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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook highlights the potential for medium-grade bond yields to lag behind consensus forecasts, emphasizing the interplay between interest rate risk and credit risk in the U.S., U.K., Europe, and Asia-Pacific regions. The report also provides an overview of upcoming economic data and market trends.

Main Views

U.S. Market Outlook

• Employment Income: Despite a high number of new jobs, the quality has been poor, leading to limited improvement in employment income.
• Interest Rates: The 10-year Treasury yield is expected to remain below $2.5%$, with inflation risks having declined compared to the "taper tantrum" period.
• Home Sales: Seasonality is a key factor in the housing market, with a likely decline in existing-home sales in July. This could negatively impact residential investment.
• Fiscal Policy: The U.S. administration is focusing on healthcare legislation rather than fiscal stimulus, which may delay corporate tax reform and infrastructure spending.
• Market Sentiment: Geopolitical tensions and uncertainty about Trump's agenda are affecting investor confidence. The S&P 500 has been range-bound since mid-July.

Baa-Grade Bonds

• Bond Issuance and Outstanding Amounts: Baa-grade corporate bonds have grown in relative importance, making up 43% of U.S. investment-grade bond issuance in the five years ended July 2017.
• Yield Outlook: Moody's forecasts a lower Baa yield than the consensus, suggesting that the 30-year Treasury yield may average $2.95%$ in 2018, leading to a Baa yield of $4.67%$, rather than the consensus $5.16%$.

European Market Outlook

• U.K. GDP: The second estimate of Q2 GDP growth is expected to remain at $0.3%$ q/q, with weak manufacturing and construction data posing downside risks.
• Consumer Spending: Growth in consumer spending is expected to be modest, at $0.2%$ q/q, despite a rebound in retail sales. Real wages are falling, limiting spending power.
• Spain and Germany: Spain's GDP growth is expected to be strong, while Germany's growth, though positive, is expected to slow as growth tailwinds wane.

Asia-Pacific Market Outlook

• Japan: The unemployment rate is expected to remain stable at $2.8%$, with a tightening labor market contributing to wage growth. Consumer spending is expected to ease in July, following a strong June.
• India: GDP growth is projected at $6.5%$ y/y for the June quarter, down from the previous year due to demonetisation effects, but expected to rebound in the second half of the year.
• South Korea: The consumer sentiment index is expected to remain optimistic at 103, but recent tensions with North Korea may have dampened expectations.
• Singapore: Industrial production growth is expected to slow to $9%$ y/y in July, following $13.1%$ in June, due to weak demand in transport engineering and limited oil price increases.

Key Information

• Credit Spreads: High-yield credit spreads may reach 450 bp by year-end 2017, while investment-grade spreads could exceed 115 bp.
• Default Rates: The U.S. HY default rate is expected to average 2.9% in Q2-2018, down from 3.6% in July 2017.
• Bond Issuance: U.S. investment-grade bond issuance is expected to rise to $1.528 trillion in 2017, while high-yield issuance is projected to increase to $425 billion, still below the 2014 peak.
• Market Data Highlights:
  • Jobless Claims: Expected to rise to 240,000 in the week ending August 19.
  • Existing-Home Sales: Forecast to fall to 5.44 million annualized units in July.
  • Durable Goods Orders: Forecast to be released during the week.
  • Japan's CPI: Expected to rise $0.4%$ y/y in July, indicating stable inflation.
  • Thailand's Industrial Production: Forecast to increase $1.5%$ y/y in July.

Summary of Upcoming Data

Conclusion

Moody's report underscores the expectation that medium-grade bond yields may not rise as sharply as the consensus anticipates, primarily due to limited upside in interest rates and the potential for lower Treasury yields than forecast. The outlook for the U.S., U.K., and Asia-Pacific markets is shaped by mixed economic data, geopolitical tensions, and policy uncertainties. Meanwhile, the European economy shows signs of resilience, with Spain and Germany leading in growth, while Japan continues to experience a tightening labor market and subdued consumer spending.