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Moody's Weekly Market Outlook Summary - 2017

Core Content

This document is a weekly market outlook from Moody's Capital Markets Research, providing insights into credit markets, equity performance, and economic indicators across the US, Europe, and Asia-Pacific regions for the upcoming week and broader 2017 outlook.

Main Points

Credit Market Outlook for 2017

• Corporate Bond Issuance: US dollar-denominated corporate bond issuance is expected to be influenced by two opposing factors: a declining high-yield default rate and rising Treasury bond yields.
• Default Rates: The US high-yield default rate is projected to fall from 6% in January 2017 to nearly 4% by the summer of 2017.
• Credit Spreads: The high-yield bond spread is expected to narrow, with a projected midpoint of 504 bp by year-end 2016, driven by improved credit quality and lower default expectations.
• Interest Rate Risks: Rising Treasury yields may offset the positive impact of lower default rates on corporate bond issuance, particularly if the spread widens, which could lead to a "fight to quality" and lower yields.
• Fiscal Policy Impact: The anticipated fiscal stimulus from a Republican-controlled government may not significantly boost corporate bond issuance due to higher borrowing costs and potential constraints from an aging population and workforce.

Equity Market Influence

• The equity market, especially as reflected by the VIX index, has historically been a strong indicator of the future direction of high-yield bond spreads.
• A strong correlation of -0.84 between the three-month change in the US stock market and the high-yield bond spread highlights the inverse relationship between equity performance and credit spreads.
• The VIX index has been a reliable predictor, with recent values suggesting a narrowing of the high-yield bond spread.

Key Economic Indicators for the Week Ahead

United States

• Employment Report (November): Expected to show 180,000 nonfarm payrolls and a 4.9% unemployment rate, signaling continued labor market tightening.
• ISM Non-Manufacturing Index (November): Forecast at 55.1, suggesting continued growth in the services sector.
• Trade Balance (October): Projected to widen to -$40.0 billion, driven by rising imports.
• Productivity & Unit Labor Costs (Q3 Final): Forecast at 3.2% productivity and 0.3% unit labor costs, indicating a strong productivity result but weak long-term trends.
• Factory Orders (October): Expected to rise 2.4%, with a focus on the transportation sector.

Europe

• Industrial Production (Germany, France, Spain, U.K.): Expected to rebound from weak September figures, though growth is likely to remain modest.
• Italy's Constitutional Referendum: Polls suggest a potential "No" vote, which could lead to new elections and increased Eurosceptic influence.
• Euro Zone GDP (Q3): Preliminary estimates show a 0.3% expansion, with growth expected to accelerate in the fourth quarter.
• Euro Zone Unemployment (October): Likely to remain at 10%, with a decrease from 10.6% in October 2015.
• ECB Monetary Policy (December): Expected to extend the quantitative easing (QE) program beyond March and announce some tapering, possibly starting to cut monthly bond purchases in April.

Asia-Pacific

• China's Economy: Shows signs of improvement, with strong retail sales and a booming housing market supporting consumer prices and producer inflation.
• South Korea's CPI (November): Forecast at 1.4%, indicating improved price pressures due to rising global demand and a weaker won.
• South Korea's Trade Balance (November): Likely to narrow slightly, as stronger imports outpace export growth.
• South Korea's GDP (2016Q3): Expected to grow 0.8%, with strong global demand for tech goods but weak consumption due to high private debt and stagnant wages.
• Australia's Retail Sales (October): Forecast at 0.3%, suggesting continued subdued consumer spending.
• Australia's Balance of Payments (2016Q3): Expected to show a current account deficit of -A$14.6 billion, narrowing slightly due to rising commodity prices.
• Japan's Consumer Confidence (November): Forecast at 42.1, indicating net pessimism and continued uncertainty about economic policies.

Key Information

• The high-yield bond spread is expected to narrow in 2017, but the VIX index and rising Treasury yields could affect this trend.
• The US economy is expected to show modest growth, with the corporate bond issuance outlook constrained by interest rate risks and fiscal policy considerations.
• European markets will be closely watched for industrial production data and the outcome of Italy's constitutional referendum, which could impact political and economic stability.
• In the Asia-Pacific region, China and South Korea are expected to show some improvement, while Japan and Australia face continued challenges with low consumer confidence and subdued economic activity.

Summary Table

Conclusion

The document highlights the interplay between equity markets and credit spreads, with the VIX index playing a significant role in predicting future spread movements. It also outlines the economic outlook for the upcoming week, emphasizing the importance of key indicators and the potential impact of political events on market performance. Overall, the 2017 outlook for credit markets is cautiously optimistic, but influenced by macroeconomic and fiscal uncertainties.