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Moody's Analytics Weekly Market Outlook Summary

Core Content

Moody's Analytics Weekly Market Outlook highlights the current state of credit markets and economic indicators across the U.S., Europe, and Asia-Pacific. The report emphasizes the widening gap between internal funds and corporate debt growth in the U.S., which has contributed to a decline in corporate bond yield spreads and a forecasted drop in high-yield default rates. It also discusses the potential for the Federal Reserve to adopt a more aggressive monetary policy stance due to stronger economic data and fiscal stimulus, while the Eurozone and Asia-Pacific regions are analyzed for their inflation trends and industrial activity.

Main Points

U.S. Credit Market Trends

• Internal Funds vs. Corporate Debt: In 2017, internal funds for U.S. nonfinancial corporations grew by 9.0%, outpacing the 5.9% growth in corporate debt. This was the widest margin since 2011.
• Debt-to-Internal Funds Ratio: The ratio fell from 515% in Q2-2017 to 496% in Q4-2017, indicating improved corporate leverage.
• Default Rates: The U.S. high-yield default rate is expected to decline from 3.2% in January 2018 to 2.0% by January 2019.
• Bond Issuance: Corporate bond issuance for 2018 is forecasted to decrease by 2.7% for investment-grade and 4.2% for high-yield compared to 2017.
• Market Response to Tariffs: Despite the imposition of tariffs on steel and aluminum, the U.S. equity market has recovered, with corporate bonds remaining largely unaffected.
• VIX and Credit Spreads: The VIX index has a strong inverse correlation with high-yield bond spreads. In March 2018, the high-yield spread was below its median, suggesting a more optimistic outlook for corporate credit.

Economic Indicators and Outlook

The Week Ahead – U.S.

• Key Data: February consumer prices, retail sales, industrial production, and housing starts are expected to be released.
• Fed Policy: The Federal Reserve is likely to shift toward more aggressive rate hikes due to lower unemployment and rising inflation expectations. The unemployment rate is expected to trend lower, and inflation could approach the 2% target.
• Fiscal Stimulus: The recently passed federal budget is expected to add 0.4 percentage points to GDP growth, potentially influencing the Fed's rate hike decisions.

Europe

• Eurozone CPI: The report forecasts an upward revision in the eurozone's CPI for February, with the core rate expected to rise due to stronger services and non-energy goods inflation.
• Industrial Production: January industrial production is expected to be weak due to lower energy demand from milder temperatures, but construction activity may have increased.
• UK Fiscal Policy: The Spring Statement by Philip Hammond is expected to maintain the current fiscal stance, with the OBR likely to revise its borrowing forecasts downward.

Asia-Pacific

• China: Consumer price inflation is expected to rise to 2.5% in February, while producer price inflation is forecasted to slow to 3.9%. Credit growth in China is slowing due to government efforts to reduce financial risks.
• India: Consumer price inflation is expected to remain stable at 5.1% in February, with industrial production likely to decelerate slightly due to base effects. A good monsoon season could help cool inflation.
• Japan: The Bank of Japan is expected to maintain its monetary policy, with no significant changes in interest rates or asset purchases. The central bank may shift toward tightening policy in the future.

Key Information

• Credit Market Metrics:
  • Investment-grade bond spreads are expected to remain around 100 bp.
  • High-yield bond spreads may reach 425 bp by year-end 2018.
• Economic Growth:
  • U.S. GDP growth is expected to be around 3% in 2018, supported by fiscal stimulus.
  • Eurozone inflation is forecasted to average 1.7% in 2018, above the ECB's 1.4% forecast.
• Market Sentiment:
  • The corporate bond market has not shown significant fear over the recent tariff-related volatility.
  • Payrolls growth is inversely correlated with high-yield spreads, suggesting a positive impact on corporate credit conditions.
• Monetary Policy:
  • The Fed is under pressure to raise rates more aggressively, while the BoJ may shift toward tightening.
  • The ECB is expected to maintain its accommodative stance, with inflation risks tilted upward.

Summary of Figures

• Figure 1: Highlights the widening gap between internal funds and corporate debt growth in 2017.
• Figure 2: Shows the declining ratio of debt to internal funds and its correlation with default rates.
• Figure 3: Illustrates the inverse relationship between payrolls growth and high-yield spreads.

Conclusion

The report suggests a cautiously optimistic outlook for credit markets, driven by improving corporate fundamentals and a shift in monetary policy expectations. While protectionist measures remain a concern, the market has shown resilience, and the U.S. corporate bond market is expected to continue its recovery. In Europe and Asia, inflation trends and economic indicators point to a gradual improvement, with the BoJ and ECB likely to maintain accommodative policies for now.