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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides a comprehensive analysis of current and projected trends in credit markets, focusing on the U.S., Europe, and Asia-Pacific regions. The report highlights the interplay between financial market indicators, such as the VIX index and credit spreads, and macroeconomic data that may influence investor sentiment and market behavior.

Main Points

1. Credit Market Outlook

• Credit Spreads:
  • Investment Grade spreads are expected to exceed their recent 120 bp by year-end 2017.
  • High Yield spreads may rise to approximately 460 bp by year-end 2017, up from the recent 384 bp.
• Defaults:
  • The US High Yield default rate is forecast to decrease from January 2017's 5.8% to near 3.7% by 4Q 2017.
• Issuance:
  • US$-denominated Investment Grade bond issuance is projected to grow by 1.6% in 2017.
  • US$-priced High Yield bond issuance is expected to increase by 7.5% in 2017.

2. Risk Indicators and Market Confidence

• VIX Index:
  • The VIX index has been unusually low, suggesting reduced equity market volatility.
  • However, the low VIX may not accurately reflect underlying financial market risks.
• Expected Default Frequency (EDF):
  • The EDF metric indicates higher risk than the VIX index, suggesting that equity markets may be overvalued.
  • The EDF predicts a higher midpoint for the VIX index than the VIX index does for the EDF, implying potential misalignment in market risk perception.

3. Relationship Between VIX and EDF

• The correlation between the VIX index and the EDF metric is statistically significant but not perfect.
• The EDF metric is more sensitive to financial market risk, indicating that the current low VIX may not fully capture the true risk levels in the market.

Key Economic Indicators

United States

• New Home Sales (January):
  • Projected to rebound sharply after a ten-month low in December.
  • The sales pace is expected to be 25% year-over-year in Q4 2016, with recent figures at 26% below the 20-year average.
• Consumer Sentiment (February Final):
  • Expected to remain above average, though slightly down from a 12-year high.
  • Inflation expectations are rising, but long-term inflation is expected to remain muted at 2.5%.
• GDP (Fourth Quarter):
  • Projected to grow at 2.1% year-over-year.
  • Trade activity and import growth are expected to temper GDP gains.
• Personal Income & Spending (January):
  • Projected to grow at 0.3% for both income and spending.
  • Wage growth is expected to remain subdued, limiting income gains.
• ISM Manufacturing Index (February):
  • Forecast to remain near a two-year high at 55.8, indicating continued expansion.
• Construction Spending (January):
  • Expected to rise by 0.8% year-over-year, supported by strong residential activity.
• Vehicle Sales (February):
  • Likely to remain stable after a sharp decline from December's 11-year high.

Europe

• Spain:
  • GDP is expected to grow at 3.2% year-over-year in 2016, down from 3.2% in Q4 2016.
  • Consumer and business confidence is improving, but inflation pressures and political uncertainty may slow growth to 2.5% in 2017 and 2.1% in 2018.
• Italy:
  • GDP growth in Q4 2016 was 0.2%, with net exports likely supporting growth.
  • Political instability and banking sector issues remain risks.
• France:
  • Consumer spending has been weak due to low oil prices and limited wage growth.
  • GDP growth is expected to slow to 1.1% in 2017, with domestic demand as the main growth driver.
• Germany:
  • Unemployment rate is expected to remain at 5.9%, with a slight increase due to refugee inflows.
  • Manufacturing PMI showed a strong hiring trend, indicating economic resilience.
• Euro Zone:
  • Inflation is expected to rise to 1.9% in February, up from 1.8% in January.
  • Political uncertainty and commodity price effects may delay ECB tightening.

Asia-Pacific

• India:
  • Economic growth slowed significantly in Q4 2016 due to demonetization.
• Japan:
  • Industrial production is forecast to rise by 1.4% m/m in January.
  • Retail sales are expected to increase by 1.1% y/y in January, with rising fuel prices and a rebounding stock market supporting growth.
• South Korea:
  • Consumer sentiment is expected to remain at 92.5, indicating cautious optimism.
  • High household debt and weak wage growth are expected to limit spending.
• Singapore:
  • Industrial production growth is projected to slow to 15% y/y in January from 21.3% in December.
  • Electronics and biomedicals are expected to be the fastest-growing sectors.
• Thailand:
  • Industrial production growth is forecast to rise to 2.4% y/y in January, driven by external demand.
• Australia:
  • Balance of payments for 2016Q4 is expected to show a slight improvement in trade balances due to higher commodity prices.

Conclusion

The report emphasizes the need for caution as low VIX and thin spreads may indicate overconfidence in the market, potentially leading to increased volatility if expectations are not met. The analysis of credit markets and economic indicators across the U.S., Europe, and Asia-Pacific provides a nuanced view of market conditions, highlighting both opportunities and risks. The forecast suggests a cautious outlook for 2017, with moderate growth in profits and the potential for a rise in the VIX index if economic conditions deteriorate.