiscal stimulus.
• Expansion of government entitlement programs will likely require higher or new taxes, with value-added taxes being a probable outcome.
• The financial stress on the middle class, despite a low unemployment rate, suggests potential for increased demand for government support.

Household Debt

• Household debt remains elevated, at 105% of disposable personal income in Q1-2017, down from 135% in 2007.
• Annual growth of household debt in Q1-2017 was 3.4%, which is higher than the 2.1% average of the last five years but still below the 10.6% growth seen in the five-years-ended 2007.

Nonfinancial-Business Debt

• Nonfinancial-corporate debt grew by 4.9% in Q1-2017, slower than its 6.1% average over the last five years.
• The growth rate is significantly lower than the 9.1% seen in the five-years-ended 2007, which contributed to higher default rates.

State and Local Government Debt

• State and local government debt decreased by 0.1% in Q1-2017, down from 3.064 trillion.
• This decline is due to financial constraints and reduced infrastructure spending.

Main Views

Interest Rates and Debt

• A high debt to GDP ratio limits the ability of the economy to sustain higher interest rates.
• The report suggests that full normalization of interest rates is unlikely in the next 10 years due to the significant debt burden.
• The US government's debt growth has outpaced nominal GDP growth since 2007, restricting fiscal flexibility.

Economic Outlook

• The US economy faces challenges in maintaining growth due to high debt levels.
• The Fed is expected to announce balance sheet normalization in September, with a gradual process of reducing securities holdings.
• The cumulative odds of a rate hike in 2017 are estimated at 75%, with the most likely increase in December.

Europe

• Eurozone economic confidence is expected to rise in June, with business sentiment improving.
• However, risks remain, including the UK's Brexit negotiations and Italy's banking sector instability.
• German retail sales are expected to recover in May, but consumer spending is likely to remain cautious due to uncertainty and rising inflation.

Asia-Pacific

• Japan's Tankan survey shows improved business sentiment in Q2, but further gains are unlikely due to a fading tech cycle and weak domestic demand.
• South Korea's trade surplus is expected to widen in June, driven by improved global demand and tech releases.
• Inflation in South Korea is expected to rise to 2.1% in June, with core inflation heating up.

Key Data and Forecasts

Credit Spreads

• Investment-grade credit spreads are expected to exceed 118 bp by year-end 2017.
• High-yield credit spreads may approach 425 bp by year-end 2017, up from 386 bp recently.

Defaults

• US HY default rate is forecast to average 2.7% for the three-months-ended May 2018, down from 3.9% in May 2017.
• The report warns that if the federal funds rate increases beyond market expectations, defaults may rise.

Issuance

• US$-IG bond issuance reached a record $1.446 trillion in 2017.
• US$-priced high-yield bond issuance is expected to rise by 19.7% to $408 billion, still below the 2014 peak of $435 billion.

Summary of Upcoming Reports

The US

• June 29 (Thursday): Jobless claims and GDP revisions are expected to show mixed signals.
• June 30 (Friday): Personal income and spending data, as well as consumer confidence, will be released.
• July 3 (Monday): South Korea's foreign trade data and Japan's Tankan survey.
• July 4 (Tuesday): South Korea's CPI data and Japan's consumer confidence survey.

Conclusion

The report emphasizes that the current high levels of debt, particularly in the public sector, are constraining economic growth and interest rate normalization. While there are signs of improved business sentiment in Japan and the Eurozone, risks persist due to political and economic uncertainties. In the US, the Fed's balance sheet reduction and potential rate hikes are expected to be gradual, with limited fiscal stimulus available due to high debt-to-GDP ratios.