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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides an analysis of current and upcoming economic data and market trends in the US, Europe, and Asia-Pacific. The report highlights the continued impact of low bond yields, the performance of credit markets, and the implications of corporate borrowing behavior, M&A activity, and economic indicators such as GDP, industrial production, and consumer sentiment.

Main Views

Low Bond Yields and Credit Market Trends

• Credit Spreads:
  • Investment-grade bond spreads are expected to exceed 119 bp by year-end 2017.
  • High-yield bond spreads may approach 425 bp by year-end 2017, despite a recent narrowing from 403 bp to 381 bp.
• Defaults:
  • The US HY default rate is forecasted to average 2.7% for the three-months-ended May 2018, down from May 2017's 3.9%.
• Issuance:
  • US$-denominated investment-grade bond issuance is projected to rise by 2.8% to $1.451 trillion in 2017.
  • High-yield bond issuance is expected to increase by 17.3% to $400 billion, though this is lower than the 2014 peak of $435 billion.
• Corporate Debt:
  • The slowdown in C&I loan growth from 10.4% in May 2016 to 2.0% in May 2017 indicates a deceleration in corporate debt growth.
  • Nonfinancial corporate debt is expected to grow at a slower pace in 2017, with a projected annual increase of about 4.5% in Q2.
• Maturities and Credit Quality:
  • The lengthening of debt maturities is beneficial for credit quality and financial flexibility.
  • The "quick ratio" (liquid assets to short-term liabilities) has increased from 40% (five-years-ended 2007) to 47% (Q1-2017), reflecting improved liquidity.

M&A Activity and Economic Cycle

• M&A Surge:
  • M&A activity has outpaced organic revenue growth, indicating an aging upturn.
  • This trend is a typical late-cycle phenomenon, which may signal a waning economic momentum.
• Economic Indicators:
  • Weak organic revenue growth and low corporate GVA growth are contributing to the surge in M&A.
  • The first-quarter of 2017 saw weak GVA growth, with total corporate GVA up only 3.0% y/y and nonfinancial corporate GVA up 2.2% y/y, both below previous growth rates.

Key Information

Upcoming Economic Data

The US

• Jobless Claims (June 22): Forecast at 240,000, with potential volatility due to auto retooling and school-year timing.
• New-Home Sales (June 23): Expected to rise to 588,000 annualized units, following a weak April performance.
• Debt Ceiling: Concerns remain that the Treasury may run out of cash in early October without an increase in the debt limit.

Europe

• France GDP (June 23): Expected to grow by 0.4% q/q in Q1, driven by strong investment and improved manufacturing and service sectors.
• Flash PMI: Expected to show further growth in manufacturing and services for France, Germany, and the euro zone.

Asia-Pacific

• Japan's Economic Momentum: Continued growth, with retail sales expected to rise by 2.8% in May due to low base effects and higher fuel prices.
• New Zealand's Trade Balance: Expected to remain in surplus, supported by strong dairy exports and robust domestic demand.
• Singapore Industrial Production: Projected to grow by 8% in May, up from 6.7% in April, driven by electronics demand.
• Taiwan Industrial Production: Expected to rise by 3.7% in May, following a 0.6% drop in April, with global tech demand peaking.
• Thailand Industrial Production: Projected to grow by 1.2% in May, up from a 1.7% decline in April, supported by global electronics demand and improved food production.
• South Korea Consumer Sentiment: Expected to cool slightly in June to 105, following a surge in May due to political changes.
• South Korea Industrial Production: Projected to rise by 4.2% in May, up from 1.7% in April, with tech demand recovering.
• South Korea Retail Sales: Expected to grow only 0.1% m/m in May, reflecting weak domestic demand and high household debt.

Market Dynamics

• VIX Index: Atypically low VIX levels have contributed to narrow high-yield spreads despite rising default risk.
• Interest Rates: Expectations of higher interest rates are driving companies to refinance short-term debt with long-term bonds.
• Inflation:
  • US PCE inflation is expected to slow from 1.7% in April to below the Fed's 2% target.
  • Japan's core inflation remains at 0.3% in May, below the central bank's 2% target.

Conclusion

The report suggests that while credit markets remain resilient due to low bond yields and ample liquidity, the economic growth is showing signs of slowing, particularly in the US and Europe. M&A activity is outpacing organic revenue growth, indicating a possible waning of the upturn. Upcoming economic data will provide further insight into the health of the labor market, housing, and manufacturing sectors, with particular attention to the impact of seasonal adjustments and global demand trends.