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Moody's Weekly Market Outlook Summary

Core Content

This document provides a detailed analysis of the current state and outlook for credit markets, focusing on the U.S., Europe, and Asia-Pacific regions. It highlights the benign but blemished credit outlook, emphasizing the relationship between credit rating changes, default rates, and economic indicators.

Main Points

• Credit Outlook: Moody's Analytics forecasts a benign credit outlook, but it acknowledges the presence of downside risks, particularly in the high-yield market.
• Default Rates: The U.S. high-yield default rate is expected to rise to 2.4% in Q3-2018, up from 3.4% in November 2017, due to increased leverage and a slight upward revision in corporate earnings.
• Credit Spreads: Investment-grade credit spreads are projected to exceed 104 bp by year-end 2018, while high-yield spreads may approach 425 bp, indicating potential stress in the high-yield market.
• Rating Changes: Net high-yield downgrades have shown a strong correlation with default rates, and recent increases in downgrades suggest a higher risk of defaults.
• Tax Reform Impact: The recent tax reform has a more significant negative impact on Caa-rated issuers, as the loss of full interest expense deductibility affects a large portion of high-yield companies.
• Economic Outlook: The U.S. economy is expected to grow at 2.9% in 2018 and 2.5% in 2019 due to the tax cuts, though this may lead to higher long-term interest rates and potential inflationary pressures.
• Europe: Russia's economy is fragile, with growth slowing and inflation dropping. Germany is expected to maintain a strong labor market, with a potential record low unemployment rate. The Euro Zone is anticipated to see a slight cooling in inflation but will remain in recovery.
• Asia-Pacific: Japan's CPI is expected to remain stable, while South Korea and China show continued strength in manufacturing and exports. Australia is benefiting from a liquefied natural gas (LNG) construction boom.

Key Information

• U.S. Corporate Bond Issuance:
  • 2016: $1.412 trillion (IG) and $341 billion (HY).
  • 2017: Expected to reach $1.508 trillion (IG) and $452 billion (HY), surpassing 2014's HY record.
• Default Rate Correlations:
  • Net high-yield downgrades to Caa3 or lower show a high correlation (0.92) with the high-yield default rate.
  • The default rate for Q3-2018 is projected to be 2.4%, up from 3.3% in Q4-2017.
• High-Yield Bond Spread:
  • The high-yield bond spread is expected to rise, with a midpoint of 419 bp, suggesting more upgrades than downgrades.
  • The spread for Caa-rated bonds narrowed by 7 bp over three months, indicating market optimism.
• Tax Reform Impact:
  • The tax cuts will reduce growth in the early 2020s and increase the government's debt load.
  • The loss of full deductibility of interest expense affects about 26% of U.S. high-yield issuers, with the impact increasing for lower-rated companies.
• Economic Data Preview:
  • U.S.: Consumer Confidence, Pending Home Sales, Jobless Claims.
  • Europe: Russia GDP, Spain Retail Sales, France GDP, Germany Unemployment, Euro Zone CPI.
  • Asia-Pacific: Japan CPI, South Korea Foreign Trade, China PMI, Australia Trade Surplus.

Summary Table

Conclusion

Moody's Analytics outlines a cautiously optimistic credit market outlook, but with notable risks. The U.S. market is expected to see a slight rise in default rates, while Europe and Asia-Pacific show mixed signals, with some regions performing well and others facing structural and geopolitical challenges. The interplay between credit spreads, rating changes, and economic data remains critical in shaping market sentiment and expectations.