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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides a detailed analysis of credit market trends and economic forecasts for the US, Europe, and Asia-Pacific regions. The report highlights the relationship between the VIX index and the high-yield default rate, as well as the impact of economic indicators on market sentiment and corporate bond spreads.

Main Views

• Default Rate Trends: The high-yield default rate is expected to decline from its recent level of 5.5% in July 2016, with the VIX index indicating a potential midpoint of 2.9% for the next three months. However, the high-yield bond spread suggests a higher default rate, indicating a potential conflict between market indicators.

• Market Volatility and Credit Spreads: The VIX index, which measures equity market volatility, has shown a strong historical correlation (0.96) with the high-yield bond spread since 2003. The current VIX level of 12.1 suggests a lower default rate, while the high-yield bond spread of 519 bp implies higher volatility and risk.

• Economic Indicators and Outlook:

  • US: The ISM indices indicate a slowdown in August, with manufacturing and service-sector activity weakening. The high-yield bond spread is predicted to rise to 736 bp based on these indicators, which is significantly higher than the recent 519 bp.
  • Europe: The European Central Bank is expected to maintain its monetary policy stance, with no significant rate cuts or expansion of quantitative easing. The UK's exit from the EU continues to create uncertainty, affecting economic data and market sentiment.
  • Asia-Pacific: China's economic data show signs of continued overcapacity and slowing growth, while India faces challenges with weak external demand and supply issues. The Philippines and Malaysia are expected to see moderate industrial production growth, but with risks from external conditions and domestic issues.

Key Information

Credit Spreads

• Investment Grade: The year-end 2016 spread is expected to remain close to its recent level of 141 bp.
• High Yield: The high-yield bond spread is projected to approximate 600 bp by year-end 2016, though it has recently narrowed to 519 bp.

Default Rate

• US High Yield: The default rate is forecasted to rise to 6.3% by Q4 2016, but the VIX index suggests a decline to 2.9% in the next three months.

Issuance Trends

• US Investment Grade: Issuance is expected to increase by 6.1% to a record $1.407 trillion.
• US High Yield: Issuance is projected to fall by -12.7% to $309 billion.

Economic Forecasts

The US

• Import Price Index (August): Forecasted to decline by 0.2%.
• Retail Sales (August): Overall growth is expected to be 0.0%, with ex-auto sales up 0.3%.
• Producer Price Index (August): Projected to rise by 0.1% overall and 0.1% core.
• Industrial Production & Capacity Utilization (August): Industrial production is expected to decline by 0.2%, while capacity utilization is at 75.7%.
• Consumer Price Index (August): Overall growth is forecasted at 0.1%, with core CPI at 0.2%.
• University of Michigan Consumer Sentiment (September Preliminary): Expected to rise to 91.0, improving from August's low.

Europe

• Euro Zone Monetary Policy (September): The ECB is likely to keep rates unchanged and may extend the deadline for quantitative easing.
• France Industrial Production (July): Expected to decline by 0.1% y/y, with weak external demand and export order declines.
• Spain Industrial Production (July): Projected to rise by 0.2% y/y, but with weak new orders and declining confidence.

Asia-Pacific

• China August Data:
  • Industrial Production: Growth is expected to be 5.9%, with overcapacity in key sectors.
  • Fixed Asset Investment: Projected to rise by 8%, but deceleration is expected due to overcapacity.
  • Consumer Price Index: Forecasted to rise by 1.5% y/y, with food inflation still a concern.
  • Producer Price Index: Expected to decline by 1.3% due to falling commodity prices.
  • Monetary Aggregates: Growth is forecasted at 10.4%, with the government restricting lending.
• India August Data:
  • Wholesale Price Index: Expected to rise by 3.3%, driven by food inflation.
  • Foreign Trade Deficit: Likely to be $7.1 billion, due to weak exports and low commodity prices.
  • Consumer Price Index: Forecasted to rise by 6.2% y/y, with food inflation remaining a key concern.
  • Industrial Production: Projected to increase by 1.6% y/y, but with excess capacity and weak external demand.
• Philippines Industrial Production (July): Expected to rise by 8% y/y, supported by strong domestic demand.
• Malaysia Industrial Production (July): Likely to slow to 3% y/y, with weak external conditions and domestic scandals affecting demand.
• South Korea Employment (August): Unemployment rate is forecasted to remain at 3.6%, with subdued employment growth.
• Japan Machinery Orders (July): Expected to rise by 3.8% m/m, but the overall trend is downward.
• Japan Industry Activity Indexes (July): Likely to decline by 0.4% m/m, with weak domestic demand and tepid wage growth.

Summary of Key Charts and Figures

• Figure 1: Shows the strong correlation (0.91) between the VIX index and the high-yield default rate since 2003.
• Figure 2: Highlights the very strong correlation (0.96) between the VIX index and the high-yield bond spread since 2003.
• Figure 3: Indicates that the high-yield spread's yearlong average predicts a default rate of 5%, below July's 5.5%.

Conclusion

The report underscores the complex interplay between market indicators like the VIX index and economic data, suggesting a potential decline in the high-yield default rate despite current concerns. It also highlights the ongoing economic slowdown in the US and Europe, as well as the mixed performance in Asia-Pacific markets, driven by both domestic and global factors.