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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides a comprehensive analysis of credit markets and economic indicators across the US, Europe, and Asia-Pacific for the period leading into 2018. The report highlights both positive trends and underlying risks that could affect market stability and corporate credit conditions.

Main Points

1. Credit Market Outlook for 2018

• Positive Outlook: Despite a generally positive economic environment in 2017, the report warns of hidden dangers that could impact credit markets in 2018.
• Interest Rates and Spreads: The report suggests that rising interest rates and wider credit spreads could increase the after-tax cost of debt, potentially leading to more defaults, especially for high-yield issuers.
• Tax Reform Impact: The proposed tax reforms, particularly the House and Senate plans, may benefit most investment-grade companies but could harm at least 26% and 36% of high-yield issuers respectively due to reduced interest deductibility.
• Inflation Expectations: A malfunctioning Phillips Curve and contained inflation expectations have kept Treasury yields low, which has been beneficial for corporate credit spreads. However, if inflation expectations rise, it could lead to higher bond yields, increased volatility (VIX), and higher default risk.

2. Economic Data Preview for the Week Ahead

United States

• Retail Sales: November retail sales exceeded expectations, with a 0.8% increase, and vehicle sales declined slightly. Excluding autos, retail sales rose by 1%.
• Consumer Spending: Real consumer spending is expected to rise slightly in November, though the pace may not be sustainable.
• Key Indicators:
  • Moody's Analytics Business Confidence Index: 4-wk MA
  • NAHB Housing Market Index for December: Index
  • Euro Zone Consumer Price Index for November: % change yr ago
  • Core PCE Deflator for November: % change
  • Personal Income and Spending for November: % change
  • New-home Sales for November: ths, SAAR

Europe

• U.K. GDP: Expected to confirm a 0.4% quarterly growth, with a yearly rate of 1.5%, the lowest since 2013.
• Consumer Spending: Expected to slow in the fourth quarter, with retail sales being a misleading indicator due to Black Friday effects.
• Investment and Net Trade: Business investment growth is expected to slow to 0.2% q/q, and net trade is likely to drag on growth.
• France GDP: Expected to grow by 0.5% q/q, with strong domestic demand and increased household and services consumption.
• Key Indicators:
  • Italy: Foreign Trade for October: € bil
  • Euro Zone: Consumer Price Index for November: % change yr ago
  • Russia: Retail Sales for November: % change yr ago
  • Russia: Unemployment for November: %
  • Germany: Producer Price Index for November: % change yr ago
  • Germany: Ifo Business Climate Index for December: index
  • France: GDP for Q3: % change
  • France: Household Consumption Survey for November: % change

Asia-Pacific

• Japan: Exports are expected to increase, contributing to a trade surplus. The Tankan survey shows a slight pullback in sentiment, but external demand, especially in tech, remains strong. The yen's depreciation has supported export values.
• Singapore: Exports are expected to grow by 9.4% y/y in November, but this may be a slowdown from previous months.
• New Zealand: GDP growth is likely to cool slightly, with a focus on construction and business services.
• Thailand and Taiwan: Both are expected to show moderate growth in trade and industrial production, respectively.
• Key Indicators:
  • Japan Foreign Trade for November: ¥ bil
  • Singapore Foreign Trade for November: % change yr ago
  • New Zealand Foreign Trade for November: NZ$ mil
  • Thailand Monetary Policy for December: %
  • New Zealand GDP for Q3: % change
  • Japan Monetary Policy for December: ¥ tri
  • Taiwan Domestic Trade for November: % change yr ago
  • Taiwan Industrial Production for November: % change yr ago

Key Information

• Credit Spreads: Investment-grade spreads are expected to remain thin, while high-yield spreads may widen slightly in 2018.
• Defaults: The US high-yield default rate is forecast to average 2.4% in Q3 2018, but this is still below the 2017 average.
• Bond Issuance: US$-denominated high-yield bond issuance rose significantly in 2017, but the trend may be affected by rising interest rates and wider spreads.
• Fiscal Policy: The reconciliation of the House and Senate tax plans is expected to be a key focus in the coming week.
• Monetary Policy: The Fed's gradual reduction of Treasury holdings is unlikely to cause a significant rise in bond yields, as seen historically.
• Inflation and Volatility: Contained inflation expectations have helped keep the VIX index low and credit spreads narrow. However, any upward revision in inflation expectations could reverse these trends.

Conclusion

While the outlook for 2018 is generally positive, the report underscores the risks posed by rising interest rates, wider credit spreads, and potential inflation surprises. These factors could increase default risk, reduce corporate credit quality, and negatively impact equity markets. The coming week's economic data will be crucial in assessing whether the current trends are sustainable or if the market is on the brink of a downturn.