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Moody's Weekly Market Outlook Summary

Core Content

Moody's Analytics Weekly Market Outlook highlights the divergent behavior of corporate bonds and equities in the context of market volatility and economic conditions. The report focuses on the U.S., Europe, and Asia-Pacific regions, providing insights into credit markets, economic indicators, and central bank policies.

Main Views

• Corporate Bonds vs. Equities: Despite the turbulence in equity markets, corporate bonds have remained relatively calm. This is attributed to expectations of continued profit growth, which may lead to a decline in the high-yield default rate.
• High-Yield Bond Spreads: The high-yield bond spread has shown a significant divergence from its historical correlation with the VIX index. The spread has been lower than what the VIX index would predict, suggesting a possible overreaction to market conditions.
• Interest Rate Outlook: The report suggests that the U.S. 10-year Treasury yield may peak at less than 3% in 2018 if home sales and auto sales remain subdued. However, the risk of interest rate increases persists due to inflationary pressures and the Fed's policy stance.
• Inflation Risks: Inflation remains a concern, particularly in the U.S. and India, where high energy and food prices are contributing to elevated inflation rates. The U.S. PCE price index is expected to rise above 2% in March, driven by costlier energy products.
• Consumer Spending and Savings: The low personal savings rate is limiting the impact of fiscal stimulus on demand-driven inflation. Consumers are likely to save a significant portion of tax cuts, reducing their spending power and potentially dampening inflationary pressures.

Key Information

U.S. Credit Market Outlook

• Corporate Bond Issuance: Corporate bond issuance in 2018 is expected to decline by 5% to $1.432 trillion, while high-yield bond issuance is projected to fall by 4.5% to $433 billion.
• Default Rates: The U.S. high-yield default rate is forecasted to average 2.4% in Q4 2018, down from 3.3% in December 2017.
• Baa Spreads: The Baa-grade corporate bond spread is currently at 142 bp, while the VIX index suggests a higher spread of 279 bp. The spread is expected to thin over time as the Fed's policy stance remains unchanged.
• Inflation and Wage Growth: The average hourly wage growth is not a reliable indicator of core PCE price index inflation. Slower wage growth is more indicative of slowing inflation.

U.S. Economic Indicators

• Consumer Price Index (CPI): Expected to show a 3.0% year-over-year increase in January.
• Core CPI: Also expected to rise to 3.0%, slightly above the MPC's target.
• Housing Market: A subdued pace in home sales may cap the 10-year Treasury yield at less than 3%.
• Retail Sales: Expected to show a weak 0.1% monthly increase in January, following a 1.5% decline in December.

Europe Outlook

• Germany: Preliminary GDP for Q4 2017 is expected to rise by 0.4% q/q, with strong growth in the three months to September creating base effects.
• U.K.: Retail sales are expected to disappoint again in January, with only a 0.6% year-over-year increase. CPI is forecasted to remain at 3.0% for January.
• Euro Zone: Industrial production for December is expected to decline by 0.1%, while external trade is forecasted to reach €29.0 billion.

Asia-Pacific Outlook

• Japan: Q4 2017 GDP is expected to rise by 0.4% q/q, confirming a strong performance in 2017. The economy is driven by exports, improved global demand, and a weaker yen.
• Malaysia: Fourth quarter GDP growth is forecasted to reach 5.8%, extending the trend of strong economic performance.
• India: CPI inflation is expected to remain at 5.0% for January, driven by food and fuel prices. Industrial production is forecasted to grow at 7.3% y/y in December, aided by base effects.
• South Korea: The Bank of Korea is expected to keep the policy rate at 1.5% in February, with inflation remaining muted.

Upcoming Data and Forecasts

Conclusion

The report underscores the resilience of corporate bonds in the face of equity market volatility and highlights the complex interplay between inflation, wage growth, and monetary policy. It also provides a detailed outlook for key economic indicators and central bank decisions in the coming weeks.