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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides a detailed analysis of current and future trends in credit markets, focusing on the U.S., Europe, and Asia-Pacific regions. The report highlights the uncertainty surrounding U.S. interest rate movements, the impact of economic data on market sentiment, and the outlook for corporate bond issuance and credit spreads.

Main Views

• U.S. Interest Rate Outlook: The U.S. interest rate outlook is uncertain in the short term, but long-term expectations suggest a more muted economic environment. Despite recent optimism and rising short-term rates, long-term inflation risks are limited, and the Fed is expected to proceed cautiously with rate hikes.

• Economic Optimism: There is a notable increase in business and consumer confidence following the U.S. election, though this optimism is not fully supported by long-term inflation expectations. The Fed is likely to remain cautious in its tightening stance due to the lack of sustained inflationary pressures.

• Credit Markets: Credit spreads have narrowed, with investment-grade spreads at 121 bp and high-yield spreads at 381 bp. However, the outlook for high-yield defaults is concerning, with a projected rate of 3.7% in the fourth quarter of 2017. Corporate bond issuance is expected to increase slightly for investment-grade bonds and more significantly for high-yield bonds in 2017.

• Inflation Expectations: Consumer inflation expectations are split between near-term price increases and long-term disinflationary trends. Short-term expectations have risen, but long-term expectations remain low, indicating a subdued outlook for future inflation.

• Federal Reserve Policy: The Fed is under pressure to raise rates due to rising inflation, but its long-term rate outlook has shifted downward. The FOMC's projected long-term neutral rate has decreased, reflecting concerns about economic potential and productivity.

Key Information

U.S. Market Highlights

• Interest Rates: The 10-year Treasury yield rose to a three-week high of 2.51%, while the yield curve suggests limited long-term inflation risk.
• Credit Spreads: Investment-grade spreads are near their two-year average, and high-yield spreads are expected to rise to 440 bp by year-end 2017.
• Bond Issuance: U.S. investment-grade bond issuance is projected to rise by 0.6% in 2017, while high-yield issuance is expected to grow by 6.9% to $364 billion.
• Defaults: The U.S. high-yield default rate is expected to decline from 5.8% in January 2017 to 3.7% in the fourth quarter of 2017.

Europe Market Highlights

• Germany: Fourth-quarter GDP is expected to grow by 0.5% q/q, though there are downside risks due to weak industrial production and trade data.
• Italy: GDP growth is expected to slow to 0.2% q/q from 0.3% in the third quarter, with continued positive contributions from machinery investment.
• U.K.: Retail sales are expected to decline, with a yearly growth rate of 2.3%, reflecting weak consumer spending and the impact of higher petrol prices.

Asia-Pacific Market Highlights

• Japan: The weak yen is supporting exports, but the trade surplus is unlikely to widen significantly due to rising import costs.
• Hong Kong: GDP growth is expected to be 0.3% for the fourth quarter of 2016, with a rebound in exports and a strong housing market.
• Thailand: GDP growth is expected to slow to 2.9% for the fourth quarter of 2016, with the king's death impacting consumer spending.
• South Korea: The Bank of Korea is expected to keep interest rates at 1.25%, with inflation pressures building and export growth improving.
• Singapore: Industrial production is expected to grow by 15% y/y in January 2017, though growth is expected to moderate from December's 21.3%.

Other Highlights

• Market Data: The report includes key market data such as credit spreads, CDS movers, and issuance trends.
• Regulatory Impact: Regulatory changes may affect market liquidity and corporate bond yield spreads.
• Consumer Sentiment: The University of Michigan Consumer Sentiment Index is expected to remain stable, with long-term inflation expectations at 2.5%.
• FOMC Minutes: The upcoming FOMC meeting minutes will provide insights into the Fed's policy outlook, with expectations of three rate hikes in 2017.

Conclusion

Moody's Weekly Market Outlook suggests a cautiously optimistic outlook for credit markets, with limited long-term inflation risks and a potential for moderate interest rate increases. The report emphasizes the importance of monitoring economic indicators, policy changes, and market sentiment as key drivers of future market movements.