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Moody's Weekly Market Outlook Summary

Core Content

Moody's Weekly Market Outlook provides insights into credit market conditions and economic indicators for the US, Europe, and Asia-Pacific regions. The report highlights the potential signs of an upcoming credit cycle downturn, based on historical patterns and current market behavior.

Main Views

Credit Cycle Indicators

• Thin Spreads as a Warning Sign: Very narrow credit spreads, particularly in high yield bonds, often precede credit cycle downturns. The current high yield bond spread of 330 bp is exceptionally low and historically indicates potential stress in the credit cycle.
• Default Rates as a Leading Indicator: The US high yield default rate has been a key indicator of the corporate credit cycle. A default rate above 6% has historically signaled a downturn, and the current default rate is rising, suggesting a possible shift.
• Debt vs. Profits Growth: A faster growth rate in corporate debt compared to core profits is a red flag for credit cycle stress. In the most recent quarter, debt growth outpaced profits by 3.1 percentage points, raising concerns about corporate credit quality.

Historical Context

• Past Downturns: The last three credit cycle downturns were preceded by a narrowing of high yield spreads and a slowdown in core profits growth relative to debt.
• 1986 Exception: The 1986 period saw a false alarm, with core profits falling but not triggering a downturn due to the absence of a recession and lower default rates.

Key Information

Investment Grade and High Yield Bonds

• Investment Grade: The spread is expected to widen from its recent 104 bp to a higher level by year-end 2014.
• High Yield: The spread is at 330 bp, potentially rising to 375 bp by year-end. June's speculative grade bond yield is on track to set a record low, indicating overconfidence in the market.

Issuance Trends

• Investment Grade: US$1.119 trillion in 2013 dropped by -1.5% to $1.063 trillion in 2014.
• High Yield: Issuance reached a record $431 billion in 2013 and is expected to fall by -10% to $388 billion in 2014.

Market Data

• CDS Movers and Credit Spreads: The report includes analysis of credit spreads and CDS (Credit Default Swap) movements, which are crucial for assessing credit risk.
• Ratings Activity: Upgrade and downgrade ratios remain consistent with previous weeks, indicating ongoing market activity and risk assessment.

Regional Outlook

United States

• Existing Home Sales: Forecast at 4.74 million for May, showing signs of recovery but still below pre-recession levels.
• GDP: First-quarter GDP is expected to be revised downward, potentially to -1.8%, signaling weak economic performance.
• Durable Goods Orders: Core orders are expected to rise 7.5% annualized, indicating industrial demand strength.
• Consumer Confidence: Expected to rise slightly, but still under pressure due to weak economic recovery and high unemployment.

Europe

• Political Tensions: Ongoing issues in Ukraine and Iraq are affecting energy prices and business sentiment.
• Germany: The Ifo Business Climate Index declined to 110.4 in May, and the PPI is expected to fall 0.4% m/m.
• France: Consumer confidence is forecast to rise to 88, but remains weak due to low GDP and high unemployment.
• Italy: Business confidence is expected to remain high at 99.5, but manufacturing PMI dropped to 53.2, indicating slower recovery.
• Euro Zone: Business and consumer confidence are expected to rise slightly in June due to ECB easing and a weaker euro.

Asia-Pacific

• Japan: May data suggest continued economic contraction, with household spending weak and the sales tax distorting price trends.
• Taiwan: Domestic trade and industrial production are expected to remain stable, supported by improving global demand.
• South Korea: Consumer sentiment is forecast to rise to 107 in June, recovering from May's 105 due to improved economic conditions.
• Singapore: Industrial production is expected to rise 4%, but the electronics sector faces pressure from weak PC demand and production shifts.
• Hong Kong: Trade deficit is expected to narrow to -HK$52.9 billion from -HK$55.3 billion in April, driven by improving global demand.

Conclusion

Moody's Weekly Market Outlook highlights the risks of an impending credit cycle downturn, driven by historically thin credit spreads, rising default rates, and a shift in debt vs. profit growth. The report also provides a detailed forecast of economic indicators across the US, Europe, and Asia-Pacific, emphasizing the need for vigilance in the face of these signs.