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Moody's Weekly Market Outlook Summary

Core Content

This document provides an analysis of the U.S., Europe, and Asia-Pacific credit markets, focusing on economic growth, debt-to-GDP ratios, interest rates, and upcoming economic data releases. It also includes insights on monetary policy decisions, credit market trends, and key indicators that may influence market behavior.

Main Views

U.S. Credit Markets

• Debt-to-GDP Ratio: The U.S. private and public nonfinancial-sector debt-to-GDP ratio has increased significantly, from 131% in 1968 to 253% in 2017.
• Economic Growth: The 10-year average annualized real GDP growth has slowed, from 4.9% in the 1968-2017 span to 1.4% in the 2017-2027 span.
• Credit Spreads: Investment grade bond spreads are expected to exceed 127 bp by year-end 2018, while high-yield spreads may reach 425 bp.
• Defaults: The U.S. high-yield default rate is forecast to drop from 3.7% in April 2018 to 1.5% by April 2019.
• Bond Issuance: U.S. corporate bond issuance is expected to decline in 2018, with investment grade issuance dropping by 7.0% and high-yield issuance by 10.4%.
• Monetary Policy: The Fed is expected to raise interest rates in June, with a higher bar for not moving again in September. The Fed may cut its long-run unemployment estimate and adjust forward guidance.
• GDP Forecast: Second quarter GDP growth is forecast at 4% annualized, up from 3.7%. First quarter growth is expected to be revised down to 2.1%.
• Treasury Yields: The 10-year Treasury yield is projected to rise to 3.69% by 2027, but the Blue Chip consensus forecasts a plateau through 2024. A recession before 2029 could temporarily push yields below 2%.

Europe

• ECB Policy: The ECB is likely to delay announcing the end of its asset purchase programme until July, with a gradual taper to zero by the fourth quarter. The first rate hike is expected in summer 2019.
• Inflation: Euro zone inflation is expected to rise to 1.9% in May, driven by energy and services inflation. Core inflation remains below the ECB target of 2%.
• Economic Growth: Euro zone growth is expected to slow to 2% in 2018 from 2.5% in 2017. Weakness in services and industrial production is noted.
• Key Indicators:
  • Industrial Production: Euro zone industrial production is expected to rise slightly.
  • Unemployment: U.K. unemployment is expected to remain stable at 4.2%.
  • Retail Sales: U.K. retail sales are forecast to grow by 1.0%.
  • Consumer Price Index (CPI): Euro zone CPI is expected to rise to 1.9% in May, while U.K. CPI is expected to be 2.4%.
  • Monetary Policy: The ECB will announce its policy stance in June, which may signal the end of quantitative easing.

Asia-Pacific

• China:
  • Trade Data: China's trade surplus is expected to widen in May, with exports and imports continuing an improving trend.
  • Monetary Aggregates: M2 growth is forecast to rise to 8.5% in May, up from 8.3% in April.
  • Inflation: Consumer price inflation is expected to rise slightly to 1.7% in May, while producer price inflation is projected to increase to 3.8%.
  • Industrial Production: China's industrial production is expected to rise to 7.1% in May, following a five-month low in April.
  • Fixed Asset Investment: Fixed asset investment is expected to grow at 6.8% in May, driven by government-led infrastructure spending.
  • Credit Growth: Credit growth continues to decelerate as part of government efforts to control financial risks.
• India:
  • Inflation: Consumer price inflation is expected to rise to 4.8% in May, following a four-month high of 4.6% in April.
  • Monetary Policy: The Reserve Bank of India increased the repo rate to 6.25% in June to combat capital outflows and anchor inflation expectations.
  • Industrial Production: Industrial production is expected to improve to 6.6% in April, up from 4.4% in March.
  • Trade Deficit: India's trade deficit is expected to widen in May due to high oil prices and a weak rupee.
• Japan:
  • GDP: Preliminary GDP for the March quarter was disappointing, with a 0.2% decline.
  • Machinery Orders: Core machinery orders are expected to rise by 1% in April, following a 3.9% decline in March.
  • Industrial Production: Industrial production is expected to rise to 6.6% in April, following a five-month low.
  • Monetary Policy: Japan's monetary policy meeting in June is expected to maintain the status quo, with no significant changes anticipated.

Key Information

• Debt-to-GDP Ratio and Growth: The U.S. debt-to-GDP ratio has increased significantly over the past decades, yet economic growth has not kept pace, indicating a potential mismatch.
• Interest Rates and Inflation: The relationship between interest rates and debt-to-GDP ratios is complex, with inflation expectations playing a key role in shaping yields.
• Credit Market Trends: High-yield spreads are expected to widen, while investment grade spreads may also rise due to economic uncertainty.
• Upcoming Data Releases:
  • U.S.: Forecasts for GDP, employment, and inflation will be released.
  • Europe: ECB monetary policy decision, CPI, and industrial production data will be key.
  • Asia-Pacific: China's monetary aggregates, CPI, and trade data; India's CPI and trade deficit; Japan's GDP and machinery orders are expected to be released.

Summary Table of Key Indicators