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Moody's Weekly Market Outlook Summary

Core Content

This document provides an in-depth analysis of the current state and future outlook for credit markets, emphasizing the long-term impact of demographic changes on economic and financial trends. It also includes a preview of upcoming economic reports and forecasts for the US, Europe, and Asia-Pacific regions.

Main Viewpoints

• Demographic Impact on Debt and Growth: The aging population in the US is expected to have a significant negative impact on economic growth, particularly on employment income and household expenditures. This trend is projected to continue, leading to slower inflation and profit growth.
• Credit Market Trends: The US high-yield bond spread is expected to widen, while the 10-year Treasury yield is anticipated to remain low due to the preference of older investors for safer assets.
• Financial Market Behavior: An aging workforce is likely to favor low-risk credit instruments, such as Treasury bonds, over equities. This is expected to keep the 10-year Treasury yield below 3% in the foreseeable future.
• Economic Indicators and Outlook: The document outlines key economic indicators and their expected performance, including GDP, inflation, and trade data for the US, Germany, Italy, and the UK, with a focus on the potential for below-trend growth.

Key Information

Credit Market Metrics

Demographic Trends

• The US workforce is aging significantly, with the percentage of employed individuals aged 55 and over reaching 22.9% by January 2017, up from 12.8% in 1997-2000.
• The number of Americans aged 65 and older is expected to grow by 1.8 million annually over the next decade, compared to 450,000 for the 16 to 64-year-old group.
• The aging workforce is expected to reduce the growth of employment income and household expenditures, leading to slower inflation and profits.

Treasury Yield Analysis

• A strong inverse correlation (-0.84) exists between the 10-year Treasury yield and the percentage of employed Americans aged 55 and over.
• The 10-year Treasury yield is unlikely to return to the 2002-2007 range of 3.25% to 5.25% due to the aging population.
• Recent 10-year Treasury yields have aligned with model predictions, suggesting that the yield is influenced by a combination of factors including the federal funds rate, core PCE inflation, older workers' share of employment, and high-yield spreads.

Economic Outlook for the Week Ahead

United States

• Import Price Index – January: Expected to rise by 0.2%, driven by raw material costs.
• University of Michigan Consumer Sentiment – February Preliminary: Forecast at 97.8, indicating a slight dip from the January high.
• Producer Price Index – January: Projected to increase by 0.2% overall and 0.2% core, continuing a steady rise.
• Consumer Price Index – January: Anticipated to rise by 0.3% overall and 0.2% core, with gasoline costs leading the increase.
• Retail Sales – January: Expected to show a weak 0.1% overall growth, with a stronger 0.4% ex auto growth.
• Industrial Production & Capacity Utilization – January: Industrial production is forecast to remain flat, while capacity utilization is expected to be 75.4%.
• Housing Starts & Building Permits – January: Both are forecast to reach 1.23 million, signaling a rebound in homebuilding activity.
• Leading Economic Indicators Index – January: Expected to rise by 0.5%, supported by falling unemployment claims and increased building permits.

Europe

• Germany: Foreign Trade (December): Trade surplus is expected to expand to €22 billion, driven by a weak euro and strong US demand.
• Germany: Preliminary GDP (Q4): Real GDP is forecast to grow by 1.8% y/y, with a 0.5% q/q growth in the fourth quarter. However, growth is expected to slow to 1.4% in 2017 due to political uncertainty and external factors.
• Germany: Consumer Price Index (January): Annual CPI inflation is expected to rise to 1.9%, with energy prices up 5.8% y/y.
• Euro Zone: Industrial Production (December): Likely to contract by 1.8% m/m, with capital goods production being a key drag.
• Italy: Industrial Production (December): Expected to rise by 1.4% m/m, but the overall euro zone industrial production is likely to slow.
• Italy: Preliminary GDP (Q4): Expected to grow by 0.2% q/q, following a 0.3% growth in the third quarter. The economy is expected to expand by 0.8% in 2017.
• Spain: Consumer Price Index (January): CPI inflation is forecast to rise to 3% y/y, the strongest in over four years, due to rising energy prices and wages.
• U.K.: Unemployment (December): Expected to increase slightly to 4.9%, with signs of labor market weakness emerging.
• U.K.: Retail Sales (January): Projected to fall by 2.3% y/y, indicating a slowdown in consumer spending.

Conclusion

The aging US population is expected to have a lasting impact on economic growth, credit markets, and financial behavior, leading to slower growth in employment income and household expenditures. This demographic shift is likely to keep Treasury yields low and favor safer investments. The upcoming economic reports for the US, Europe, and Asia-Pacific regions suggest a mixed outlook, with some indicators showing signs of improvement while others indicate continued challenges.