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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides an analysis of credit market conditions and outlooks for the US, Europe, and Asia-Pacific, emphasizing the relationship between default rates, credit spreads, and economic indicators. The report suggests that if default rates rise through 2017, investors should take protective measures due to the potential impact on liquidity and asset valuations.

Main Points

• Default Rates:

  • The US high-yield default rate has risen from 1.6% in September 2014 to 5.5% in July 2016.
  • Moody's Credit Policy Group forecasts the default rate to peak at 6.5% in early 2017 and then decline to 4.9% by July 2017.
  • Historically, every time the default rate has climbed to 6.5%, it has been followed by a recession within 12 months, except in the mid-1980s.

• Credit Spreads:

  • Investment-grade credit spreads are expected to remain close to their recent level of 141 bp by year-end 2016.
  • High-yield credit spreads are projected to rise from 522 bp to around 600 bp by year-end 2016.
  • The spread is influenced by the default outlook, with higher default risk leading to wider spreads and lower share prices.

• Economic Outlook:

  • The current credit cycle is expected to continue with subpar revenue growth, which may prevent a significant drop in default rates.
  • The report highlights the need for a major revitalization of corporate revenues to support a lower default rate.
  • The US labor market is tightening, potentially leading to higher employment costs and further challenges for corporate profits.

• Regional Analysis:

  • United States:
    • The US economy is expected to show modest growth, with a focus on nonfarm payrolls and manufacturing data.
    • The service sector PMI is expected to decline slightly, while the non-manufacturing index is forecasted to remain stable.
  • Europe:
    • Italy's GDP growth is expected to be weak at 0.6% for 2016 and 0.4% for 2017 due to domestic and external challenges.
    • The euro zone's business and consumer confidence indicators are mixed, with Germany and France showing some weakness.
    • Spain's political uncertainty could lead to another election by December if no government is formed.
  • Asia-Pacific:
    • China's inflation remains subdued, with the consumer price index forecasted at 1.5% and the producer price index at -1.3%.
    • Australia's economy is expected to grow at a slower pace, with a current account deficit narrowing slightly.
    • South Korea's monetary policy is expected to remain unchanged, with concerns over private debt levels.

Key Information

• Credit Risk:

  • Default risk significantly affects liquidity and interest rates.
  • High default rates increase the cost of both debt and equity capital.

• Market Implications:

  • A higher default rate correlates with wider credit spreads and lower share prices.
  • If the default rate does not decline, the market may face further liquidity challenges.

• Data Highlights:

  • The report outlines key economic indicators for the coming weeks, including employment reports, GDP data, and trade balances.
  • It emphasizes the importance of monitoring credit spreads and default rates as they reflect the market's perception of risk.

Summary of Forecasts

Conclusion

The report underscores the critical role of default rates in shaping credit market dynamics and liquidity conditions. It warns that a continued rise in defaults could have significant adverse effects on bond yields and equity prices, while a decline would require substantial improvements in corporate revenue and economic conditions. Investors are advised to monitor these indicators closely and consider protective strategies in the event of a deterioration in the default outlook.