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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides a comprehensive analysis of credit markets, economic indicators, and the broader financial environment, focusing on the United States, Europe, and Asia-Pacific. The report highlights the impact of the aging business cycle on market performance, the dynamics of mergers and acquisitions (M&A), and the implications of changing economic and financial conditions on credit quality and bond spreads.

Main Views

1. Aging Business Cycle and Market Dynamics

• Speculative-grade bond yields have dropped significantly since February 11, reaching 8.88%, the lowest since December 31, 2015.
• The high-yield bond spread has narrowed from a six-and-a-half-year high of 899 bp to 749 bp, with the potential for further narrowing to 625–650 bp based on recent indicators.
• The unemployment rate has decreased, but it is not the best measure of labor market tightness due to the influence of labor force dropouts.
• The ratio of payrolls to the working-age population is a more accurate indicator, suggesting 2.65% annual wage growth, compared to 3.28% predicted by the unemployment rate.
• Faster wage growth may lead to recessionary pressures if not matched by productivity growth, as seen historically when unit labor costs exceeded corporate gross value added.

2. M&A Activity and Credit Quality

• Global M&A activity has remained strong despite financial market volatility and tight debt markets, with $721 billion in the first two months of 2016, a 33% increase.
• M&A-linked bond issuance has declined, with $138 billion in the six months ending February, down from $211 billion in the same period in 2015.
• Leveraged buyout (LBO) activity has been subdued, falling to $165 billion in the six months ending February from $213 billion in the previous period, indicating ongoing challenges for high-risk transactions.
• M&A activity may lead to credit rating downgrades, as 70% of M&A-linked rating changes for investment-grade borrowers were downgrades in 2015.

3. Market Outlook and Key Indicators

• US M&A linked corporate bond issuance is expected to remain elevated, accounting for 23% of total bond volume, up from the historical average of 11%.
• The base metals price index has been recovering since January 2016, rising 5.6% since year-end 2015, in contrast to the -6.4% decline in oil prices.
• Industrial metals show a stronger correlation with global economic growth than oil or US real GDP, making them a more reliable indicator of economic health.

Key Information

US Economic Outlook

• February Employment Report is expected to show 195,000 new nonfarm payrolls and a 4.9% unemployment rate, with a potential for wage and price inflation.
• Trade Balance for January is forecast at -€44.0 billion, with falling oil costs and weak exports likely keeping the deficit stable.
• Import Price Index for February is expected to decline 0.8%, continuing the trend of deflationary pressures.
• US M&A volume has surged, reaching $3.49 trillion in the year ending February, a 31% increase, despite a 2.4% drop in business sales last year.

European Economic Outlook

• Eurozone inflation fell to -0.2% in February, with core inflation also slowing to 0.7% from 1% in January, signaling persistent deflationary pressures.
• The European Central Bank (ECB) is expected to cut its deposit rate to -0.5% and expand its bond-buying program in response to the economic conditions.
• Italy's GDP growth in 2015Q4 was 0.1%, slower than the previous quarter's 0.2%, with domestic consumption being the main driver.
• Spain's industrial production increased 3.5% in January, while house prices rose 5.2% year-over-year, indicating a recovery in the real estate market.
• Germany's industrial production grew 0.5% in January, but business sentiment remained weak, with manufacturing PMI at a 15-month low.

Asia-Pacific Economic Outlook

• The report focuses on economic reports and forecasts, though specific details are not provided in the summary.

Summary of Key Metrics

Conclusion

The report underscores the aging business cycle limiting market rallies, the resilience of M&A activity, and the mixed signals from economic indicators. It also highlights the importance of labor market indicators beyond the unemployment rate and the role of industrial metals as a more reliable economic barometer than oil or US GDP. The ECB's potential stimulus measures and fiscal challenges in Europe further shape the outlook, with Spain and Italy showing signs of recovery but Germany and France still facing structural and external headwinds.