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Moody's Weekly Market Outlook Summary

Core Content

This document is a weekly market outlook report from Moody's Capital Markets Research, Inc., covering credit markets, consumer behavior, and upcoming economic data releases. It highlights the interplay between shareholder compensation, credit risk, and market dynamics, particularly in the context of the U.S., Europe, and Asia-Pacific regions.

Main Points

Credit Markets Overview

• Shareholder Compensation and Credit Risk: Shareholder compensation, particularly through equity buybacks, has been a major factor in corporate credit downgrades. In June 2016, 65 downgrades were linked to shareholder compensation, compared to 15 upgrades from equity infusions.
• Credit Spreads:
  • Investment-grade bond spreads are expected to remain near 141 bp by year-end 2016.
  • High-yield bond spreads are projected to rise to 630 bp by year-end 2016, reflecting heightened credit risk.
• Bond Issuance Trends:
  • U.S. investment-grade bond issuance is forecasted to reach a record $1.394 trillion in 2016, up 5.1% from 2015.
  • High-yield bond issuance is expected to decline to $298 billion in 2016, down 15.9% from 2015.
• VIX Index and Market Sentiment:
  • The VIX index, a measure of market volatility, averaged 12.3 over the most recent five trading days, the lowest since 2015.
  • This low VIX is partly due to equity buybacks that increase share prices but reduce credit quality.
  • A VIX of 12.3 suggests a midpoint of 360 bp for high-yield spreads and 150 bp for long-term Baa industrial spreads.

Consumer Borrowing and Recovery

• Cautious Consumer Borrowing: Consumer debt growth has been modest, with borrowing increasing slower than income, which helps avoid the excessive leverage that contributed to past recessions.
• Consumer Debt to Income Ratio: The ratio of household debt to disposable income has been declining for over eight years, reaching a 14-year low of 104% in Q1 2016.
• Consumer Financial Obligations: These obligations are near record lows, at 15.3% of disposable income in Q1 2016, supported by low interest rates and rising income.
• Housing Market Recovery:
  • Mortgage debt has been rising since mid-2015, with a 1.5% annual increase in Q1 2016.
  • The 30-year mortgage rate is near an all-time low, which supports housing affordability and refinancing activity.
  • The U.S. housing market remains a key driver of consumer spending and broader economic growth.

Economic Outlook for the Week Ahead

The U.S.

• S&P / Case-Shiller Home Price Index – May: Expected to show a 5.0% annual increase in the 20-city index.
• Conference Board Consumer Confidence – July: Forecast to drop slightly to 95.5, following a strong June reading.
• New Home Sales – June: Projected to remain near July’s level, with a 15% year-over-year increase in Q2.
• Durable Goods Orders – June: Overall forecast at -0.9%, with ex-transportation at 0.0%.
• Pending Home Sales Index – June: Expected to rise 1.2% after a decline in May.
• FOMC Rate Decision – July: Likely to keep the fed funds target range at 0.25%–0.50%, with a potential rate hike if job and wage growth continues.
• GDP – Second Quarter: Forecast at 2.6% annualized growth, driven by strong consumer spending.

Europe

• Brexit Impact: The U.K. vote to leave the EU has caused uncertainty and a slowdown in economic activity.
• June Data: Expected to show a decline in retail sales and construction PMI, with a likely drop in French and German business confidence.
• ZEW Indicator: Likely to decline, reflecting market concerns about the economic outlook.
• ECB Response: The European Central Bank is expected to maintain current monetary policies, but will emphasize readiness to act if needed.

Asia-Pacific

• Japan:
  • Expected to report a trade surplus of ¥345 billion in June, driven by a sharper decline in imports than exports.
  • Weak global demand and a strong yen are expected to keep exports under pressure.
• New Zealand:
  • Trade balance is forecasted at NZ$332 million in June, indicating some improvement.
  • Dairy exports are under pressure due to low global prices.
• South Korea:
  • GDP growth for 2016Q2 is expected to be 0.6%, with exports improving but still weak on a year-over-year basis.
• Singapore:
  • Industrial production is forecasted to rise 1.1% in June, slightly above the previous 0.9%.

Key Information

• Shareholder Compensation: Has been a key driver of credit downgrades, especially in the high-yield segment.
• Equity Buybacks: While boosting share prices, they reduce financial flexibility and credit quality.
• Consumer Behavior: Consumers are borrowing cautiously, avoiding excessive leverage, which supports a more stable economic recovery.
• Housing Market: A critical component of the broader economic recovery, supported by low mortgage rates and rising disposable income.
• Economic Uncertainty: Brexit has caused a slowdown in the U.K. and broader European markets, with potential spillover effects.
• Monetary Policy Outlook: The Fed is likely to maintain low rates in July, while the BoJ may expand its stimulus measures.

Conclusion

The report emphasizes the contrast between strong corporate equity buybacks and rising credit risk, as well as the cautious consumer borrowing behavior that supports a more stable recovery. It also outlines key economic data releases for the coming week, highlighting the ongoing impact of Brexit on Europe and the subdued outlook for Asia-Pacific economies. Overall, the U.S. remains a key growth driver, with the housing and consumer sectors playing a pivotal role.