Moody's Weekly Market Outlook Credit Concerns Surpass Rate Risks (Capital Markets Research)

WEEKLY MARKET OUTLOOK

JULY 30, 2015

CAPITAL MARKETS RESEARCH

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Credit Concerns Surpass Rate Risks

Credit Markets Review and Outlook by John Lonski Credit Concerns Surpass Rate Risks.

» FULL STORY PAGE 2

Topic of the Week by Ben Garber One Company Mirrors the Worldwide Economic Slowdown.


The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions.


The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “July’s worldwide offerings of corporate bonds may advance by 65% annually for investment grade, but dip by -5% for high yield,” begin on page 19.


Ratings Round-Up by Njundu Sanneh US Credit Quality Rises.


Market Data Credit spreads, CDS movers, issuance.


Moody’s Capital Markets Research recent publications Links to commentaries on: Ford, Campbell, AXP, risk, GS, M&A, UBS, issuance, WFC, C, MS, JPM, IP.


Credit Spreads

Investment Grade: Year-end 2015 spread to resemble its recent 152 bp. High Yield: Recent spread of 529 bp should approximate 500 bp by year-end 2015.

Defaults US HY default rate: June 2015, 2.0%; Moody’s Credit Policy Group forecasts 3.0% in 1H2016

Issuance For 2015, US$ IG bond offerings may grow by 24% to $1.401 trillion, while US$ HY bond issuance sinks by -5% to $401 billion. In 2014, US$ IG bond issuance rose by 0.9% to $1.129 trillion, while US$ HY bond issuance dropped by -2.3% to $421 billion.

Click here for Moody’s Credit Outlook, our sister publication containing Moody’s rating agency analysis of recent news events, summaries of recent rating changes, and summaries of recent research.

Moody’s Capital Markets Research, Inc.

Weekly Market Outlook Contributors: David W. Munves, CFA 1.212.553.2844 [email protected] John Lonski 1.212.553.7144 [email protected] Ben Garber 1.212.553.4732 [email protected] Njundu Sanneh 1.212.553.4036 [email protected] Yukyung Choi 1.212.553.0906 [email protected] Irina Baron 1.212.553.4307 [email protected] Franklin Kim 1.212.553.4419 [email protected] Xian (Peter) Li 1.212.553.1404 [email protected]

Moody's Analytics/Europe: Tomas Holinka 1.420 ( 221) 666-384 [email protected]

Moody's Analytics/Asia-Pacific: Matthew Circosta 1.612.9270.8118 [email protected] Faraz Syed 1.612.9270.8146 [email protected]

Editor Dana Gordon 1.212.553.0398 [email protected]

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2 JULY 30, 2015 CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM

Credit Markets Review and Outlook

Credit Markets Review and Outlook By John Lonski, Chief Economist, Moody’s Capital Markets Research, Inc.

Credit Concerns Surpass Rate Risks Markets have become more accepting of the limited upside for benchmark interest rates. Forthcoming trajectories for short- and long-term interest rates are more likely to resemble mild inclines than steep lift-offs. A global surfeit of production capacity vis-a-vis expenditures should rein in inflation risks indefinitely. If inflation expectations are well contained and real economic growth remains modest, 3% should be the new 6% for the 10-year Treasury yield.

The FOMC’s policy statement of July 29 did not strongly indicate the likelihood of a rate hike at the September 17 meeting. Accordingly, the 83% of surveyed economists who predicted in early July that the first rate hike will occur at September’s FOMC meeting might be proven wrong.

Real GDP averages just 1.8% growth for current recovery to date The latest bout of industrial commodity price deflation stems from above-average underutilization of global production capacity that should keep inflation well contained. Like the rest of the world, the US is now mired in the dullest business cycle upturn since the 1940s.

The second quarter of 2015 marked the end of the sixth year of the current recovery. The 1.8% average annualized real GDP growth of the first six years of the ongoing upturn was far slower than the 2.7% average annual growth of 2002-2007’s upturn, the 3.6% growth of 1991-2000’s recovery, and the 4.3% advance of 1983-1990’s upswing. Moreover, US real GDP’s average annual growth plunged from the 3.4% of the 10-years-ended Q2-2005 to the 1.4% of the 10-years-ended Q2-2015. The latter helps to explain why fed funds remains stuck at nearly 0%.

Sales: S&P 500

Operating Income: S&P 500

Sales: S&P 500 excluding financial

companies

Operating Income: S&P 500

excluding financial companies

Sales Ex Energy

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Energy

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Average annual percent changes:

2010-2011 9.4 27.6 10.7 23.2

2012 2.4 4.7 2.1 1.5

2013 2.3 5.0 2.3 2.7

2014 3.3 7.2 3.6 7.8

Yearly percent changes by quarter:

13Q1 0.6 2.7 0.3 1.9

13Q2 2.6 3.8 1.8 -1.3

13Q3 3.2 4.8 3.7 4.2

13Q4 2.6 8.8 3.5 6.0

14Q1 3.0 5.4 3.6 5.1

14Q2 4.6 10.3 5.1 11.3

14Q3 4.0 8.8 3.8 7.9

14Q4 1.5 4.2 1.7 7.0 4.2 6.6

15Q1 -3.0 0.7 -3.7 -0.9 2.0 7.8

15Q2: 65% of S&P500 -1.7 1.7 -2.1 0.9 0.8 5.1

Latest projections:EST 15Q2 -2.8 -4.2

EST 15Q3 -4.5 -5.5

EST 15Q4 2.3 -0.5

EST 16Q1 6.6 7.6

Sources: Bloomberg News, Moody' s Capital Markets Research Group

Figure 1: Worldwide Slack, Industrial Commodity Price Deflation, and Costlier Dollar Curb Growth of Sales and Operating Profits

Revenues are mostly sluggish after excluding plunge by energy sales Subpar corporate revenues mirror below-trend economic growth. The revenues of the 65% of the S&P 500 that have reported for 2015’s second quarter were down by -1.7% year-over-year. After excluding the -30.1% annual plummet incurred by energy companies, the annual percent change of sales for the remainder of the S&P 500 improved to a still mediocre rise of 0.8%. Because the latter includes the 1.0% yearly gain of




financial company sales, the revenues of non-financial companies excluding energy companies rose by less than 0.8%.

Other broad non-financial company categories incurring an annual drop by sales thus far in Q2-2015 included the -10.9% of materials, the -4.7% of consumer staples, the -2.6% of the industrials, and the -2.3% of utilities. On the positive side, Q2-2015’s sales growth for the non-financial company members of the S&P 500 excluding energy has been led by annual increases if 6.7% for health care, 3.9% for information technology, 2.5% for telecommunication services, and 2.4% for discretionary consumer spending. (Figure 1.)

Let’s be frank, no broad category of S&P 500 sales, outside of health care, appears to be growing rapidly enough to justify average hourly wage growth much above 2%. Very mild sales growth, if any, would compel businesses to spend more cautiously on capital goods and labor.

Subpar sales growth is hardly confined to the US. For 2015’s first half, China’s industrial sales rose by merely 1.4% year-over-year, which was down from their 8.6% annual rise of 2014’s first half and was the category’s worst first-half showing since the 0.4% annual uptick of 1H/2009. In stark contrast, for the three January-June spans of 2011 through 2013, China’s industrial sales advanced by 17.5% annually, on average.

Severe base metals price deflation may rein in rates The global slack implicit to the extraordinarily slow growth of China’s industrial sales also has helped to slash the prices of a broad array of industrial commodities. A decisive firming of base metals prices would indicate a fuller utilization of global production capacity.

At the current annual rate of base metals price deflation, the 10-year Treasury has always been less than its year earlier reading, while fed funds has never been hiked.

Moody’s industrial metals price index was recently down by -25% from a year earlier. During the last 13 weeks, the base metals price index has declined by -16% year-over-year.

Since year-end 1982, the base metal price index’s moving three-month average has declined by at least -15% year-over-year for 46 months. In each of the 46 months not only was the 10-year Treasury yield’s month-long average down from a year earlier, but the federal funds rate was either left unchanged or cut. Since 1982, the federal funds rate has never been hiked when the base metals price index’s moving three-month average sank by at least -15% from year to year.

Wider spreads, subpar profits and rising default risk favor low rates Also, the latest widening of corporate bond yield spreads, the subpar growth rate of profits, and the recent ascent by the average expected frequency of high-yield defaults weigh against significantly higher interest rates.

The recent 215 bp spread of Moody’s long-term Baa industrial company bond yield was well above its 151 bp median of the previous two economic recoveries. Moreover, the 215 bp spread was even further above its averages just prior to the fed fund rate hikes of June 2004 and February 1994, where each was the first in a series of rate hikes following a recession. The initial rate hike of June 2004 was preceded by a 132 bp average for the Baa yield spread, while February 1994’s commencement of monetary tightening was preceded by a similar 131 bp average for the Baa spread.

Likewise, not only was the recent high-yield bond spread of 529 bp much wider than its 418 bp of the previous two upturns, it was also much broader than its pre-rate hike averages of 381 bp for June 2004 and 378 bp for early 1994.

Profits now perform meekly compared to their showings when Fed rate hikes were first implemented in June 2004 and February 1994. During the years-ended Q2-2004 and Q1-1994, the annual increases for pretax profits from current production were 20% and 15%, respectively. By contrast, for the year-ended March 2015, the annual increase by this measure of core profits was merely 3.4% and may be no greater than 2% for yearlong 2015.

The rising default risk of US high-yield corporates now limits the upside for fed funds. At the Fed’s last first-hike of rates after a recession in June 2004, the average high-yield expected default frequency (EDF) metric had declined by -42 bp over the previous three months and -286 bp over the past 12 months, to 4.26%. By contrast, July 29th’s high-yield EDF metric of 4.54% was up by +112 bp over the previous three months and by +243 bp from a year earlier.

Because the measurement of the average high-yield EDF metric did not commence until 1996, the trend of the actual high-yield default rate at the time of February 1994’s first rate hike will be employed. January 1994’s




default rate of 3.7% was down from both July 1993’s 5.1% and February 1993’s 4.6%. Moreover, the default rate was on its way to forming a localized bottom at the 1.9% of June and July 1994.

Thus, the end of the Fed’s 0% rate policy will probably not be followed by an aggressive tightening of monetary policy. Instead of peaking in a range of 5% to 6%, fed funds may rise no higher than 2% during the next tightening cycle. In turn, the 10-year Treasury yield might do well to reach 3%. (Figure 2.)

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Nov-07 Aug-08 May-09 Feb-10 Nov-10 Aug-11 May-12 Feb-13 Nov-13 Aug-14 May-15

Quantitative Easings Are Shaded 10-year Treasury Yield: %

Figure 2: 10-year US Treasury Yield Should Remain Well Under Its 2.75% Average of August 2013 thro through March 2014




Topic of the Week By Ben Garber, Economist, Moody’s Capital Markets Research, Inc.

One Company Mirrors the Worldwide Economic Slowdown Diminished global growth prospects stem from the fading dynamism of major emerging market countries, a trend that is manifest in the collapse of commodity prices. One major industrial firm sits amid the epicenter of this malaise — Caterpillar, Inc. (CAT), the Peoria, Illinois based manufacturer of engines and equipment for construction and mining. With sales declining for three consecutive years, CAT is rooted in the industries facing the highest risk of credit default. Such weaknesses in the mining and energy sectors also inhibit inflation, which in turn keeps the lid on interest rates.

Slumping global growth has sapped industrial output The ongoing slowdown in Chinese economic activity is a leading cause of restrained global output growth, following the initial burst of activity after the financial crisis. Actual and projected figures from the IMF see Chinese real growth slowing from 10.4% in 2010 to the 25-year low of 6.8% in 2015. That tracks with a decline in global growth of 5.4% in 2010 to 3.3% in 2015, marking the fourth consecutive year of growth under 3.5%. With China’s construction boom leveling off and demand for natural resources falling, the negative effects on global industrial business results are substantial.

Slowing manufacturing and construction activity in China and the world in general in recent years lines right up with the challenges facing CAT. In 2013, the company saw revenue declines in its mining, construction, and energy segments from which it has yet to recover. Reuters quotes CAT CFO Brad Halverson as saying that revenues are slated to fall for the third straight year for the first time since the 1930s. Monthly retail sales of machines to end-users have declined annually in every month going back to December 2012. Such sales grew sharply alongside the rebound from the recession, expanding as much as 66% year-over-year during the 2010-2012 period (Figure 1). The subsequent slump continues unabated, with the 14% year-over-year decline in machine sales to June equaling a five-year low. The sour outlook has weighed on the company’s stock, which at $77.33 per share is down 26% yearly.

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Figure 1: Global GDP vs Caterpillar Retail SalesCaterpillar Retail Sales of Machines to End Users: YoY % Change ( L )

Global GDP: Yearly % Change ( R )

Sources: IMF, Caterpillar, Inc.

Commodity price freefall hurts business results The sales slump at CAT dovetails with the plunge in commodity prices (Figure 2). Moody’s Industrial Metals Price Index was down 25% from a year ago on July 29, and only marginally above six-year lows. The Index now stands 41% under the record high set in 2011, as robust projections for global growth at that time now seem like fantasies. In addition CAT’s performance now much more closely tracks global trends compared to its more US-centric results in the previous decade. When commodity prices were booming at the 33% annualized rate for the Metals Index in the five years ending 2007, CAT’s sales were sporting minimal growth in the final years of that period as construction activity in the US fizzled out. But with the North American

Topic of the Week




share of CAT’s revenue sliding from 53% in 2006 to 44% last year, risks from all regions in world can seriously weigh on operations.

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Figure 2: Industrial Metals Prices vs Caterpillar Retail SalesCaterpillar Retail Sales of Machines to End Users: YoY % Change

Moody's Industrial Metals Price Index: YoY % Change

Sources: Moody's Analytics, Caterpillar, Inc.

Falling import prices restrain US interest rate increases The decline in raw materials prices plus the poor sales outlook for CAT and many other firms will limit the increase in borrowing costs for US businesses. Though policymakers generally look past the large fluctuations of energy costs and other imported goods, core price measures are not likely to accelerate greatly under current conditions. The Import Price Index already had fallen 10% year-over-year to June prior to the renewed large-scale drop-off in the price of oil and other commodities of recent weeks. The core Personal Consumption Expenditures Price Index does not appear immune to this global disinflationary pressure, only rising at the 15-month low rate of 1.2% yearly to May (Figure 3). The last stretch of growth in core PCE at or above 2% in late 2011 and early 2012 came when the Import Price Index reached its highest level of the past seven years. With low commodity costs restraining observed core price trends and limiting expected price growth, long-term interest rates will not rise sharply.

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Figure 3: PCE and Import Price IndicesImport Price Index: YoY % Change ( L ) PCE Price Index: YoY % Change ( R )

Core PCE Price Index: YoY % Change ( R )

Sources: BYA, BLS

Topic of the Week




Default risk elevated for energy and mining firms The energy and mining sectors on which CAT depends are showing much higher levels of distress than the broader US corporate credit market (Figure 4). The overall high yield US corporate bond spread of 529 bp in the Barclays index is only slightly more than half of the 1,028 bp spread for the combined sectors of independent energy, oil field services, and metals & mining. Historically the spread for these three sectors has averaged 55 bp less than the rest of the US high yield market. But now if you exclude the energy and mining sectors from the overall index, the high yield spread drops over 100 bp to 426 bp. At 426 bp, the high yield spread would fall comfortably under the historical average of 580 bp, indicating investor confidence in sectors other than energy and mining. Yet the latter account for 17% of the outstanding high yield market, which means the fate of these firms broadly weighs on high risk credit. Without substantial relief from slow global growth and the long-term commodity price declines, business sales growth will lag and corporate defaults may surprise.

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Figure 4: US High Yield Bond Spread by SectorUS High Yield Bond Spread: bp

US High Yield Energy & Mining Sectors* Spread: bp

US High Yield Spread ex Energy & Mining: bp

*Includes Independent Ynergy, Oil Field Services and Metals & Mining sectorsSource: Barclays

Topic of the Week

The Week Ahead



The Week Ahead – US, Europe, Asia-Pacific

THE US By John Lonski and Ben Garber Moody’s Capital Markets Research Group Estimates are consensus views. Release times are US Eastern Daylight Time

FRIDAY, JULY 31

University of Michigan Consumer Sentiment – July Final Time: 10:00 am Forecast: 94.0 The final reading in the July Michigan sentiment survey can limit the initial decline recorded against June’s five-month high. The potential for renewed declines in gasoline prices can give consumer attitudes a lift. A supply glut and falling demand as weather in the US turns colder can give US consumers greater spending power on non-fuel items well into next year.

MONDAY, AUGUST 3

Personal Income & Spending – June Time: 8:30 am Forecast: 0.4% income, 0.2% spending A dud result for last month’s retail sales implies likewise for June consumer spending. Retail sales excluding autos and gasoline rose 3.3% annualized last quarter, pointing to a positive but tepid pace for overall spending. Yet with wage and salary income rising 5.0% yearly to May, there is room for some limited acceleration in consumer outlays during the second half of this year.

Construction Spending – June Time: 10:00 am Forecast: 0.7% Construction spending can expand for the seventh straight month in June on the heels of gains in residential activity. Building permits reached the eight-year high in June and rose 19% year-over-year in the second quarter, promising much future gains in homebuilding. Additionally, an index of architectural billings jumped to the nine-month high in June, indicating broad based gains are likely across the construction industry.

ISM Manufacturing Index – July Time: 10:00 am Forecast: 53.5 July’s ISM Manufacturing Index is projected to equal June’s six-month high amid evidence of rising industrial sector demand. The new orders component of the survey averaged a solid 55.1 in the second quarter, improving on the first quarter’s lackluster 52.4. That pick-up in orders is a sign that manufacturing output measured in the industrial production report is poised to improve greatly after failing to expand in four of the first six months of this year.

Vehicle Sales – July Forecast: 17.1 million July vehicle sales will do well to hold on the volume recorded in June, keeping such activity moving along at a sturdy long-term pace. On a moving yearlong basis, auto sales are up 6%, adding to economic growth at a pace faster than other areas of consumer spending. But the boost from auto sales has slowed from the double-digit percentage annual pace last seen in 2013, as spending on a broader mix is goods in needed to greatly lift the overall expansion.

The Week Ahead



TUESDAY, AUGUST 4

Factory Orders – June Time: 10:00 am Forecast: 1.6% Bright results for durable goods orders can lift overall factory orders to largest gain in three months in June. Yet despite a strong June gain for core durable orders, such items fell 2% annualized in the second quarter. While domestic demand can lead a rebound in industrial activity, weakness overseas restrains the potential for manufacturing sector output.

WEDNESDAY, AUGUST 5

Trade Balance – June Time: 8:30 am Forecast: -$42.5 billion The US trade deficit is projected to widen to a three month high as exports struggle to gain traction. Soft readings on Chinese economic activity and dollar strength add substantial headwinds to export activity. Yet renewed declines in the prices of oil and other commodities will prevent a substantial widening of the trade gap in the months ahead.

ISM Non-Manufacturing Index – July Time: 10:00 am Forecast: 56.0 The ISM Non-Manufacturing Index is forecast to hold firm in July as consistent hiring indicates that domestic service sector sales are rising at a decent pace. Unlike the slowdown in manufacturing, the Non-Manufacturing Index maintained sturdy readings above 55 for 15 straight months through June. During that streak the private service sector added 214,000 jobs per month, up 29% from the previous 15-month period.

FRIDAY, AUGUST 7

Employment Report – July Time: 8:30 am Forecast: 218,000 nonfarm payrolls, 5.3% unemployment rate July nonfarm payrolls are in line to expand by over 200,000 for the third straight month. Yet more attention may fall on the monthly change in average hourly wages after showing no growth in June. Signs that labor market slack is dissipating raise the probability that wage growth will accelerate in the near future. The broad underemployment rate that includes part-time workers who want full-time jobs fell 1.5% yearly in June to the seven-year low of 10.5%.

EUROPE By the Dismal (Europe) staff in London and Prague Release times are Greenwich Mean Time.

Focus: Industrial production to show little effect of Greek crisis The resumption of official talks between the Greek government and its euro zone creditors was the economic highlight of the week. It followed passage of two reform packages in as many weeks, which were required by the creditors as preconditions for the talks. The talks will have to be very rapid in order to conclude before the Aug. 11 regular meeting of euro zone finance ministers. Nevertheless, even if an agreement is not reached before Aug. 20—the due date for a large bond repayment to the European Central Bank—the European partners will provide Greece with another portion of temporary financing.

The Week Ahead



Data due in the week ahead will show whether the Greek saga has had an effect on economic activity in the rest of the euro zone. The four largest euro zone economies, together with the U.K., will publish industrial production data for June, the first month when bond markets around European periphery began to significantly respond to developments in Greece. Moody’s Analytics expects moderate acceleration in yearly growth of industrial production in Germany and France, substantial acceleration in Spain and a moderate slowdown in monthly growth in Italy and the U.K. Additionally, data for retail sales in Germany and the euro zone will be published, which we expect continued strong growth from year-ago levels. This is in line with the most recent consumer and business confidence surveys, including the ZEW and Ifo indicators, which point toward only restrained loss of momentum in the last months. Similarly, the July flash composite Purchasing Managers Index for the euro zone showed only a small decrease, which left it close to its multiyear high. Final data for euro zone manufacturing, retail and composite PMI will provide more detail.

Bank of England policymakers meet Aug. 6. While the bank's first rate increase since the financial crisis of 2008-2009 is probably still a few months away, any sign of change in the views of policymakers will be closely watched.

FRIDAY, JULY 31

France – Household Consumption Survey – June Time: 7:45 a.m. BST Forecast: 0.1% French household consumption likely increased 0.1% m/m and strengthened 1.6% y/y in June on the back of low oil prices and a slow, yet firming, recovery in the country. Still, although households are slightly more optimistic about the country's economic future, the savings rate is still high, as households remain under pressure from high and long-term unemployment, the number of temporary jobs, and tight credit. This particularly affects spending on durable goods.

France – Producer Price Index – June Time: 7:45 a.m. BST Forecast: -1.8% Year-on-year producer prices in France likely decreased again in June on the back of low energy prices, particularly oil and oil derivatives. In month-ago terms, domestic producer prices probably increased a little. Also, demand for industrial products in France remains subdued and creates no significant price pressures, although the weaker euro is raising prices of some imported goods outside of the euro zone.

Germany – Employment Situation – July Time: 9:00 a.m. BST Forecast: 6.4% unemployed German unemployment dropped by 1,000 in June, and the unemployment rate remained at 6.4%. Another decrease in the number of unemployed points to improved confidence in Germany’s further expansion despite worse than expected results for the economy at the start of this year. According to the June Markit composite PMI, employment continued to increase during the month, although the pace was marginal. The unemployment rate is forecast to remain at 6.4% in coming months.

Spain – Business Confidence – July Time: 9:00 a.m. BST Forecast: 0 Spain's business confidence likely eased in July from June. The debt dramas in Greece likely dampened sentiment in July as the ructions created widespread uncertainty and discontent throughout the euro zone. Yet, the index is at multiyear highs thanks to the strengthening economy, and forward economic indicators suggest ongoing strength.

Spain – Government Finance – June Time: 9:00 a.m. BST Forecast: -€8.3 billion Spain's fiscal deficit likely narrowed in June, from May's €9.8 billion deficit, not seasonally adjusted. Improved GDP growth is somewhat helping government finances, but they remain under pressure from high unemployment keeping a lid on income taxes, the largest source of Spanish government revenue.

The Week Ahead



Italy – Employment Situation – June Time: 9:00 a.m. BST Forecast: 12.3% unemployed Italy’s unemployment rate likely fell in June from 12.4% in May thanks to the improving economy. The economy emerged from recession in the three months to March, with real GDP rising 0.3% q/q. The purchasing managers’ index suggests that the recovery continued in the second quarter, supported by the weaker euro, low oil prices, and improved investor optimism in the euro zone. Nevertheless, we expect the unemployment rate will trend downward only gradually, as the weak outlook discourages companies from major hiring.

Euro Zone – Preliminary Consumer Price Index – July Time: 10:00 a.m. BST Forecast: 0.3% Euro zone inflation likely accelerated in July from a year earlier, with consumer prices increasing 0.3% y/y, following the 0.2% growth in the previous month. The improving economy, weaker euro, and higher oil prices should drive up inflation in coming months. To accelerate price growth the European Central Bank continues to buy assets and provide long-term liquidity. The five-year forward break-even inflation rate has risen around 30 basis points to 1.8% since mid-January, approaching the ECB’s 2% target.

Euro Zone – Unemployment – June Time: 10:00 a.m. BST Forecast: 11% unemployed The euro zone’s unemployment rate likely ticked down 0.1 percentage point in June after reaching a multiyear low the previous month. This reflects the region’s increased pace of recovery, which reached 0.4% in quarter-ago terms in the first quarter of 2015. All confidence indicators across the euro zone point towards gradually improving spirits, supported by the lower price of oil and euro and the quantitative easing policy initiated by the ECB. Nevertheless, the recovery is too weak to make a substantial dent in the elevated unemployment rate. The greatest risk to recovery comes from uncertainty surrounding the political situation in Greece, which could reignite the region's crisis.

Russian Federation – Monetary Policy – August Time: 10:30 a.m. BST Forecast: 10% We expect the Bank of Russia to continue cutting the policy rate, to 10%, as the current high price of borrowing does not bode well and there is a dire need to revive investment and domestic demand. The decision will arrive on the back of decelerating inflation and a likely second quarter of annual GDP decline.

Italy – Producer Price Index – June Time: 11:00 a.m. BST Forecast: -1.7% Italy’s producer price deflation likely eased further in June. Slowly recovering manufacturing and the weakening euro will likely contribute to higher inflation in coming months. According to the May PMIs, inflation pressures are returning, with input costs rising at the fastest rate since February 2012 in manufacturing and at the fastest rate in almost two years in services. Nevertheless, price growth will be moderate because of ongoing structural rigidities.

MONDAY, AUGUST 3

Germany – Retail Sales – June Time: 8:00 a.m. BST Forecast: 0.3% German retail sales increased 0.5% m/m in May, following a revised 1.3% rise a month earlier. Sales continued to grow in year-ago terms, and the rate accelerated. Consumption has been robust even as German households stay cautious because of the uncertain outlook, but sentiment has been strong. Still, the GfK consumer climate indicator for July fell to 10.1 from June’s 10.2, as a result of uncertainty surrounding a possible Greek exit from the euro. Meanwhile, the Markit retail PMI retreated to 54 in June

The Week Ahead



from the 11-month high of 55.8 in May, but continued to point to a stronger increase in retail sales in coming months. We expect retail sales continued to increase in June although at a slightly weaker rate.

TUESDAY, AUGUST 4

United Kingdom – Nationwide Housing Price Index – July Time: 7:05 a.m. BST Forecast: 3.5% The U.K. Nationwide house price index is forecast to rise in year-ago terms in July by more than in the previous month. The end of political uncertainty after the Conservatives won a parliamentary majority in the general election in May probably unleashed pent-up demand for residential properties. Political uncertainty typically prompts potential homebuyers to postpone purchases until the outlook becomes clearer. Yet the residential property market is likely to be under pressure in the coming months from the prospect of official interest rates starting to rise next year, the recent introduction of tighter mortgage loan standards, and already-high prices in some areas including London and South-East England.

Euro zone – Producer Price Index – June Time: 10:00 a.m. BST Forecast: -1.8% Euro zone producer prices likely moderated their decline in June in year-ago terms because of stabilization of Brent oil prices in the first half of 2015. In year-ago terms the producer price decline is driven by a drop in energy prices, which reflects the large decrease in oil prices in the last months of 2014. This effect will persist into coming months. Longer term, the euro zone’s producer prices should be lifted by the ECB’s quantitative easing, which began in March, and by depreciation of the euro during the past 12 months.

Russian Federation – Consumer Price Index – July Time: 1:40 p.m. BST Forecast: 1.1% Consumer price inflation in Russia will likely accelerate to 1.1% month over month in July, on the back of the depreciation of the ruble since the second half of May. Given the huge drop in imports due to anemic domestic demand, we expect the effects of the depreciation pass-through to fade quickly. Still, annual inflation will likely remain in double-digit territory in the coming months.

WEDNESDAY, AUGUST 5

Italy – Industrial Production – June Time: 9:00 a.m. BST Forecast: 0.3% Italy’s industrial production growth likely slowed in June, in line with other high-frequency data. Growth in manufacturing, according to the purchasing managers’ index, moderated slightly in June as the PMI fell to 54.1 from May’s 49-month high of 54.8. Furthermore, Italy's new industrial orders shrank 2.5% month over month and 0.5% year over year in May, while manufacturing confidence declined to 103.6 in July from 103.9. Despite subdued high-frequency data, we still expect that Italy’s manufacturing will improve in coming months, supported by the weaker euro and low oil prices. Nevertheless, the risk of a Greek exit from the euro zone remains a concern.

Euro Zone – Retail Trade – June Time: 10:00 a.m. BST Forecast: 0.1% Euro zone retail sales are expected to have advanced only 0.1% month over month in June. At 50.4, the retail PMI was down from May’s 49-month high of 51.4. Data signaled another rise in sales, albeit at a slower pace than previously. Also, this could be a sign that consumer spending in the single-currency area is perhaps about to turn a corner. Still, persistent unemployment above 11%, geopolitical risks, uncertainty about Greece, and low inflation continue to be the main dampeners of retail sentiment.

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THURSDAY, AUGUST 6

United Kingdom – Industrial Production – June Time: 9:30 a.m. BST Forecast: -0.2% The U.K. industrial production index rose 0.4% month over month in May and the annual increase accelerated strongly to 2.1%. Industrial production should benefit in the next month or so from the end of political uncertainty in the U.K. but will remain under pressure from the stronger pound, the euro zone’s weak recovery, and uncertainty surrounding Greek debt. Meanwhile, the U.K. manufacturing PMI fell to a 26-month low of 51.4 in June from 51.9, pointing to weaker improvement in business conditions in coming months. Industrial production likely retreated somewhat in June from the previous month.

Germany – Manufacturing Turnover and Orders Received – June Time: 11:00 a.m. BST Forecast: -0.5% German manufacturing orders fell 0.2% month over month in May but advanced 4.8% year over year. Germany's Markit manufacturing PMI for June rose to 51.9 from 51.1 the previous month, it continued to point to an only moderate improvement in business conditions in coming months. Details of the report showed new orders rose for a seventh consecutive month, and the rate of increase accelerated slightly but remained marginal overall. Industrial orders likely retreated somewhat in June from the previous month but continued to grow robustly in year-ago terms.

United Kingdom – Monetary Policy – August Time: 12:00 p.m. BST Forecast: 0.5% The Bank of England is expected to keep the main refinancing rate at 0.5%, and maintain the asset purchase program at £375 billion. The minutes of the previous meeting showed that policymakers remained focused on domestic demand-driven inflation pressures. The central bankers said there was at least some spare capacity remaining in the labor market. We expect the BoE will raise its key rate by 25 basis points to 0.75% in the first quarter of next year.

FRIDAY, AUGUST 7

France – Industrial Production – June Time: 7:45 a.m. BST Forecast: 0.2% France’s industrial production is expected to have ticked up in June on both a month-over-month and a year-ago basis. Demand for local products likely remained under pressure from the slow recovery, tight credit, and slack demand from France’s key euro zone trading partners, together with uncertainty due to developments surrounding Greece and in Ukraine and Russia. The manufacturing PMI in France increased to 50.7 in June from 49.4 in the previous stanza—an emergence from contractionary territory. Also, it was the first time in 14 months that the manufacturing sector expanded in France.

France – Fiscal balance – June Time: 8:00 a.m. BST Forecast: -€59 billion France’s fiscal deficit is expected to be €59 billion for June, a 0.7% improvement from a year earlier. France's 2014 deficit was 4% of GDP, 0.1 percentage point lower than in 2013, and likely will not go below 3% until 2017. Spending by central and local governments, including for social welfare programs, was cut by about €15 billion in 2014 and will be trimmed by an additional €50 billion by 2017. A freeze on public sector salaries, a cap on other state expenditures, and lower contributions to the EU budget have also helped with consolidation.

France – Trade balance – June Time: 8:00 a.m. BST Forecast: -€3.9 billion France’s foreign trade deficit likely shrank somewhat (seasonally adjusted) in June because of stronger exports. Nevertheless, despite recent improvements, export activity remains subdued, and will creep

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forward only slowly as France struggles with relatively low competitiveness and external demand from other euro zone countries picks up at a snail's pace.

Spain – Industrial Production – June Time: 8:05 a.m. BST Forecast: 5% Spain’s industrial production likely expanded 5% in June from a year earlier—its best result in more than five years. Export-manufacturing has picked up its pace in recent months thanks to improved price competitiveness, reflecting lower unit labor costs and a weaker euro. Euro zone demand is also increasing as the region’s economies recover.

Russian Federation – House Prices – 2015Q2 Time: 9:20 a.m. BST Forecast: 1.2% The inflation of house prices in Russia likely decelerated to 1.2% quarter over quarter in the second quarter, from 1.7% previously. While still positive, the price growth is decelerating on account of lack of demand. According to Rosstat, construction posted a 5.2% annual decline in the second quarter, and a 10% decline in June alone.

United Kingdom – Foreign Trade – June Time: 9:30 a.m. BST Forecast: -£9.3 billion The U.K. foreign trade deficit probably widened in June after it narrowed substantially in the previous month. Exports likely remained under pressure from the weak economic recovery in the euro zone, which contains key destinations for U.K. exports, and the recent strengthening of the trade-weighted pound making British goods and services less cost competitive. Meanwhile, solid domestic demand probably supported imports.

Germany – Industrial Production – June Time: 11:00 a.m. BST Forecast: 0.2% German industrial production was unchanged in May from the previous month but advanced 2.2% year over year. Manufacturing will remain under pressure in the coming months, as weak domestic and external demand has been weighing on the economy. The ZEW indicator of economic sentiment fell to 29.7 from 31.5 in June, while the ZEW indicator for the current situation rose to 63.9 from 62.9. Meanwhile, the Markit manufacturing PMI for June rose to 51.9 from 51.1 the previous month. We expect that industrial production added 0.2% in June from the previous month.

ASIA-PACIFIC By Matthew Circosta and the Asia-Pacific Staff of Moody’s Analytics Release times are Greenwich Mean Time

India's central bank is expected to cut rates while Australia, Thailand and Japan sit pat Central bank decisions are in the spotlight this week. We expect the Reserve Bank of India to cut rates by 25 basis points to 7%, reflecting slower inflation and healthier external balances. Central banks in Australia and Thailand will keep rates on hold but maintain firm easing biases. The Bank of Japan will maintain its expansionary monetary stance, continuing to expand asset purchases at an annual rate of ¥80 trillion. On the data front, Indonesia's second quarter GDP headlines releases, and expectations point to continued below-trend economic growth as the government reform program stalls. Labor market data will show unemployment rates hover around 6% in Australia and New Zealand as economic performances converge.

The Week Ahead



FRIDAY, JULY 31

Thailand – Private Consumption – June Time: 7:30 a.m. GMT Forecast: -0.4% y/y Thailand's private consumption likely fell 0.4% y/y in June, as consumers across the nation continue to struggle. The spending impulse has evaporated in 2015, and the Bank of Thailand's interest rate cuts have not yet encouraged consumers to open their wallets. Political uncertainty still weighs on sentiment, as democratic elections aren't expected until 2016. Lower inflation and oil prices haven't helped much either, so it's up to the military junta government to induce spending by increasing fiscal stimulus measures.

Thailand – Foreign Trade – June Time: 7:30 a.m. GMT Forecast: US$2.6 billion Thailand's anemic export growth likely continued in June. The trade surplus likely narrowed to US$2.6 billion. Exports and imports continued to fall on a year-ago basis. Weak commodity prices are weighing on export receipts, as is the mixed global and regional demand. The import bill continues to decline on lower oil prices, but weak domestic demand is also playing its part. Without fiscal stimulus and an increase in investment, Thai industries will continue to struggle, and exports are likely to fall further.

Thailand – Industrial Production – June Time: 5:00 p.m. GMT Forecast: -4.3% y/y Thailand's industrial production likely fell 4.3% y/y in June, after decreasing more than 7% in May. The precipitous fall in production is worrying for the Thai economy. It shows that interest rate cuts have not spurred investment in manufacturing. Export-oriented manufacturers are struggling the most as a result of a lack of external competitiveness. The problem is exacerbated by structural problems in production, namely a lack of innovation across industries. Further fiscal stimulus is needed to encourage investment in Thai wares.

South Korea – Industrial Production – June Time: 11:00 p.m. GMT Forecast: -3% y/y Industrial production likely fell 3% year on year in June, after dropping 2.8% in May. Manufacturing sentiment slid to its lowest level since September 2012, with new orders continuing a downward trend. Tech production was likely a bright spot in the data, as new products came on line. Accommodative monetary policy and the recently announced fiscal stimulus package should bolster production in coming months, while a pickup in U.S. growth will lead to a rebound in late 2015.

Japan – Consumer Price Index – June Time: 11:30 p.m. GMT Forecast: 0% y/y Japan’s core inflation rate has weakened markedly as the effects of the April 2014 tax hike fade. June data probably showed that underlying inflation is flat from a year earlier. All in all, the Bank of Japan may need to ease monetary policy further to reach its 2% inflation goal by mid-2016.

Japan – Employment Situation – June Time: 11:30 p.m. GMT Forecast: 3.4% Unemployed Japan’s unemployment rate likely rose to 3.4% in June, after sitting at 3.3% in the prior two months. The improving economy and rising wages likely prompted many to re-enter the workforce in June, though labour demand probably wasn’t strong enough to absorb these new entrants.

Japan – Household Expenditures Survey – June Time: 11:30 p.m. GMT Forecast: 4.5% y/y Workers’ household expenditure likely slowed on a year-ago basis in June, after May’s strong but unsustainable 8.3% gain. Spring wage increases are supporting household budgets, though not as much as

The Week Ahead



May’s report suggested. Household expenditure data are a better indicator of private consumption than retail sales and will be closely watched for insight on how consumers are faring.

South Korea – Retail Sales – June Time: 12:00 a.m. GMT Forecast: -0.5% m/m Korean retail sales likely fell 0.5% in June after being unchanged in May. The Middle East Respiratory Syndrome outbreak hurt consumer confidence in June, halting a recovery in domestic spending. High levels of household debt are also dampening retail spending. Monetary easing and fiscal stimulus should kick-start the flagging economy in coming months, but it may take time to boost spending.

Taiwan – GDP – 2015Q2 Time: 12:30 a.m. GMT Forecast: 2% y/y Taiwan’s economy likely softened in the June quarter, growing 2% year on year compared with 3.4% in the first quarter. Softer Chinese growth is dragging on the export-driven economy as manufacturing sentiment and exports orders fall. Domestic demand remains fairly buoyant as the damage caused by food scandals dissipates. Robust U.S. growth should boost growth through the latter half of 2015.

Japan – Housing Starts – June Time: 5:00 a.m. GMT Forecast: 3% y/y Housing starts have risen on a year-over-year basis since March, and that trend is likely to continue for the rest of 2015. The gains largely reflect a low base from 2014, when the tax hike cut consumption and the tsunami reconstruction ended. Underlying housing demand is also recovering as reforms to land tax, rising house prices, monetary easing, and wage gains offer support to residential construction.

MONDAY, AUGUST 3

South Korea – Foreign Trade – July Time: 2:00 AM GMT Forecast: US$8.7 billion Korea’s monthly trade surplus likely narrowed to US$8.7 billion in July from US$10.2 billion in June. Stronger global tech demand likely supported exports, partly offsetting softer sales to China. Imports likely eased in July, driven by a drop in raw materials and softer domestic demand.

TUESDAY, AUGUST 4

South Korea – Consumer Price Index – July Time: 11:00 p.m. GMT Forecast: 0.6% y/y Korea’s consumer price index likely rose 0.6% year on year in July, down slightly from June's 0.7% gain. Low global energy prices and soft domestic demand are dampening price growth across the economy. Dry weather across the region is expected to provide an offsetting boost as food prices edge upwards. Inflation should remain subdued through 2015, enabling the Bank of Korea to keep rates at an accommodative 1.5%.

Australia – Foreign Trade – June Time: 1:30 a.m. GMT Forecast: -A$2.9 billion Australia's monthly trade deficit likely remained relatively large in June, after May's A$2.8 billion deficit. Service exports have been improving, with the lower Australian dollar supporting price competitiveness. But goods trade is down because of sustained weakness in iron ore and coal prices. The significant fall in capital imports in May is unlikely to be repeated in June, ensuring a relatively large monthly deficit.

Australia – Retail Sales – June Time: 1:30 a.m. GMT Forecast: 0.4% m/m

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Australian retail trade likely grew a respectable 0.4% m/m in June, from 0.3% in May. Low interest rates and rising house prices have spurred higher discretionary spending in Australia's most populated cities, Sydney and Melbourne. The sustained low interest rate environment should keep households in these cities spending in the foreseeable future. Retail trade is trailing in mining-exposed Western Australia as income growth has cooled and job shedding has intensified.

Australia – Monetary Policy – August Time: 4:30 a.m. GMT Forecast: 2% The Reserve Bank of Australia will keep the cash rate steady at 2% in August. The central bank has left the door open for further easing, but we think this is unlikely. The Australian dollar is depreciating and is helping the economy rebalance. Further interest rate cuts risk further heating up frothy housing markets in Sydney and Melbourne.

India – Monetary Policy – August Time: 5:30 a.m. GMT Forecast: 7% The Reserve Bank of India will likely cut the repo rate by 25 basis points to 7% in August. India's disinflation trend and stronger external balances give the central bank room to cut rates again. With commodity prices continuing to fall, inflation will likely weaken in coming months. Fears of drought during the monsoon season have also dissipated, as rainfalls have been above average. This will cap gains in food prices. Weak industrial production and auto sales will likely sway the RBI towards another rate cut. If the RBI cuts by 25 basis points as expected, that will bring the total easing to 100 basis points in 2015.

WEDNESDAY, AUGUST 5

New Zealand – Employment Situation – 2015Q2 Time: 10:45 p.m. GMT Forecast: 5.9% Unemployed Increased labor market participation from higher net migration and excess capacity are keeping upward pressure on unemployment in New Zealand. The unemployment rate likely rose to 5.9% in the June quarter, from 5.8% in the March quarter. Domestic demand has lost momentum in recent months as lower dairy prices hit national incomes. Employment growth should pick up in the second half of the year amid easier monetary policy and the falling exchange rate.

Taiwan – Consumer Price Index – July Time: 12:30 a.m. GMT Forecast: -0.7% y/y Taiwan’s headline inflation rate likely fell 0.7% year on year in July, after June's 0.6% decline. Low global energy prices are pushing down transportation and utility costs, which are filtering through the broader economy. Soft domestic demand is also dampening price growth as the export-driven economy suffers from a slowdown in global demand. Subdued inflation will enable the central bank to keep rates on hold through 2015.

Malaysia – Foreign Trade – June Time: 4:00 a.m. GMT Forecast: MYR4.5 billion Malaysia’s trade surplus likely narrowed to MYR4.5 billion June from MYR5.5 billion in May. Malaysia is a net energy exporter, and low global energy prices are hurting the country’s trade surplus. The country's relatively weak currency is putting upward pressure on the import bill. With global oil prices expected to remain subdued through 2015, Malaysia’s trade surplus will likely weaken further in coming months.

Thailand – Monetary Policy – August Time: 7:00 a.m. GMT Forecast: 1.5% The Bank of Thailand will likely keep its official policy rates unchanged at 1.5% in August. The Thai economy is far from healthy. GDP is growing below potential, while partial indicators show little upward momentum.

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Given the 50 basis points worth of rate cuts already delivered this year, the BoT will likely take a wait-and-see approach. The BoT maintains an easing bias, and we think the central bank will cut rates again later this year.

THURSDAY, AUGUST 6

Australia – Employment Situation – July Time: 1:30 a.m. GMT Forecast: 6.1% Unemployed Australia's seasonally adjusted unemployment rate has been volatile in recent months, and we expect this trend continued in July. The unemployment rate likely rose to 6.1%, from 6% in June. We look for a modest 10,000 jobs to have been created over the month, as businesses remain cautious. Job creation in construction and real estate in the service states is going strong, but mining has cooled, hitting once-thriving industries such as professional services.

FRIDAY, AUGUST 7

Indonesia – GDP – 2015Q2 Time: 5:00 p.m. GMT Forecast: 5% y/y The Indonesian economy likely expanded 5% y/y in the June quarter, after growing 4.7% in the March quarter. President Joko Widodo's reform agenda has struggled in recent times, as infrastructure investment remains low. Meanwhile, the ASEAN powerhouse continues to be hurt by lower commodity prices. Exports have fallen, and the external sector will likely be a drag on growth in the coming year. Low import demand also suggests that government spending and private investment failed to increase strongly in the second quarter. We expect below potential growth to continue until reforms are delivered.

Australia – Housing Finance – June Time: 1:30 a.m. GMT Forecast: 3.6% m/m Owner-occupied housing finance likely partially rebounded in June, after slumping by 6.1% m/m in May. Demand for housing in the eastern states is strong, fuelling mortgage finance. But conditions are subdued elsewhere. The Australian Prudential Regulation Authority, Australia's financial regulator, is working behind the scenes to cool investor participation, particularly in the Sydney and Melbourne markets. This is having an effect at the margins, and with big banks forced to increase the cost of lending to investors, further cooling in home loan demand can be expected.

Japan – Monetary Policy – August Time: 5:00 a.m. GMT Forecast: ¥80 trillion The Bank of Japan will maintain its expansionary monetary stance, continuing to expand asset purchases at an annual rate of ¥80 trillion. The BoJ refrained from reopening the stimulus taps in July even as Greek debt woes and China’s stock turmoil caused gyrations in financial markets. On balance, the BoJ will probably need to ease monetary policy again in 2015, as energy prices are likely to stay lower for longer if sanctions are eased on Iranian production, throwing its inflation target in doubt.

Taiwan – Foreign Trade – July Time: 8:00 a.m. GMT Forecast: US$1.8 billion Taiwan’s trade surplus is expected to narrow to US$1.8 billion in July from US$2.2 billion in June. Weak global demand is hurting exports, while low global oil prices keep a lid on import prices. Taiwan has few major trade agreements outside China, making it highly reliant on mainland demand for export growth. While stronger U.S. demand will boost Taiwan exports somewhat, softening Chinese demand will continue to be a drag through the second half of 2015.

The Week Ahead



The Long View

The US: July’s worldwide offerings of corporate bonds may advance by 65% annually for investment grade, but dip by -5% for high yield By John Lonski, Chief Economist, and Ben Garber, Economist, Moody’s Capital Markets Research Group, July 30, 2015 CREDIT SPREADS As measured by Moody's long-term average corporate bond yield, the recent investment grade corporate bond yield spread of 152 bp was above its 122-point mean of the two previous economic recoveries. Any narrowing by this spread may be limited by more cash- or debt-funded acquisitions, spin-offs, stock buybacks, and dividends. Subpar growth by business sales and profits will also add to credit risk, as will a rising risk of high-yield defaults.

The recent high-yield bond spread of 529 bp approximates what might be inferred from a forecasting model that employs the average high-yield expected default frequency metric, the Chicago Fed’s national activity index, and the VIX index. In view of how the investment-grade financial company bond yield spread widened from its 110 bp average of the 12-months-ended May 2015 to a recent 137 bp, the financial system may be slightly less willing to supply liquidity in the event of an adverse shock. Moreover, the implications for liquidity of regulatory changes merit above-average scrutiny.

DEFAULTS The US's trailing 12-month high-yield default rate was 2.0% in June 2015, which inched up from the 1.9% of both May 2015 and June 2014. The default rate is projected to approach 3% by December 2015.

Sufficient liquidity and core profits growth should rein in defaults for now.

US CORPORATE BOND ISSUANCE After advancing by 33% annually in 2012 to a record $1.134 trillion, 2013’s US$-denominated investment grade (IG) bond issuance dipped by -1.5% to $1.119 trillion. Following 2012’s 48% annual surge, US$-denominated high yield bond issuance advanced by 11% to a record $431 billion in 2013. Also, after gaining 5% in 2012, newly rated high yield bank loan programs increased by 38% annually to $579 billion in 2013.

In 2014, US$-denominated bond issuance edged up by 0.7% annually for IG, to $1.127 trillion and dropped by -2.7% to $419 billion for high yield. Also, newly rated bank loan programs from high yield issuers plunged by -17% in 2014 to $480 billion, which was far under 2007’s record $661 billion.

Second-quarter 2014’s worldwide corporate bond issuance posted year-over-year advances of 15% for IG and 53% for high-yield, wherein dollar-denominated bond offerings increased by 5% for IG and advanced by 32% for high-yield.

Q3-2014’s worldwide corporate bond issuance revealed annual decline of -10.2% for IG and a rise of 0.4% for high-yield that included setbacks for US$-denominated issuance of -15% for IG and -1% for high-yield.

Q4-2014’s worldwide corporate bond issuance showed annual percent changes of a 3.8% increase for IG and a -19.7% plunge for high-yield. At the same time, US$-denominated offerings advanced by 17% for IG and sank by -9% for high yield.

Q1-2015’s worldwide corporate bond issuance increased annually by 9.5% for investment-grade and by 12.1% for high-yield; US$-priced offerings the advances were 23% and 29%, respectively.

According to a preliminary estimate, Q2-2015’s worldwide offerings of corporate bonds showed annual percent changes of +5% for IG and -35% for high-yield, wherein US$-denominated supply soared higher by 31% for IG and plunged by -21% for high yield.

For yearlong 2015, worldwide corporate bond offerings are likely to rise by 6% annually for IG and fall by -11% for high yield.

Through the first 30 weeks of 2015, the year-over-year percent changes for corporate bond issuance were +23.3% for US$-denominated investment-grade, -3.9% for US$-denominated high-yield, -12.8% for euro-denominated investment-grade, and -39.0% for euro-denominated high-yield.

In 2015, a growing number of bond issues and newly-rated bank loan programs will fund acquisitions and shareholder compensation. Companies will resort to acquisitions and divestitures in order to better cope with the US’s subpar recovery. To the degree companies fear significantly higher bond yields, pre-fundings will rise.

The Long View The Long View

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US ECONOMIC OUTLOOK Fed funds should finish 2015 no greater than 0.50%. In view of how persistently high unemployment will contain wages, low inflation should help to rein in Treasury bond yields. As long as labor is grossly underutilized and the global economy operates below trend, the 10-year Treasury yield may not remain above 2.25% for long. A fundamentally excessive climb by Treasury bond yields and a pronounced slowing by expenditures in dynamic emerging market countries are among the biggest threats to the adequacy of economic growth and credit spreads going forward.

EUROPE By Tomas Holinka of Moody’s Analytics July 30, 2015 The Eurozone’s economic recovery should pick up modestly this year. Moody’s Analytics expects the economy to grow 1.4% this year, up from around 1% in 2014. The European Central Bank is likely to keep monetary policy very loose for an extended period and maintain its bond purchases through its Expanded Asset Purchase Program, under which the bank buys €60 billion in assets per month. The program will continue until September 2016 or until inflation moves closer to target. The yield on Eurozone 10-year government bonds will remain low longer thanks to the ECB’s purchases. Meanwhile, the ECB will gradually start monetary policy normalization in the first quarter of 2018, pushing the euro zone’s 10-year government bond yield to 2.9% by late 2020. The annual inflation rate eased to 0.2% in June from 0.3% in the previous month. The improving economy, weaker euro, and higher oil prices should put upward pressure on inflation in coming months. The quantitative easing program has improved credit availability and continues to support the region’s economy. Although Greece and its creditors agreed to a new bailout deal, avoiding a Greek exit, political uncertainty in Greece remain the greatest threat to the outlook.

U.K. economic growth should moderate in 2015 but remain solid. The economy faces pressure from the weak recovery in the Eurozone — one of Britain's top export markets — and the recent strengthening of the pound against the euro making U.K. exports to the region less cost competitive. Moody’s Analytics expects the economy to grow about 2.4% in 2015, a little down from 3% last year. The Bank of England is likely to start raising interest rates in the first quarter of next year. Policymakers remain focused on domestic demand-driven pressures, particularly from the tightening labor market, because they consider that the downward cost-push pressure on inflation from the recent sharp fall in crude oil prices will be temporary. The central bankers expect inflation to rise and hit the BoE’s target of 2% within the next one to two years. The U.K. annual headline CPI held steady in June, after increasing 0.1% previously. The main risk to the outlook is the political uncertainty in Greece and also a threat from U.K. voters deciding to quit the European Union in the referendum due by the end of 2017.

ASIA PACIFIC By Faraz Syed and the Asia-Pacific Staff of Moody’s Analytics July 30, 2015 India’s negative output gap is showing little signs of closing in 2015. Though the economy has been in a cyclical upswing since late 2014, it has failed to gain broader momentum. Green shoots are slowly emerging, but the government’s failure to deliver promised reforms is the major impediment.

Ameliorated by low inflation and better external balances, the once-hawkish Reserve Bank of India has been proactively cutting rates in 2015. We expect at least one more benchmark rate reduction in 2015 to complement the 75 basis points already delivered this year. Accommodative monetary policy will lift GDP to 7.6% in 2015, increasing to 8% in 2016.

India’s political infighting is denting business confidence. Without a majority in the upper house, the ruling Bharatiya Janata Party’s power has been nullified and the opposition has blocked proposed reforms. Key reforms such as the land acquisition bill, flexible labor laws, and the goods and services tax have failed to pass parliament. And given the political seesaw, these are unlikely to be delivered until later this year or even 2016.

The downside of not delivering reforms will be punishing. GDP growth is not likely to rise above 7.5% if the government overpromises and does not deliver.

The Long View

The Week Ahead



Ratings Round-Up By Njundu Sanneh

US Credit Quality Rises Weekly rating change data for the US continues to point to enhanced corporate credit quality even as the ratings of certain sectors such as speculative grade energy companies remain under pressure. The US count was 13 changes, little different from the 15 of the week before. The percentage of upgrades was 62%, well above the 50% threshold that shows credit quality advancement.

A more stable metric of credit quality advancement is our three-month moving average of the count of favorable rating changes as percent of total rating changes, which for the first time since September 2014 scaled the 50% mark at 52% in June. The three-month moving average for the ratio of debt affected by favorable rating changes to debt affected by total rating changes has also risen above 50% for the past two months at 57% and 60% for May and June, respectively. While Moody’s bank methodology rating changes have a lot to do with these improvements, the metrics persistently point to credit quality progress after the effects of the banking methodology review were last felt some three weeks ago.

Advanced Micro Devices, Inc. and Approach Resources, Inc. were notable downgraded companies. The latter, a speculative grade energy company, is the latest to be downgraded by Moody’s as low energy prices continue to challenge the credit metrics of this sector. Among the upgraded companies were Hawaiian Holdings, Inc., and Aramark.

The weekly rating change activity for Europe was again muted at only three, comprising two financial institutions and one industrial. Downgrades bested upgrades by two to one.

FIGURE 1 Rating Changes - US Corporate & Financial Institutions: Favorable as % of Total Actions

0.0

0.2

0.4

0.6

0.8

1.0

0.0

0.2

0.4

0.6

0.8

1.0

Oct03 Sep06 Aug09 Jul12 Jun15

By Count of Actions By Amount of Debt Affected

* Trailing 3-month average

Source: Moody's FIGURE 2 Rating Key

BCF Bank Credit Facility Rating MM Money-MarketCFR Corporate Family Rating MTN MTN Program RatingCP Commercial Paper Rating Notes NotesFSR Bank Financial Strength Rating PDR Probability of Default RatingIFS Insurance Financial Strength Rating PS Preferred Stock RatingIR Issuer Rating SGLR Speculative-Grade Liquidity Rating

JrSub Junior Subordinated Rating SLTD Short- and Long-Term Deposit RatingLGD Loss Given Default Rating SrSec Senior Secured Rating LTCF Long-Term Corporate Family Rating SrUnsec Senior Unsecured Rating LTD Long-Term Deposit Rating SrSub Senior SubordinatedLTIR Long-Term Issuer Rating STD Short-Term Deposit Rating

Ratings Round-Up

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FIGURE 3 Rating Changes: Corporate & Financial Institutions – US

Date Company Sector RatingAmount

($ Million)Up/

Down

Old LTD

Rating

New LTD

Rating

IG/SG

7/22/15 ARAMARK - Aramark Services, Inc. Industrial SrUnsec/SrSec/LTCFR/PDR/BCF 1,000 U B3 B2 SG7/22/15 DHM HOLDINGS COMPANY, INC. - Dole Food Company, Inc. Industrial SrSec/LTCFR/PDR/BCF 300 U Caa1 B3 SG7/23/15 AMERICAN DENTAL PARTNERS, INC. Industrial SrSec/LTCFR/PDR/BCF U B2 B1 SG7/23/15 GROUP 1 AUTOMOTIVE, INC. Industrial SrUnsec/LTCFR/PDR 550 U B1 Ba2 SG7/23/15 MANPOWERGROUP INC. Industrial SrUnsec 384 U Baa2 Baa1 SG7/23/15 SVMK INC. - SurveyMonkey Inc. Industrial SrSec/LTCFR/PDR/BCF D B2 B3 SG7/24/15 HAWAIIAN HOLDINGS, INC. Industrial LTCFR/PDR 445 U B3 B2 SG7/27/15 ALTA MESA HOLDINGS, LP Industrial SrUnsec/LTCFR/PDR 450 D Caa1 Caa2 SG7/27/15 APPROACH RESOURCES INC. Industrial SrUnsec 250 D B3 Caa1 SG7/28/15 ADVANCED MICRO DEVICES, INC. Industrial SrUnsec/LTCFR/PDR 2,050 D Caa1 Caa2 SG7/28/15 IHF HOLDINGS, INC. Industrial LTCFR/PDR U B3 B2 SG7/28/15 MILLENNIUM HEALTH, LLC Industrial SrSec/LTCFR/PDR/BCF D B2 Caa2 SG7/28/15 PC NEXTCO HOLDINGS, LLC Industrial SrUnsec/SrSec/LTCFR/PDR/BCF 700 U Caa1 B3 SG

Source: Moody's

FIGURE 4 Rating Changes: Corporate & Financial Institutions – EUROPE

Date Company Sector RatingAmount

($ Million)Up/

Down

Old LTD

Rating

New LTD

Rating

IG/SG

Country

7/22/15 CREDINS BANK SH.A. Financial LTD D B1 B2 SG ALBANIA7/23/15 BANK TECHNIQUE OJSC Financial LTD D Caa1 Caa2 SG AZERBAIJAN7/22/15 ADECCO S.A. Industrial SrUnsec/LTIR/MTN 1,900 U Baa2 Baa1 IG SWITZERLAND

Source: Moody's

Ratings Round-Up



Market Data

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800

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200

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Spread (bp) Spread (bp) Aa2 A2 Baa2

Source: Moody'sSource: Moody's

Figure 1: 5-Year Median Spreads-Global Data (High Grade)

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Spread (bp) Spread (bp) Ba2 B2 Caa-C

Source: Moody's

Figure 2: 5-Year Median Spreads-Global Data (High Yield)

Spreads



CDS Movers

CDS Implied Rating Rises

Issuer Jun. 24 Jun. 17 Senior RatingsBank of New York Mellon Corporation (The) Aa2 Aa3 A1Virginia Electric and Power Company Aa1 Aa2 A2Genworth Holdings, Inc. B2 B3 Ba1Crown Americas LLC B3 Caa1 Ba2Principal Financial Group, Inc. Baa1 Baa2 Baa1Massachusetts Mutual Life Insurance Company Baa1 Baa2 Aa3National Retail Properties, Inc. B1 B2 Baa1KB Home B2 B3 B2Avon Products, Inc. Caa1 Caa2 Ba3Darden Restaurants, Inc. Baa2 Baa3 Ba1

CDS Implied Rating DeclinesIssuer Jun. 24 Jun. 17 Senior RatingsJohn Deere Capital Corporation A1 Aa2 A2Cigna Corporation Aa3 Aa1 Baa1General Electric Capital Corporation A3 A2 A1AT&T Inc. Baa2 Baa1 Baa1Caterpillar Financial Services Corporation Baa1 A3 A2Pfizer Inc. Aa1 Aaa A1Amgen Inc. A2 A1 Baa1McDonald's Corporation Aa3 Aa2 A3Time Warner Inc. A1 Aa3 Baa2Exxon Mobil Corporation Aa1 Aaa Aaa

CDS Spread IncreasesIssuer Senior Ratings Jun. 24 Jun. 17 Spread DiffSears Holdings Corp. Caa2 1,304 1,043 260Nine West Holdings, Inc. Caa2 1,980 1,857 122AK Steel Corporation Caa1 873 824 49Chesapeake Energy Corporation Ba1 498 465 33ConAgra Foods, Inc. Baa2 104 76 29Transocean Inc. Ba1 647 619 28Toys 'R' US, Inc. Caa2 1,411 1,385 26Frontier Communications Corporation Ba3 496 473 23PHH Corporation Ba3 345 322 23R.R. Donnelley & Sons Company Ba3 241 220 21

CDS Spread DecreasesIssuer Senior Ratings Jun. 24 Jun. 17 Spread DiffClaire's Stores, Inc. Caa3 3,056 3,219 -163Advanced Micro Devices, Inc. Caa1 710 773 -63RentPath, Inc. B3 406 450 -45McClatchy Company (The) Caa2 1,049 1,086 -37Peabody Energy Corporation B3 2,544 2,579 -35KB Home B2 301 335 -34Beazer Homes USA, Inc. Caa1 417 446 -29Cincinnati Bell Telephone Company Ba2 276 302 -26Southern Copper Corporation Baa2 173 195 -23KCP&L Greater Missouri Operations Company Baa2 108 132 -23

Source: Moody's, MarkIt

CDS Spreads

CDS Implied Ratings

CDS Implied Ratings

CDS Spreads

Figure 3. CDS Movers - US (June 17, 2015 – June 24, 2015)



CDS Implied Rating Rises

Issuer Jun. 24 Jun. 17 Senior RatingsFrance, Government of Aa1 Aa2 Aa1Barclays Bank PLC Baa1 Baa2 A2Ireland, Government of A2 A3 Baa1Portugal, Government of Ba1 Ba2 Ba1ABN AMRO Bank N.V. Baa1 Baa2 A2ING Groep N.V. Baa1 Baa2 Baa1Landesbank Baden-Wuerttemberg A3 Baa1 A1ENEL S.p.A. Baa2 Baa3 Baa2Volkswagen Aktiengesellschaft A3 Baa1 A2Banca Monte dei Paschi di Siena S.p.A. Ba3 B1 B3

CDS Implied Rating DeclinesIssuer Jun. 24 Jun. 17 Senior RatingsMAN SE Baa2 A2 A2Dexia Credit Local Ba2 Ba1 Baa3Nationwide Building Society Baa1 A3 A1DNB Bank ASA Baa1 A3 Aa3Merck KGaA Aa3 Aa2 Baa2DONG Energy A/S Baa2 Baa1 Baa1Finmeccanica S.p.A. Ba2 Ba1 Ba1Tyco Electronics Group S.A. A3 A2 Baa1Alliander N.V. Baa1 A3 Aa3Henkel AG & Co. KGaA Aa1 Aaa A2

CDS Spread IncreasesIssuer Senior Ratings Jun. 24 Jun. 17 Spread DiffMAN SE A2 79 50 29Faurecia SA B1 306 278 29Vedanta Resources plc Ba3 567 553 14Imerys S.A. Baa2 162 150 11Dexia Credit Local Baa3 175 171 4Coca-Cola HBC Finance B.V. Baa1 84 80 4Banque Federative du Credit Mutuel Aa3 64 61 3ISS Global A/S Baa3 57 54 3Nationwide Building Society A1 62 60 2Pohjola Bank plc Aa3 87 86 2

CDS Spread DecreasesIssuer Senior Ratings Jun. 24 Jun. 17 Spread DiffGreece, Government of Caa2 2,166 3,448 -1,281Norske Skogindustrier ASA Caa3 2,799 2,994 -196Alpha Bank AE Caa3 1,384 1,515 -131Abengoa S.A. B2 985 1,114 -129Piraeus Bank S.A. Caa3 1,628 1,731 -103Portugal Telecom International Finance B.V. Ba2 476 526 -49Unilabs Subholding AB Caa2 388 435 -47New Look Bondco I plc B3 125 168 -43Ardagh Packaging Finance plc Caa1 379 421 -42VTB Capital S.A. Ba1 497 534 -37

Source: Moody's, MarkIt

CDS Spreads

CDS Implied Ratings

CDS Implied Ratings

CDS Spreads

Figure 4. CDS Movers - Europe (June 17, 2015 – June 24, 2015)



Issuance

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Issuance ($B) Issuance ($B)2012 2013 2014 2015

Source: Moody's / Dealogic

Figure 5. Market Cumulative Issuance - Corporate & Financial Institutions: USD Denominated

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Issuance ($B) Issuance ($B)2012 2013 2014 2015

Source: Moody's / Dealogic

Figure 6. Market Cumulative Issuance - Corporate & Financial Institutions: Euro Denominated

Investment-Grade High-Yield Total*Amount Amount Amount

$B $B $BWeekly 28.607 6.000 34.892

Year-to-Date 754.186 227.498 1,025.601

Investment-Grade High-Yield Total*Amount Amount Amount

$B $B $BWeekly 2.529 0.253 3.165

Year-to-Date 389.877 59.573 474.878* Difference represents issuance with pending ratings.Source: Moody's/ Dealogic

USD Denominated

Euro Denominated

Figure 7. Issuance: Corporate & Financial Institutions



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Moody's Weekly Market Outlook Credit Concerns Surpass Rate Risks (Capital Markets Research)

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