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Moody's Weekly Market Outlook Summary

Core Content

This report from Moody's Analytics provides a comprehensive review and outlook for credit markets, focusing on the relationship between corporate debt and profits, the performance of the U.S. economy, and the outlook for Europe and Asia-Pacific. It highlights key credit market metrics, default rates, bond issuance trends, and macroeconomic indicators such as GDP, inflation, and employment.

Main Points

1. Debt-to-Profits vs. Debt-to-GDP

• Debt-to-Profits Outperforms Debt-to-GDP: The ratio of nonfinancial-corporate debt-to-operating profits is a more meaningful indicator of corporate credit quality than debt-to-GDP.
• Historical Correlation: The high-yield default rate has a strong correlation (0.82) with the moving yearlong ratio of nonfinancial-corporate debt-to-operating profits, compared to a weaker correlation (0.52) with debt-to-GDP.
• 2017 Performance: In 2017, nonfinancial-corporate profits grew by 7.7% annually, while corporate debt grew by 6.6%, indicating improved credit quality.
• 2018 Outlook: The U.S. high-yield default rate is expected to decline from 3.6% in February 2018 to 2.4% in Q4-2018, supported by continued profit growth relative to debt.
• Debt-to-Profits Ratio: The ratio of nonfinancial-corporate debt-to-pretax operating profits dropped to 697% in Q4-2017, far below the 1,245% peak in Q4-2001 and 990% in Q2-1991.

2. Corporate Bond Issuance

• 2017 Issuance: U.S. investment-grade (IG) bond issuance reached a record $1.508 trillion, while high-yield (HY) issuance hit $453 billion.
• 2018 Projection: IG issuance is expected to fall by 4.8% to $1.435 trillion, and HY issuance is likely to decrease by 5.1% to $431 billion.
• Bank Loan Programs: High-yield issuers' newly rated bank loan programs saw a 28% annual decline in Q1-2018, following a 37% increase in 2017.

3. U.S. Economy Outlook

• Q4-2017 GDP Growth: Revised to 2.9% from 2.5%, driven by strong consumer spending and services.
• Q1-2018 GDP Growth: Expected to be around 2%, below the second-half 2017 growth of 2.9%, due to residual seasonality.
• Real GDP and Corporate Credit: Real GDP growth is less relevant to corporate credit unless economic activity contracts outright.
• Employee Compensation: Growth in employee compensation has been modest, averaging 3.4% annually, which has helped contain costs and support profit growth.

4. Europe Outlook

• Euro Zone Inflation: Expected to rebound to 1.3% in March, following a dip to 1.1% in February, mainly due to higher food inflation.
• Core Inflation: Projected to rise to 1.5% by year-end, still below the ECB's target of 2%.
• ECB Policy: The ECB may gradually taper quantitative easing by the end of 2018, but risks of faster tightening are present.
• Key Indicators: Preliminary CPI, retail sales, industrial production, and unemployment data will be released in the coming week.

5. Asia-Pacific Outlook

• Japan: The Tankan survey is expected to show a decline in business sentiment to 23 in Q1-2018 from 25 in the previous quarter, due to supply chain disruptions from the Lunar New Year.
• South Korea: Retail sales are projected to grow 2.1% m/m in February, aided by the Winter Olympics and minimum wage increases, but consumer sentiment remains weak.
• Australia: The cash rate is expected to remain at 1.5% in April, with core inflation below target and no immediate need for rate hikes.
• Key Indicators: Trade data, retail sales, and industrial production figures will be released in the coming week.

Key Information

• Moody's Contributors: John Lonski (U.S.), Ryan Sweet (U.S.), Kathryn Asher and Michael Ferlez (U.S.), Barbara Teixeira Arajuo (Europe), Katrina Ell (Asia-Pacific).
• Default Rates: U.S. HY default rate is forecasted to drop from 3.6% in February 2018 to 2.4% in Q4-2018.
• Interest Rates: The wide TED spread (85 bp) and LIBOR spread (68 bp above fed funds) suggest tighter credit conditions and may influence monetary policy decisions.
• Seasonality: Residual seasonality is expected to impact Q1-2018 GDP and employment data, with adjustments likely to be made in the coming weeks.
• Market Data: Includes credit spreads, CDS movers, and bond issuance trends.

Summary Table of Key Indicators

Conclusion

The report emphasizes that corporate credit quality is more closely tied to the growth of operating profits relative to debt than to GDP. It also highlights the importance of monitoring key economic indicators and the potential impact of seasonality on GDP and employment data. In Europe, inflation is expected to rebound, while in Asia-Pacific, Japan and South Korea face mixed economic signals, with supply chain disruptions and geopolitical tensions affecting performance. Overall, the report suggests that the U.S. corporate credit environment is improving, and the ECB may gradually adjust its monetary policy in response to rising inflation.