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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides an analysis of credit market trends, economic forecasts, and rating changes for the US, Europe, and Asia-Pacific regions. The report highlights the implications of prolonged slow growth on credit spreads and corporate borrowing, as well as the potential for a recession due to the high frequency of high-yield downgrades. It also includes forecasts for upcoming economic data releases and monetary policy decisions.

Main Views

• Credit Risks Increase: The report notes that credit risks are rising due to the fading long-term growth prospects. The US economy is expected to grow at a slower pace than historical averages, with real GDP growth projected to average 2.1% through 2027, down from 3.4% in the 2007 period.

• High-Yield Bond Spreads Widening: High-yield spreads are anticipated to remain wide due to the sluggish growth outlook. The midpoint for the high-yield bond spread is estimated at 590 bp through 2027, with the potential to reach 550 bp to 620 bp if the growth rate remains at 2.1%. The report also indicates that the high incidence of downgrades may push the spread beyond 700 bp.

• Economic Slowdown and Deflationary Pressures: Deflationary forces are expected to persist in the US and the Eurozone, influenced by falling commodity prices and weak demand. The report forecasts a continued decline in real GDP growth and profits, which are key drivers of credit spreads.

• Recession Risk: The report suggests that the current recovery is in its final quarter, with a high frequency of high-yield downgrades signaling an elevated risk of recession. Historical data shows that similar downgrades preceded recessions.

• Monetary Policy Outlook: The Federal Reserve is expected to maintain its current interest rate policy in March due to financial market volatility and deflationary pressures, but may resume tightening in the future. The Bank of England is also expected to keep its main repurchase rate at 0.5% for the foreseeable future.

Key Information

US Economic Outlook

• Real GDP Growth: Expected to slow from 2.4% in 2015 to 2.1% in 2016, with a long-term average of 2.1% through 2027.
• Profits Growth: Pretax profits from current production are expected to grow at 3.5% annually from the end of 2015 through 2027, down from 7.4% in the 2007 period.
• Credit Spreads: High-yield bond spreads are expected to remain wide, with a midpoint of 590 bp by 2027. If the spread of downgrades continues, it may exceed 700 bp.
• Key Data Releases:
  • Import Price Index – February: Forecast to decline by 0.7%.
  • Retail Sales – February: Expected to grow by 0.1% overall, -0.1% excluding autos.
  • Producer Price Index – February: Overall forecast at -0.1%, core at 0.1%.
  • NAHB Housing Market Index – March: Forecast at 59, indicating improved confidence.
  • Business Inventories – January: Forecast at 0.0% growth.
  • Housing Starts & Building Permits – February: Expected to rise to 1.14 million starts and 1.20 million permits.
  • Consumer Price Index – February: Overall forecast at -0.2%, core at 0.2%.
  • Industrial Production & Capacity Utilization – February: Industrial production forecast at -0.1%, capacity utilization at 76.9%.
  • FOMC Rate Decision: Expected to leave rates unchanged in March, with potential tightening in 2017.

European Economic Outlook

• EU Summit and Migrant Crisis: The EU is under pressure to resolve the migrant crisis, with potential agreements between Turkey and Germany. Greece is particularly affected, with high debt levels and fiscal constraints.
• Consumer Price Index (CPI):
  • Germany – February: Forecast at 0% annual growth.
  • Spain – February: Forecast at -0.8%.
  • France – February: Forecast at -0.1%.
  • Italy – February: Forecast at -0.2%.
  • Euro Zone – February: Forecast at -0.2% annual growth.
• Industrial Production:
  • Italy – January: Forecast at -0.3%.
  • Russia – February: Forecast at -2.5%.
  • Euro Zone – January: Forecast at 0.2%.
• Trade Data:
  • UK – January: Trade deficit forecast at -£9.6 billion.
  • Russia – January: Trade balance forecast at -RUB450 trillion.
  • Euro Zone – January: External trade surplus forecast at €8 billion.
  • Italy – January: Merchandise trade surplus forecast at €200 million.

Asia-Pacific Economic Outlook

• Not detailed in this summary, but the report mentions the importance of monitoring economic data and forecasts from the Asia-Pacific region.

Conclusion

The report underscores a shift from historical growth patterns to a prolonged period of slow economic growth, which is expected to keep credit spreads wide and increase the risk of a recession. It also highlights the importance of upcoming economic data releases and the potential for monetary policy adjustments in the future.