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Moody's Weekly Market Outlook Summary

Core Content

This document provides a detailed analysis of the credit markets and macroeconomic outlook for the U.S., Europe, and Asia-Pacific for the week ahead and the broader economic perspective for 2018 and 2019. Key contributors include John Lonski, Ryan Sweet, Kathryn Asher, Michael Ferlez, Barbara Teixeira Arajuo, and Katrina Ell.

Main Points

U.S. Credit Market Outlook

• Profits Growth and Defaults: Profit growth is expected to curb defaults, with the U.S. high-yield default rate forecasted to drop from 3.9% in March 2018 to 1.7% by March 2019.
• Bond Issuance Trends: In 2017, U.S. investment-grade (IG) bond issuance reached a record $1.508 trillion, while high-yield (HY) issuance hit $453 billion. For 2018, IG issuance is expected to fall by 4.7% to $1.438 trillion, and HY issuance to decline by 4.2% to $435 billion.
• Credit Spreads: Investment-grade bond spreads are expected to exceed 115 basis points (bp) by year-end 2018, while HY spreads may rise to 425 bp.
• Operating Income Growth: Operating income growth is projected to accelerate relative to revenue growth due to tax cuts and controlled labor costs.
• Inflation and Interest Rates: The core CPI is expected to rise to 2.1% in March 2018, the largest increase since 2006. The Fed is expected to raise rates three more times in 2018, but the potential for a fourth hike is still under consideration.
• Economic Multiplier: The fiscal stimulus is expected to have a weaker multiplier effect due to the current expansionary phase of the economy.
• Key Data Releases: Retail sales, industrial production, and housing starts will be key indicators for the upcoming week.

Europe Credit Market Outlook

• U.K. Economic Outlook: U.K. data is expected to continue disappointing, with retail sales likely to fall by 1.5% y/y in March, and industrial production showing a weak trend.
• Inflation and Monetary Policy: U.K. inflation is expected to remain around 2.7% in March and may decline to 2.6% in April. The Bank of England is unlikely to raise rates due to weak growth and inflationary pressures.
• Key Data Releases: Unemployment, CPI, and retail sales will be closely watched in the U.K., with the BoE potentially delaying rate hikes.

Asia-Pacific Credit Market Outlook

• China: March GDP growth is expected to slow slightly to 6.7% y/y from 6.8% in December. The trade balance is likely to improve to a $40 billion surplus. The government's focus on financial risk control and a slowing housing market are expected to affect investment and industrial output.
• Japan: Consumer price inflation is expected to remain stable at 1% y/y in March. The BOJ's 2% inflation target is unlikely to be met in the short to medium term.
• Singapore: GDP growth is expected to cool to 2.9% y/y in the first quarter, following a 3.1% expansion in the previous quarter. Non-oil exports are projected to rebound to 6.5% y/y in March.
• India: The trade deficit is expected to widen slightly to -$13 billion in March due to rising commodity prices, particularly oil. Global growth and external demand are seen as positive factors, but trade wars pose a risk.
• Indonesia: The trade balance is expected to return to surplus in March, with exports rebounding to $950 million after a $120 million deficit in February. However, palm oil exports are expected to remain weak due to India's import duties.

Key Information

• Profit and Default Relationship: Historical data suggests that a drop in operating profits is correlated with higher default rates. If profit growth continues, default rates are expected to remain low.
• Capacity Utilization and Unemployment: A low capacity utilization rate (78.1% in February 2018) alongside a low unemployment rate (4.1%) indicates that the economy may not be at full capacity, potentially allowing for non-inflationary growth.
• Labor Costs and Productivity: Containing labor costs is a key driver for improving profit margins. The correlation between operating profits and the difference between corporate GVA and employment costs is strong.
• Interest Rate Outlook: The Fed's rate hikes and bond holdings reduction are seen as potential risks for financial markets, especially if interest rates rise unexpectedly.
• Global Trade Risks: Trade protectionism and potential trade wars could negatively impact export growth and corporate earnings in key economies like the U.S., China, and India.

Conclusion

The outlook for the credit markets is generally positive, driven by profit growth and contained labor costs. However, the risks of economic slowdown, inflationary pressures, and global trade tensions remain significant. The U.S. and European markets show signs of slowing growth, while Asia-Pacific markets, particularly China and Singapore, are expected to experience a more modest slowdown. Investors should remain cautious and monitor key economic indicators and central bank policies closely.

Key Indicators Overview