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Moody's Weekly Market Outlook Summary

Core Content Overview

Moody's Weekly Market Outlook provides a detailed analysis of credit markets, economic indicators, and market trends across the US, Europe, and Asia-Pacific. The report highlights the current state of bond yields, credit spreads, default rates, and industrial production, offering insights into future market movements and economic outlooks.

Key Points

Credit Markets and Bond Yields

• Medium-Grade Yields at 60-Year Low: Baa-grade corporate bond yields have reached a 60-year low, with the long-term Baa industrial company bond yield at 4.21% on July 13, 2016.
• Investment-Grade Bond Yields: The spread for investment-grade (IG) bonds is expected to remain near 145 bp, while high-yield (HY) bond spreads may rise to 640 bp by year-end 2016.
• High-Yield Bond Spread: The HY bond spread has declined from 899 bp in February 2016 to 573 bp on July 13, 2016. The VIX index at 12.9 suggests a 377 bp midpoint for the HY spread, indicating market complacency.

Default Rates

• US HY Default Rate: The default rate is projected to rise from 5.0% in May 2016 to 6.4% by Q4 2016, and potentially to 6.5% by late 2016 or early 2017.
• Historical Context: The last time the default rate reached 6.5% was during the 1986-1987 period, which was followed by a sharp decline. This suggests the current default rate may not be a harbinger of recession.
• Profitability Impact: A 2017 slide in default rates will depend on profitability rebounds. If profits fail to grow, the default rate may remain elevated.

Economic Outlook

United States

• Bond Issuance: US$-denominated IG bond issuance is expected to hit a record $1.402 trillion in 2016, up 5.7% from 2015. HY issuance, however, is projected to fall by 16.7% to $295 billion.
• Economic Indicators:
  • Retail Sales: Expected to be unchanged in June.
  • Consumer Price Index (CPI): Overall CPI is forecast at 0.3%, with core CPI at 0.2%.
  • Industrial Production: Likely to rise 0.3% m/m, exceeding the consensus forecast.
  • Business Inventories: Expected to increase only slightly.
  • Consumer Sentiment: Likely to remain neutral at 93.5.
• Housing Market: June housing starts and permits are forecast at 1.17 million and 1.14 million, respectively. Existing home sales are expected at 5.47 million, down 1.1% from May.
• Monetary Policy: The Fed is expected to maintain a cautious stance, with no significant rate cuts anticipated in the near term.

Europe

• Economic Impact of Brexit: The euro zone is expected to grow at 1.3% in 2016 and 1.1% in 2017, down from previous forecasts due to Brexit.
• Inflation Trends: Euro zone inflation is expected to remain subdued, with the harmonized CPI growing 0.4% in 2016 and rebounding to 1.1% in 2017.
• ECB Policy: The ECB is likely to keep interest rates and asset purchases steady, avoiding further rate cuts to negative territory.
• UK Economic Outlook: UK growth is projected to moderate to 1.5% in 2016 and 0.5% in 2017. The Bank of England has maintained its policy rate and asset-purchase program, avoiding further rate cuts to prevent additional currency depreciation.

Asia-Pacific

• Taiwan: Industrial production is expected to decline by 0.7% y/y in June, with weak global demand and slowing wage growth affecting the economy. Retail sales are forecast to fall 0.4% y/y.
• China:
  • GDP Growth: Forecast at 6.5% for Q2 2016, showing continued deceleration.
  • Fixed Asset Investment: Expected to grow at 9.4% in June, but weak in manufacturing and mining.
  • Industrial Production: Likely to stabilize, but with significant weakness in heavy industry.
  • Retail Sales: Expected to rise 9.5% y/y in June, driven by housing-related purchases.
• Indonesia: Trade balance is forecast at US$0.8 billion in June, with both exports and imports contracting. The central bank is unlikely to cut rates due to concerns over capital outflows.
• New Zealand: CPI is expected to rise to 0.5% in Q2 2016, driven by housing and food prices. Petrol and transportation costs are expected to increase in the second half of the year.

Market Data Highlights

• Credit Spreads: IG spreads are near 145 bp, HY spreads at 573 bp.
• CDS Movers: Not explicitly detailed, but the report suggests monitoring credit risk and sovereign risk.
• Bond Issuance Trends: IG issuance is on an upward trajectory, while HY issuance is declining.

Key Figures and Trends

• Baa Industrial Bond Yield: 4.21% (July 13, 2016), lowest since 1956.
• High-Yield Bond Spread: 573 bp (July 13, 2016), down from 899 bp in February 2016.
• US HY Default Rate: Projected to rise to 6.4% by Q4 2016.
• Euro Zone Inflation: 0.1% in June, with a forecast of 0.4% for 2016 and 1.1% for 2017.
• China's GDP: 6.5% in Q2 2016, showing a slowdown.
• Taiwan's Industrial Production: -0.7% y/y in June, with weak global demand.
• Indonesia's Trade Balance: US$0.8 billion in June, with both exports and imports contracting.

Conclusion

The report emphasizes the current low yields and spreads in credit markets, suggesting a period of overvaluation and complacency. However, it warns of potential risks, including rising default rates, weak global demand, and the long-term economic impact of Brexit. The outlook for 2016 is cautiously optimistic, with the US and euro zone economies showing resilience, while Asia-Pacific regions, particularly China and Taiwan, face ongoing challenges in growth and industrial performance.