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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides a comprehensive review and forecast of credit market conditions, focusing on the United States, Europe, and Asia-Pacific. The report highlights key trends in bond issuance, credit spreads, default rates, and economic indicators that may influence market behavior in the coming months.

Main Views

• US Bond Offerings to Slow:

  • Corporate bond issuance in the first half of 2015 saw a modest increase of 2.3% globally, driven largely by a 43% surge in US offerings.
  • US investment-grade (IG) bond issuance is projected to rise by 20% in 2015 to $1.357 trillion, while high-yield (HY) issuance is expected to decline by 7% to $391 billion.
  • The global HY issuance dropped by 16% in the first half of 2015 to $302 billion, with the US HY market expanding by 26% and the rest of the world shrinking by 47%.
  • The HY EDF (Expected Default Frequency) metric rose to 4.45%, signaling increased default risk and potential slowdown in HY borrowing.

• Economic Outlook and Growth:

  • The US is expected to see continued weak real GDP growth, with real GDP growth projected at less than 3% in 2016.
  • The Eurozone is forecasted to grow at 1.7% in 2016, slightly above 2015's 1.5%, but still below the long-term average.
  • Weak business sales in the US, particularly in Q2-2015, indicate a potential downturn, with similar patterns observed in past recessions.

• Credit Market Dynamics:

  • Credit spreads are expected to narrow slightly, with the HY spread likely to approach 500 bp by year-end 2015.
  • The US share of global corporate bond issuance is increasing, but this may not be sustainable as the rest of the world begins to recover.
  • There is a strong inverse correlation between HY EDF and bond issuance, suggesting that rising default risk may curb future HY borrowing.

• M&A and Borrowing Trends:

  • US M&A activity surged to a record $3.1 trillion in 2015, but business borrowing remained lower than M&A activity, at a 74% ratio.
  • This ratio has dropped significantly from the long-term average of 100%, indicating a shift in corporate financing strategies.

• Market Data and Outlook:

  • The report includes detailed forecasts for economic indicators such as new home sales, durable goods orders, and consumer confidence.
  • The FOMC is expected to maintain the current interest rate range, but preparations for a potential September rate hike are underway.
  • The ECB is expected to continue its asset purchase program, supporting liquidity and economic recovery in the Eurozone.

Key Information

• Contributors: David W. Munves, John Lonski, Ben Garber, Njundu Sanneh, Yukyung Choi, Irina Baron, Franklin Kim, Xian (Peter) Li, Tomas Holinka, Alaistair Chan, Katrina Ell.
• Editor: Dana Gordon.
• Key Metrics:
  • US HY default rate: 2.0% in June 2015, forecasted to reach 3.0% in 1H2016.
  • US HY EDF: Rose from 2.1% to 4.45% over the last 12 months.
  • US corporate bond issuance: $898 billion in 2015, up 43% from previous year.
  • Eurozone M3 money supply growth: Expected to rise to 5.2% in June 2015.
  • Eurozone unemployment: Likely to remain at 11% in July 2015.
  • US real GDP growth: Expected to be below 3% for an 11th consecutive year in 2016.

Economic Forecasts

The US

• New Home Sales – June: Forecast at 548,000, with a 23% year-over-year increase in the three months ending May.
• Durable Goods Orders – June: Forecast at 2.5% overall, 0.5% ex-transportation, signaling improving industrial demand.
• S&P / Case-Shiller Home Price Index – May: Expected to show a 5.7% yearly change.
• Pending Home Sales Index – June: Forecast at 1.0%, indicating a new cycle high due to a growing mortgage market.
• FOMC Rate Decision: Fed funds target is expected to remain at 0-0.25%, with potential for a September rate hike.
• GDP - Second Quarter Advance Estimate: Forecast at 2.5%, showing a rebound from Q1 contraction.
• University of Michigan Consumer Sentiment – July Final: Forecast at 94.3, suggesting limited improvement in consumer confidence.

Europe

• Migration Quotas: EU ministers continue to debate how to redistribute migrants from Italy and Greece.
• Germany – Ifo Business Climate Index – July: Forecast at 107, indicating a slight decline in business sentiment.
• Euro Zone – Monetary Aggregates – June: M3 growth is expected to rise to 5.2%.
• France – Job Seekers – June: Forecast at 3.55 million, with no significant change expected.
• Italy – Consumer and Business Confidence – July: Forecast at 104.5, suggesting modest improvement in confidence.
• Spain – Retail Sales – June: Forecast at 2.2%, indicating a slight improvement after May's 1.7%.
• Euro Zone – Preliminary Consumer Price Index – July: Inflation is expected to rise to 0.3% year-over-year.

Outlook

• The report warns that rising default risk and weak economic growth could lead to a contraction in HY borrowing.
• A potential drop in the HY EDF metric could signal a slowdown in bond issuance and bank loans.
• The ECB's continued asset purchases are expected to support liquidity and economic growth in the Eurozone.
• The US and Eurozone economies face challenges in maintaining growth, with the US lagging behind in real GDP growth compared to the Eurozone.
• The report suggests that the global economy may be approaching a downturn, with signs of weakening business activity and rising default risk.