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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides an analysis of current and upcoming economic data, focusing on credit markets, equity performance, and macroeconomic indicators across the US, Europe, and Asia-Pacific. The report highlights the subdued outlook for business activity, the behavior of credit spreads, and the potential implications of economic trends on financial markets.

Key Economic Indicators and Outlook

Credit Markets

• Credit Spreads:
  • Investment Grade: Expected to remain close to 138 bp by year-end 2016.
  • High Yield: Projected to rise from 494 bp to 575 bp by year-end 2016.
• Default Rates:
  • US High-Yield Default Rate: Forecast to decrease from 5.4% in September 2016 to near 4.2% by summer 2017.
• Bond Issuance:
  • US$-denominated Investment Grade (IG) bond issuance for 2016 is expected to reach a record $1.464 trillion, up 10.4%.
  • US$-priced High-Yield (HY) bond issuance is projected to fall by -8.3% to $324 billion.

Equities and Consumer Behavior

• Despite sagging profits, the market value of US common stock rose 5.5% over the past year.
• High-yield bond spreads narrowed from 622 bp in mid-2015 to 494 bp recently.
• Consumer spending growth for 2016 is expected to slow from 2.9% (October 2015) to 2.6% (October 2016), with a contraction in profits forecast.

Housing and Treasury Yields

• Housing starts are expected to remain at 1.18 million units in October 2016, showing a diminished outlook.
• The limited response of home sales to low mortgage yields suggests only a limited upside for Treasury yields.
• The 10-year Treasury yield is expected to fall from 2.7% in October 2015 to 1.7% in October 2016.

Personal Savings and Consumer Spending

• Personal savings have grown faster than consumer spending, with a 6.2% increase in 2016 compared to 3.6% for consumer spending.
• The personal savings rate increased from 3.0% to 5.6% despite ultra-low interest rates, indicating a shift in consumer behavior.

Unemployment and Defaults

• The correlation between the unemployment rate and the US HY default rate is strong (0.77).
• A slight increase in the unemployment rate could lead to a higher default rate, which is currently expected to trend lower due to the Fed's rate hike expectations.

Upcoming Data Releases

United States

• Retail Sales – September: Forecast at 0.6% overall, 0.5% ex auto.
• Producer Price Index – September: Forecast at 0.2% overall, 0.1% core.
• Business Inventories – August: Forecast at 0.1% growth.
• University of Michigan Consumer Sentiment – October Preliminary: Forecast at 92.0.
• Industrial Production & Capacity Utilization – September: Forecast at 0.2% production growth, 75.6% capacity utilization.
• Consumer Price Index – September: Forecast at 0.3% overall, 0.2% core.
• NAHB Housing Market Index – October: Forecast at 63, indicating a dip in homebuilder confidence.
• Housing Starts & Building Permits – September: Forecast at 1.17 million starts, 1.16 million permits.
• Existing Home Sales – September: Forecast at 5.33 million units.
• Leading Indicators Index – September: Forecast at 0.2% growth.

Europe

• U.K. Consumer Price Index – September: Forecast at 0.8% y/y, with inflation expected to exceed the 2% target by mid-2017.
• Euro Zone Consumer Price Index – September: Preliminary estimate at 0.4% y/y, with inflation expected to remain tame due to weak economic recovery.
• Russia Industrial Production – September: Forecast at 0.8% y/y growth, suggesting the economy may be bottoming out.
• U.K. Employment Situation – August: Unemployment rate likely unchanged at 4.9%.
• U.K. Retail Sales – September: Forecast at 4.8% y/y growth, though this may weaken in coming months due to inflation and wage stagnation.
• Euro Zone Monetary Policy – October: Expected to keep rates unchanged, but may hint at extending quantitative easing until the end of 2017.

Asia-Pacific

• China GDP – Q3 2016: Forecast at 6.7% y/y growth, with stabilization expected after a period of slowdown.
• China Foreign Direct Investment – September: Forecast at $9.6 billion, remaining flat due to expectations of slower growth and a weaker currency.
• China Consumer Price Index – September: Forecast at 1.6% y/y, with food prices dragging the headline rate down.
• China Producer Price Index – September: Forecast at -0.5%, showing continued improvement due to raw material and energy price recovery.
• India Wholesale Price Index – September: Forecast at 2.4% y/y, with food prices easing due to good monsoon rains.
• India Foreign Trade – September: Forecast at a trade deficit of -US$7.7 billion, driven by weak global growth and low oil prices.
• Singapore GDP – 2016Q3: Forecast at 2.1% y/y growth, with manufacturing activity likely improving.
• Singapore Foreign Trade – September: Forecast at -1.1% growth, reflecting weak export performance.

Main Points

• The credit market outlook is mixed, with high-yield spreads expected to rise and investment grade spreads to remain stable.
• The US economy shows signs of subdued growth, with weak consumer spending and a contraction in profits.
• The UK faces inflationary pressures due to a weaker pound and global economic conditions, while the labor market remains resilient despite Brexit uncertainty.
• The ECB is expected to maintain current monetary policy but may extend quantitative easing.
• Asia-Pacific economies, particularly China and India, are expected to show modest growth, though challenges like overcapacity and weak global demand persist.

Key Information

• The report is authored by a team of analysts including David W. Munves, John Lonski, Ben Garber, and others.
• The analysis covers the US, Europe, and Asia-Pacific regions, with a focus on economic indicators and their implications for credit and equity markets.
• The report emphasizes the impact of global economic conditions, interest rates, and inflation on market dynamics.
• Upcoming data releases are highlighted, with forecasts for key economic metrics.