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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides an analysis of credit markets and economic trends across the US, UK/Europe, and Asia-Pacific regions. The report emphasizes the role of low interest rates in offsetting fiscal gridlock and highlights the outlook for corporate credit, default rates, and economic indicators.

Main Points

1. Credit Market Outlook

• Low Interest Rates Offset Fiscal Gridlock: Despite the lack of fiscal stimulus in the US due to political gridlock, low interest rates have helped maintain market stability.
• Default Rates: The US high-yield default rate has decreased from a seven-year high of 5.9% in January 2017 to 3.8% in June 2017. Moody's expects it to further decline to 3.3% in Q4-2017 and 3.0% in Q1-2018, though it will still exceed the 1.85% average from 2014-2015.
• Credit Spreads: Corporate bond yield spreads have narrowed due to reduced interest rate concerns. The long-term Baa industrial company bond yield spread has fallen from 168 bp to 151 bp, while the composite high-yield bond spread has dropped from 424 bp to 372 bp.
• Profits Growth: Sustained profits growth is key to suppressing default risk. As of early July, the Blue Chip consensus predicts 3.6% and 4.1% annual increases in pretax profits for 2017 and 2018, respectively.
• Historical Context: Moody's notes that significant profit contractions since 1982 have always been accompanied by rising default rates and wider credit spreads, even during economic recoveries.

2. Market Data

• Interest Rates: The 10-year Treasury yield has declined from a peak of 2.49% in December 2016 to 2.24% in early 2017. If business activity slows and inflation expectations remain low, yields could fall further.
• Equity Market Sentiment: Equity investors are less concerned about rising interest rates due to low yields, which supports the relative attractiveness of earnings-sensitive securities.
• VIX Index: The VIX has dropped to 10.0, indicating reduced market volatility, partly due to the stability in interest rates.

3. Economic Outlook for the Week Ahead

United States

• Jobless Claims: Expected to rise to 254,000 in the week ending July 15. Initial claims have weakened recently, but seasonal adjustments and auto retooling may cause volatility.
• Philadelphia Fed Manufacturing Survey: Expected to fall to 24.6 from 27.6 in June. The gap between new orders and inventories is narrowing, and the inventory build in Q2 may support GDP and manufacturing growth.
• Housing Data: Homebuilder confidence is expected to edge higher in July, with housing starts rebounding in June after a sharp decline in May.

Europe

• UK Inflation: Headline inflation is expected to remain at 2.9% in June, driven by higher import prices. Core inflation is also expected to remain strong.
• Euro Zone Inflation: Expected to decline slightly to 1.3% in June, mainly due to falling energy prices and fading base effects. Core inflation, however, is strengthening.
• ECB Policy: The ECB is expected to maintain its quantitative easing program until at least June 2018, with a potential reduction in bond purchases to €40 billion/month in September. The deposit rate is unlikely to rise into positive territory before Q2 2018.
• Spain Trade Deficit: Expected to improve to €0.9 billion in June, driven by strong exports and slowing imports. However, protectionist policies in the US and trade barriers with the UK could cloud the medium-term outlook.

Asia-Pacific

• Japan Inflation: Core CPI is expected to remain unchanged at 0.4% y/y in June. Inflation remains below the 2% target, and the Bank of Japan is unlikely to change its policy levers in 2017.
• Japan Trade Surplus: Expected to rise to ¥200 billion in June, driven by higher global demand and a weaker yen.
• Australia Unemployment: Expected to remain at 5.7% in June. Underemployment remains a problem, affecting wage growth and consumer spending.
• Australia Inflation: Headline CPI is expected to remain flat at 0.5% q/q in the June quarter. Inflation is weak due to low wage growth.
• South Korea GDP: Expected to grow at 0.6% q/q in the June quarter, weaker than the previous 1.1% gain. Exports and consumption are key factors, with consumption improving slightly due to increased consumer confidence.
• Taiwan GDP: Expected to grow at a modest pace, supported by strong manufacturing and export conditions. Domestic trade and industrial production are also expected to rise.
• Singapore Industrial Production: Expected to grow by 5.4% y/y in June, driven by increased global demand and strong electronics production.

Key Information

• Interest Rates: Low interest rates are a critical factor in maintaining market stability and suppressing default risk, even in the absence of fiscal stimulus.
• Economic Indicators: The report anticipates a mix of economic data, with some sectors showing signs of recovery and others facing headwinds.
• Default Risk: The outlook for default rates is improving, but remains above historical averages, suggesting caution is still warranted.
• Policy Outlook: Central banks in the US and Europe are expected to maintain accommodative policies for some time, with gradual tightening expected in the future.
• Market Sentiment: Equity investors are less fearful of interest rate hikes due to low yields and strong corporate earnings, which support the current market environment.