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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides a detailed analysis of credit market trends, equity performance, and economic indicators for the US, Europe, and Asia-Pacific regions. The report highlights the positive impact of a slowing debt growth and a rally in equities on credit quality, while also addressing potential risks such as volatility, inflation, and geopolitical tensions.

Main Views

• Credit Quality Improvement: The overvaluation of US equities has led to an increase in rating upgrades related to common equity infusions and mergers, while reducing the frequency of downgrades due to shareholder compensation actions.

• Debt Growth Slowing: The year-over-year growth of nonfinancial-corporate debt has decelerated, with bank C&I loans showing a slowdown in outstandings growth, indicating a potential easing of credit risk.

• Equity Rally and Corporate Actions: The recent equity rally has been more broadly distributed than previous periods, with a notable increase in the number of equity-infusion upgrades compared to shareholder-compensation downgrades.

• Market Volatility: The VIX is expected to rise, though it remains below the level implied by fundamentals. The inverted VIX curve suggests investors anticipate higher short-term volatility but lower long-term risk.

• Economic Outlook: The report forecasts mixed economic signals across regions, with some showing signs of recovery and others facing challenges due to weak wage growth, high inflation, and geopolitical factors.

Key Information

US Market Outlook

• Equity Performance: US equities have shown a rally, with the Value Line index advancing by +21.3% year-over-year, indicating broader market participation.

• Credit Spreads: Investment-grade credit spreads are expected to exceed 122 bp by year-end 2017, while high-yield spreads may reach 480 bp.

• Default Rates: The US high-yield default rate is projected to be near 2.9% in Q1 2018, down from Q1 2017's 4.7%.

• Corporate Debt and Internal Funds: Nonfinancial-corporate debt growth slowed in 2016, and internal funds increased, which is expected to continue supporting credit quality.

• Economic Data: Industrial production is forecasted to rise by 0.4% in March, but manufacturing production is expected to decline. Housing starts are anticipated to increase, and the 10-year Treasury yield has fallen due to a slowdown in business activity.

Europe Market Outlook

• UK Retail Sales: March retail sales are expected to grow at a slower pace, with a yearly growth rate of 3.3%, down from the 2016 average. The BRC retail sales monitor indicates a slowdown in spending, particularly in nonfood categories.

• Eurozone Inflation: Inflation is expected to slow in March, but it will rebound in April due to calendar effects. Non-energy goods inflation is expected to remain stable, while energy inflation is slowing.

• Spain Trade Deficit: Spain's trade deficit is forecasted to widen to €2.4 billion in February, driven by higher oil prices and energy import dependence.

Asia-Pacific Market Outlook

• Japan: Cyclical momentum is uneven, with weak wage growth and subdued consumer spending. The industrial activity index is expected to rise slightly, supported by improved consumer confidence and an aging population.

• New Zealand: Consumer price growth is forecasted to rise to 0.5% q/q, with annual inflation approaching the central bank's target range. The central bank is expected to keep rates steady through 2017.

• Indonesia: The central bank will maintain an accommodative policy rate of 4.75% despite rising inflation. Weak domestic demand and concerns about capital outflows are factors in this decision.

• Taiwan: Industrial production is expected to grow by 13.1% y/y in March, driven by the global tech cycle and China's economic performance. Retail spending is likely to remain flat due to weak wage growth.

• Hong Kong: Trade activity through the port has recovered, with commodity shipments driven by China's investment recovery and improved global tech demand.

• South Korea: Consumer confidence is improving, with the Bank of Korea's index expected to rise to 98.5 in April. Political uncertainty from upcoming elections is expected to have a minimal impact.

Summary of Key Metrics

• Credit Spreads:

  • Investment Grade: Exceed 122 bp by year-end 2017.
  • High Yield: May reach 480 bp by year-end 2017.

• Defaults:

  • US HY default rate: Near 2.9% in Q1 2018, down from 4.7% in Q1 2017.

• Issuance:

  • US$-IG bond issuance: Projected to rise by 4.2% to $1.472 trillion in 2017.
  • US$-priced high-yield bond issuance: Expected to increase by 16.8% to $398 billion in 2017.

• Equity Market:

  • Value Line index: +21.3% year-over-year in March.
  • US common stock market value: +20.0% year-over-year in March.

• VIX:

  • Fundamentals suggest VIX should be around 15.4, but current levels may remain higher.
  • The VIX curve is inverted, indicating higher near-term volatility and lower long-term expectations.

Economic Data Highlights

• US Industrial Production: +0.4% in March, but weak in manufacturing.
• UK Retail Sales: 3.3% y/y growth in March, down from previous levels.
• Spain Trade Deficit: €2.4 billion in February, up from €1.8 billion in the previous year.
• Japan Trade Surplus: ¥800 billion in March, up from ¥680 billion in February.
• New Zealand CPI: 0.5% q/q in March, with annual inflation near 1.8%.
• Taiwan Industrial Production: +13.1% y/y in March, driven by global tech demand.
• Hong Kong Trade Activity: Strong recovery post-Lunar New Year, with commodity shipments rising.
• South Korea Consumer Sentiment Index: Expected to rise to 98.5 in April.

Conclusion

The report suggests that credit quality is improving due to slowing debt growth and a broad equity rally, which has led to more rating upgrades than downgrades. However, the report also warns of potential risks such as volatility, inflation, and geopolitical tensions, which could impact credit markets and economic activity.