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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides insights into credit markets, economic indicators, and market trends across the US, Europe, and Asia-Pacific. The report highlights concerns about slowing business activity, the impact of weak sales on corporate performance, and the potential for a recession. It also forecasts key economic data points and evaluates credit spreads, bond issuance, and rating changes.

Main Points

US Market Outlook

• Credit Markets:

  • Core business sales growth in January is expected to be just 1.8%, the weakest since 2010, indicating a potential slowdown in non-energy sectors.
  • High yield bond spreads are widening, with the non-energy high yield spread at 693 bp, higher than the model-predicted 641 bp, suggesting market overreaction to credit risk.
  • High yield bond issuance is expected to decline by 21.5% to $278 billion in 2016, reflecting weak demand and tighter credit conditions.
  • The S&P 500's non-energy companies are struggling to achieve 3.5% revenue growth, which is necessary to avoid a more pronounced deterioration in business activity.

• Economic Indicators:

  • GDP is forecasted to grow 0.4% in Q4 2015, with potential for a rebound to 2% in the current quarter.
  • Personal income is expected to rise, with spending growing at 0.3% in January.
  • Consumer sentiment is forecasted to be at 91.0, confirming the lowest level in four months.
  • Vehicle sales are projected to reach 17.7 million in February, driven by strong consumer fundamentals.

• Labor Market:

  • Productivity fell due to a slowdown in output growth despite strong hiring.
  • Unemployment is expected to remain at 4.9%, with nonfarm payrolls adding 195,000 jobs in February.
  • Unit labor costs are forecasted to rise 4.8%, putting pressure on profit margins.

• Construction & Trade:

  • Construction spending is expected to increase 0.5% in January, reversing December's decline.
  • The trade deficit is forecasted to remain at -$43.5 billion, driven by falling oil prices and weak exports.

Europe Market Outlook

• EU & Euro Zone:

  • EU leaders are seeking a solution to the migration crisis, with plans to hold a summit with Turkey.
  • The euro zone's economic sentiment is expected to decline to 104.5 in February, reflecting ongoing challenges.
  • Inflation is projected to fall to 0.2% in February, with the ECB likely to ease monetary policy further.
  • Unemployment in the euro zone is forecasted to remain at 10.4%, though the jobless rate is expected to continue declining.

• Country-Specific Outlook:

  • Spain: Business confidence is expected to remain weak, and political instability could delay government formation.
  • France: Household consumption is forecasted to rise 0.6% m/m, but producer prices are expected to fall 2.8% y/y.
  • Germany: Bank lending is expected to rise 0.3% y/y, but business sentiment has declined.
  • Italy: Unemployment is forecasted to rise to 11.5%, driven by a cooling economy.
  • Russia: The reserve fund is expected to fall to RUB3.4 trillion by March, due to weak oil prices and fiscal constraints.

Key Information

• Credit Spreads:

  • Investment-grade spreads are expected to fall below 180 bp by year-end 2016.
  • High yield spreads are expected to approximate 750 bp by year-end 2016, with non-energy spreads at 693 bp.
  • The spread for non-energy high yield bonds is 151 bp wider than the composite spread, indicating increased credit risk.

• Bond Issuance:

  • US investment-grade bond issuance is expected to rise 5.4% to $1.398 trillion in 2016.
  • High yield bond issuance is expected to plunge by 21.5% to $278 billion in 2016, with a -36% year-over-year drop in the three-months-ended January 2016.

• Rating Changes:

  • High yield credit rating changes show a higher proportion of downgrades than upgrades, signaling increased risk.
  • The upgrade ratio for non-energy high yield bonds is at its lowest since the Great Recession.

Conclusion

The report emphasizes the need for stronger sales growth to sustain the current economic upturn, particularly in non-energy sectors. It highlights the weakness in business activity, slowing productivity, and rising credit spreads as key indicators of potential economic stress. Meanwhile, the European markets face political and economic uncertainties, including the migration crisis, populism, and slow growth, which could affect the region's recovery. The Federal Reserve and ECB are under pressure to maintain accommodative policies to support economic activity.