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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides a comprehensive analysis of the current state and future outlook of credit markets, focusing on high yield bonds, investment grade spreads, defaults, and issuance trends. It also includes forecasts and insights on key economic indicators from the US, Europe, and Asia-Pacific regions.

Main Points

Credit Market Outlook

• High Yield Bonds:

  • The high yield bond market has experienced a powerful rally, leading to improved issuance outlook and a moderation in the rising default rate.
  • The high yield spread is projected to narrow to around 628 bp by year-end 2016, down from a high of 839 bp this year.
  • The US high yield default rate is expected to rise to a seven-year high of 5.5% in early 2017, but market access improvements may limit this increase.

• Investment Grade Bonds:

  • Investment grade spreads are forecasted to be less than 156 bp by year-end 2016, reflecting improved market conditions.
  • In 2016, US$-denominated investment-grade bond issuance is expected to increase by 8.7% to $1.442 trillion, while high yield issuance is projected to drop to $290 billion.

• Sectoral Differences:

  • High yield sectors show deep contrasts, with energy and commodity sectors remaining in distress (spreads over 1,000 bp).
  • Non-commodity high yield sectors have a more favorable outlook, with spreads near the historical average of 582 bp.

Market Data

• The distribution of EDF™ (Expected Default Frequency) measures indicates that the majority of high yield borrowers are not at elevated risk of default, with a median EDF of 0.55%.
• The spread of high yield bonds has decreased significantly, suggesting improved market conditions and potential for better performance in non-distressed sectors.

Key Economic Indicators

United States

• GDP (Fourth Quarter – Third Estimate): Expected to show 1.0% growth, indicating a potential shift from sluggish growth to consumer-led expansion.
• Personal Income & Spending (February): Projected to rise by 0.1% in income and spending, with a 2.9% YoY increase in real spending in January.
• Employment Report (March): Forecasted to show 200,000 nonfarm payrolls and a 4.9% unemployment rate, signaling a tightening labor market.
• ISM Manufacturing Index (March): Expected to rise to 50.4, indicating a move into expansionary territory after six months of contraction.
• Consumer Sentiment (March Final): Projected to increase slightly to 90.7, though still below previous cycle highs due to ongoing concerns about GDP growth and unemployment.
• Vehicle Sales (March): Anticipated to reach 17.6 million, reflecting strong incentives and credit availability.

Europe

• Euro Zone – Leading Indicators (February): Expected to fall to 106.5, highlighting concerns about a slowdown in growth.
• Euro Zone – Consumer Confidence (March): Projected to remain unchanged at 104, with geopolitical tensions and financial volatility affecting sentiment.
• France – Consumer Confidence (March): Likely to rise slightly to 96, but remains weak due to low GDP growth and high unemployment.
• France – GDP (2015Q4): Forecasted to grow by 0.3% q/q, with 2015 GDP growth at 1.1%.
• Spain – Business Confidence (March): Expected to remain subdued at -2, with political instability and external concerns dampening optimism.
• Spain – Retail Sales (February): Projected to grow at 1.7% y/y, down from 2% in January, due to political uncertainty.
• Germany – Retail Sales (February): Anticipated to rise by 1.7% y/y, with a slight increase in the PMI index.
• Germany – Unemployment (March): Expected to remain stable at 6.2%, reflecting strong domestic demand and economic confidence.
• Euro Zone – CPI (March): Forecasted to fall to -0.3%, indicating continued deflationary pressures.

Asia-Pacific

• The report highlights the impact of global economic conditions on Asia-Pacific markets, though specific data is less detailed compared to the US and Europe.

Summary of Outlook

• The global financial market rally has positively impacted high yield credit, with improved issuance and a potential moderation in defaults.
• Non-commodity high yield sectors show a more positive outlook, supported by narrowing credit spreads and improved market access.
• The US economy is expected to show signs of recovery, with a focus on consumer spending and labor market improvements.
• European markets remain under pressure from deflation and political uncertainty, though some indicators suggest a gradual recovery.
• The ECB's monetary stimulus is expected to take time to show effects, with inflation likely to remain negative in the short term.

Key Contributors

• Ben Garber: Analyzed credit markets and provided insights on high yield bonds and issuance trends.
• David W. Munves, CFA: Contributed to the overall market outlook and analysis.
• John Lonski: Focused on US economic indicators and market performance.
• Njundu Sanneh: Covered ratings changes and sectoral performance.
• Moody's Analytics/Europe and Asia-Pacific Teams: Provided market data and regional analysis.

Conclusion

Moody's Weekly Market Outlook suggests a cautiously optimistic stance for credit markets, particularly in non-commodity high yield sectors, driven by improved market conditions and narrowing credit spreads. However, the US and European markets remain vulnerable to economic and political uncertainties, which could affect the pace of recovery and the default rate.