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Moody's Weekly Market Outlook Summary

Core Content

This document provides an overview of the current state and future outlook for credit markets, focusing on the U.S., Europe, and Asia-Pacific regions. It includes analysis of credit cycles, market data, rating changes, and economic indicators that could influence credit conditions and market behavior.

Main Points

Credit Cycle Trends

• The U.S. credit cycle has stabilized after a period of stress, with a significant reduction in credit rating downgrades relative to upgrades.
• In Q1-2017, the high-yield default rate eased from 4.7% in March 2017 to a projected average of 3.1% in the final quarter of 2017.
• Credit spreads have narrowed, with the high-yield spread at 412 bp, down from 839 bp in February 2016.
• The high-yield spread is seen as a signal of market expectations for more upgrades than downgrades in Q2-2017.

Credit Rating Revisions

• In Q1-2017, there were 89 upgrades and 83 downgrades for high-yield ratings, but when limited to fundamental drivers, the number of downgrades (59) surpassed upgrades (54).
• For investment-grade ratings, there were 11 upgrades and 8 downgrades, with M&A activity contributing to many of the downgrades.
• The oil & gas industry no longer skews the number of downgrades, as it experienced a balanced number of upgrades and downgrades.

Market Expectations

• The market expects profits to outpace corporate debt growth, similar to the 1987-1988 period.
• This expectation is linked to the narrowing of high-yield spreads and the improved fundamentals in some sectors.
• However, the mid-1980s experience suggests that such a reprieve may not last, especially if interest rates rise or economic momentum weakens.

Key Economic Indicators

U.S. Outlook

• Jobless Claims: Expected to rise to 255,000 in the week ending April 8, with a trend between 250,000 and 260,000.
• University of Michigan Survey: Consumer confidence is expected to drop slightly to 95.4 in April, down from 95.9 in the implied second half of March.
• Consumer Price Index (CPI): Forecast to fall by -0.1% (headline) and rise by 0.2% (core) in March, with core CPI expected to be up 2.3% year-over-year.
• Retail Sales: Projected to decline by -0.3% in total and -0.1% excluding autos, with continued pressure from inflation and weak consumer sentiment.

Europe Outlook

• U.K. Retail Sales: Expected to mean-revert to a slower growth rate, with nonfood sales being the main drag and food sales remaining weak.
• Euro Zone CPI: Annual harmonized inflation slowed to 1.5% in March, with core inflation easing to 0.7%.
• Germany CPI: Rose by 1.6% y/y in March, with energy and food prices easing slightly.
• France CPI: Likely rose by 1.1% y/y in March, with core inflation remaining positive.
• Spain Trade Deficit: Expected to widen to €2.4 billion in February, driven by rising oil prices and energy dependence.

Asia-Pacific Outlook

• China Economic Outlook: The economy is on a stronger footing in 2017, with upbeat GDP growth and improved consumer and business confidence.
• China Trade: Expected to return to surplus in March, with export growth supported by rising U.S. demand and import growth due to higher global commodity prices.
• Japan Exports: Likely to rise in March, driven by the global tech cycle and yen depreciation, with continued support from new vehicle models.

Summary of Key Metrics

Conclusion

The U.S. credit cycle is currently enjoying a respite, with signs of stabilization in credit spreads and a reduction in default rates. However, the market's expectation of a profits recovery over debt growth is tempered by historical precedents, suggesting that the current improvement may not be long-lasting. In Europe, retail sales and inflation data indicate a slowdown in consumer activity, while in Asia-Pacific, China and Japan show signs of economic resilience and improved trade conditions. Overall, the outlook remains cautious, with potential risks from rising interest rates, political uncertainty, and global trade tensions.