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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides an analysis of credit markets, economic indicators, and market expectations for the upcoming week. It highlights the performance of Treasury yields, credit spreads, corporate issuance, and the outlook for economic growth across the US, Europe, and Asia-Pacific regions.

Key Points

Treasury Yields and Fed Policy

• The 10-year Treasury yield has fallen below the consensus forecast for Q2 2017, averaging 2.29% compared to the predicted 2.6%.
• Despite the Fed's rate hike on March 14 (from 0.625% to 0.875%), the yield has moved in the opposite direction, indicating softer inflation expectations.
• The Fed is expected to raise rates in June, but this may depend on achieving an average of 140,000 new jobs per month in April and May.
• The VIX index dropped to 10.6 on April 27, signaling a calm market environment, which could lead to a narrowing of the high-yield bond spread.

Credit Markets Overview

• Investment Grade Credit Spreads: Expected to exceed 122 bp by year-end 2017.
• High Yield Credit Spreads: Projected to rise to 475 bp by year-end 2017, up from 385 bp.
• Corporate Issuance: US$-IG bond issuance in 2017 is forecast to rise to $1.449 trillion, while high-yield issuance is expected to increase by 16.6% to $397 billion, still below the 2014 peak of $435 billion.

Equity Market Valuation

• The market value of US common stock now approximates 226% of corporate gross value added, the highest since Q1-2000.
• This overvaluation suggests that equities may be vulnerable to a sharp correction if profits decline or inflation expectations rise.
• The current equity market is not necessarily overbought, as the 2000 ratio was higher due to significantly higher bond yields.

Economic Outlook

• The consensus expects the current economic expansion to last until 2022, with a projected 12-year upturn.
• This expectation is based on the historical pattern of interest rate declines following recessions, and the absence of such declines in the forecast suggests a prolonged expansion.
• The long-term outlook for corporate profits and gross value added is modest, with growth rates expected to be below 4% annually, which could limit the ability of Treasury yields to rise significantly.

Regional Forecasts

United States

• The first quarter GDP is expected to grow at 0.8% annually, but is likely to be weaker than anticipated due to residual seasonality, weather effects, and tax refund delays.
• Durable goods orders are forecast to rise 0.8% in March, but motor vehicle and parts orders are expected to be a drag.
• Consumer sentiment is expected to remain stable at 97.5, slightly below the preliminary estimate but still above March's 96.9.
• Jobless claims are forecast to rise to 245,000 for the week ending April 22, with the four-week moving average at 243,000.
• The Fed is likely to ignore the weak first-quarter GDP growth and focus on employment data and wage pressures.

Europe

• The Eurozone is expected to see a 0.6% quarterly GDP growth in Q1 2017, up from 0.4% in the previous quarter.
• France's GDP growth is expected to be 0.3% q/q, with net exports and consumer spending as key factors.
• Germany's retail sales are expected to decline 0.5% m/m in March, though manufacturing and construction are showing signs of improvement.
• Italy's unemployment rate is expected to fall further in March, but labor market rigidity and productivity stagnation may limit the pace of improvement.
• Eurozone inflation is forecast to rise to 1.6% in April, with core inflation remaining low, especially in southern European countries.

Asia-Pacific

• While no major economic releases are mentioned, the Asia-Pacific region is included in the broader market outlook, suggesting a focus on global economic trends and interest rate expectations.

Additional Highlights

• Moody's Analytics is responsible for distributing all Moody's Capital Markets Research materials.
• The consensus views the current economic expansion as exceptionally long, potentially lasting until 2022.
• The market value of equities is currently overvalued relative to corporate revenues, but the long-term outlook for profits is positive, suggesting potential for continued growth.
• Moody's Credit Outlook is referenced as a complementary publication, offering further insights into ratings and market analysis.

Conclusion

The report emphasizes the contradiction between Treasury yield expectations and actual market behavior, the overvaluation of equities, and the prolonged nature of the current economic expansion. It also outlines the regional economic performance and the impact of geopolitical and seasonal factors on growth and inflation. The Fed's policy stance and monetary conditions are critical in shaping the outlook for both bond and equity markets.