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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides insights into credit markets, employment trends, and economic forecasts for the US, UK/Europe, and Asia-Pacific regions. The report highlights the interplay between economic performance, credit spreads, and market behavior, emphasizing the need for increased spending to support jobs and corporate credit.

Main Views

1. Credit and Jobs Need More Spending

• Economic Imbalance: US business activity has been marked by an unsustainable imbalance between labor costs and sales growth.
• Sales Decline: May's -0.1% monthly dip in manufacturers' sales (excluding energy) reflects a slowdown in growth.
• Employment Trends: The strong correlation (0.90) between corporate gross-value-added and private-sector payroll growth suggests that weak sales could lead to slower employment growth.
• Credit Spreads: High-yield bond spreads are expected to rise, indicating potential challenges for corporate credit.

2. Bondholders Profit from Less Than Rosy Outlook

• Credit Market Gains: The first half of 2016 saw strong returns in both government and corporate debt markets.
• Equity Market Performance: The S&P 500's modest 5.4% annualized gain indicates uncertainty about corporate profits.
• Inflation Expectations: Inflation expectations for the next five to ten years are at a seven-year low (1.51%), signaling limited upside inflation risk.
• Sovereign Bond Yields: Developed-market sovereign bond yields, including the US, Germany, UK, and Japan, reached record lows, reflecting global economic uncertainty.

3. Net High-Yield Downgrades Fall from First- to Second-Quarter

• Downgrades vs. Upgrades: In Q2 2016, there were 146 net downgrades and 88 upgrades for US high-yield issuers.
• Sector Impact: Excluding oil and gas, the net downgrades dropped to 99 and upgrades to 79.
• Credit Spread Trends: The high-yield bond spread narrowed from Q1's 776 bp to Q2's 642 bp, but still above the long-term forecast.

Key Information

Credit Market Metrics

Bond Issuance Trends

• Investment Grade: US$-denominated investment-grade bond issuance is expected to rise by 5.7% to a record $1.402 trillion.
• High Yield: US$-priced high-yield bond issuance is projected to fall by -16.7% to $295 billion.

Economic Forecasts

• US Employment: Expected to grow by 180,000 nonfarm payrolls in June, with a 4.8% unemployment rate.
• Import Price Index: Projected to increase for the fourth consecutive month in June.
• Producer Price Index: Expected to rise 0.3% overall and 0.1% core in June, driven by commodity costs.
• Retail Sales: Projected to rise 0.1% overall and 0.4% excluding autos in June.
• Consumer Price Index: Expected to increase 0.3% overall and 0.2% core in June, with housing costs remaining a key driver.

Europe Outlook

• UK Political Uncertainty: The UK is in political turmoil following Brexit, with a new prime minister expected to be chosen in a Conservative leadership contest.
• Spain's Political Deadlock: Spain remains in a political quagmire with no clear winner in parliamentary elections, likely leading to prolonged uncertainty.
• Eurozone Economic Data: Industrial production is expected to contract in France, Spain, and the UK, while retail sales may accelerate due to Germany's strong performance.

Asia-Pacific Outlook

• Market Analysis: The report previews economic reports and forecasts for the Asia-Pacific region, though specific data is not detailed in the provided text.

Market Data Highlights

• Bond Indices: US Treasuries gained 11.0%, US high yield corporate bonds gained 18.9%, and Euro high yield corporate bonds gained 7.4%.
• Equity Indices: S&P 500 gained 5.4%, with energy sector stocks contributing significantly to the rise.
• Commodities: Oil prices rose 29.4% in June, but still trail the 2014 cycle high by nearly 60%.

Ratings Round-Up

• Limited Activity: There was less rating action in Q2 2016 compared to previous quarters, with more upgrades than downgrades.
• Credit Risk: Despite some narrowing of spreads, credit risk remains a concern, especially in the commodity sector.

The Week Ahead

US

• Employment Report (June): Expected to show 180,000 nonfarm payrolls and a 4.8% unemployment rate.
• Import Price Index (June): Projected to rise 0.6%.
• Producer Price Index (June): Expected to rise 0.3% overall and 0.1% core.
• Retail Sales (June): Projected to increase 0.1% overall and 0.4% excluding autos.
• Consumer Price Index (June): Expected to rise 0.3% overall and 0.2% core.
• Industrial Production & Capacity Utilization (June): Projected to rise 0.1% and capacity utilization at 75.0%.
• Business Inventories (May): Expected to grow 0.1%.

Europe

• France Industrial Production (May): Likely to rise 0.2% m/m, with manufacturing PMI at 48.4.
• Germany Foreign Trade (May): Expected to show a slight increase in surplus to €24.2 billion.
• Eurozone Economic Outlook: Mixed signals with industrial production likely contracting and retail sales possibly rising.

Conclusion

Moody's report underscores the importance of increased spending for both jobs and corporate credit. Despite recent market rallies, the outlook remains cautious, with credit spreads and inflation expectations indicating limited growth prospects. Political and economic uncertainties, particularly in the UK and Spain, are expected to continue affecting market sentiment. The report highlights the need for sustained improvements in corporate sales and investment to support a stronger recovery in credit markets and employment.