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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides insights into credit market trends, equity performance, and upcoming economic data across the US, Europe, and Asia-Pacific. The report emphasizes the relationship between credit default rates and equity market performance, highlighting that a decline in high-yield defaults is generally positive for equities. It also includes detailed forecasts for economic indicators and market data.

Main Points

Credit Market Outlook

• High-Yield Defaults: Moody's Default Research Group forecasts that the US high-yield default rate will decline from October 2017's 3.2% to 2.2% by October 2018.
• Equity Market Correlation: There is a strong correlation between high-yield bond spreads and Moody's long-term Baa bond yield spreads (0.92) and Barclays' investment-grade and high-yield spreads (0.95).
• EDF and Defaults: The average high-yield EDF metric often leads the high-yield default rate, with a strong correlation of 0.90 between year-to-year changes in EDF and the default rate nine months later.
• Equity Performance: Equities tend to rally when the high-yield EDF declines. For example, in 88% of the 133 months since 1996 showing a year-to-year drop in EDF, the equity market increased. The exception was during 2001-2002, where the market declined despite a drop in EDF, possibly due to post-9/11 uncertainty.

Market Data Highlights

• Equity Market: The market value of US common equity rose by nearly 22% annually in November.
• Consumer Confidence: The University of Michigan's consumer confidence index is expected to rise slightly in November, supported by rising stock prices and tax cut expectations.
• Inflation Expectations: One-year inflation expectations fell in October, but long-term expectations remain low.

Key Information

US Economic Outlook

• Jobless Claims: Initial claims are expected to rise slightly to 230,000 in the week ending November 4, but remain near their lowest levels since the 1970s.
• Employment: Employment is forecast to increase by 313,000 in October, with the unemployment rate rising to 4.4%.
• Average Hourly Earnings: Expected to rise by 0.2% in October, though this is influenced by calendar effects and weather-related disruptions.
• Trade Deficit: The nominal trade deficit is forecast to widen to -$43.2 billion in September, driven by a larger goods deficit and modest export growth.

European Economic Outlook

• Industrial Production: The euro zone's industrial production is expected to rise by 1.1% q/q in the third quarter, with Germany and France leading the growth.
• Germany: Industrial production is expected to fall by 0.7% m/m in September, but the yearly rate should remain strong at 4.5%. The trade surplus is forecast to narrow to €21 billion.
• France: Industrial production is expected to rise by 0.9% m/m in September, pushing the yearly rate to 3.4%. The pharmaceuticals and machinery sectors are expected to see growth.
• Italy: Retail sales are expected to rise by 0.2% m/m in September, reversing August's drop. However, subdued wage growth could limit household spending.
• Spain: Industrial production is expected to rise by 0.8% m/m in September, with continued growth in equipment manufacturing and non-durable consumer goods. Political tensions in Catalonia pose a risk to medium-term growth.

Asia-Pacific Outlook

• Moody's Analytics/Asia-Pacific Team: Includes Katrina Ell and Veasna Kong, who provide analysis and forecasts for the region.
• Key Topics Covered: The report links to commentaries on credit, stocks, yields, debt, growth, and other market-related factors.

Upcoming Economic Releases

Conclusion

The report suggests a generally positive outlook for the equity market, supported by declining high-yield default rates and improved credit spreads. While the correlation between default rates and equity performance is strong, the market's response to rising default rates is less consistent. The upcoming economic data will provide further insight into the health of the US, European, and Asia-Pacific markets, with particular attention to employment, industrial production, and trade figures.