WEEKLY MARKET OUTLOOK SEPTEMBER 15, 2016 CAPITAL MARKETS RESEARCH Moody’s Analytics markets and distributes all Moody’s Capital Markets Research, Inc. materials. Moody’s Capital Markets Research, Inc is a subsidiary of Moody’s Corporation. Moody’s Analytics does not provide investment advisory services or products. For further detail, please see the last page. Rate Hikes Will Be the Least of Market Worries Credit Markets Review and Outlook by John Lonski Rate Hikes Will Be the Least of Market Worries. » FULL STORY PAGE 2 Topic of the Week by Ben Garber Corporate Issuance Booms, Post-Brexit. » FULL STORY PAGE 5 The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. » FULL STORY PAGE 8 The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories, “Wider spreads have yet to materially slow high-yield bond issuance,” begin on page 13. » FULL STORY PAGE 13 Ratings Round-Up by Njundu Sanneh Accentuating the Positive. » FULL STORY PAGE 19 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 19 Moody’s Capital Markets Research recent publications Links to commentaries on: ECB, defaults, EDFs, Swiber, defaults, Mexico, stability, retail, Portugal, overvalued, Pakistan, productivity, gold, Venezuela, economy, Italy, pricey, borrowing. » FULL STORY PAGE 23 Credit Spreads Investment Grade: Year-end 2016 spread to be close to its recent 142 bp. High Yield: After recent spread of 538 bp, it may approximate 610 bp by year-end 2016. Defaults US HY default rate: after August 2016’s 5.7%, Moody’s Credit Policy Group forecasts it near 4.5% by the summer of 2017. Issuance For 2016, US$-denominated IG bond issuance may increase by 6.0% to a record $1.406 trillion, while US$-priced high-yield bond issuance may sink by -12.1% to $311 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 david.munves@moodys.com John Lonski 1.212.553.7144 john.lonski@moodys.com Ben Garber 1.212.553.4732 benjamin.garber@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Yukyung Choi 1.212.553.0906 yukyung.choi@moodys.com Irina Baron 1.212.553.4307 irina.baron@moodys.com Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Xian (Peter) Li 1.212.553.1404 Xian.li@moodys.com Moody's Analytics/Europe: Tomas Holinka +420 ( 221) 666-384 Tomas.holinka@moodys.com Moody's Analytics/Asia-Pacific: Emily Dabbs +61 (2) 9270-8159 Emily.Dabbs @moodys.com Faraz Syed +61 (2) 9270-8146 Faraz.Syed @moodys.com Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 SEPTEMBER15, 2016 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. Rate Hikes Will Be the Least of Market Worries The Fed does not set interest rates in a vacuum. Indeed, the federal funds rate is shaped by a host of drivers that are hardly limited to labor market conditions. Despite warnings from high-ranking Fed officials that ultra-low interest rates are not forever, recent soundings of business activity, as well as the nearness of November 8’s Presidential election, weigh against a hiking of the federal funds rate prior to the FOMC’s December 14 meeting. Moreover, recent data question whether 2016 will be home to even a single rate hike. In a September 12 speech, Fed governor Lael Brainard presented a convincing case favoring an extended stay by exceptionally low benchmark interest rates. On several occasions, Governor Brainard challenged the wisdom of a preemptive rate hike that intends to thwart inflation before it takes hold. Given “the absence of accelerating inflationary pressures” and the limited scope for lowering of fed funds in the event recession risks rise, Brainard argues for the continuation of a highly accommodative monetary policy. Basically, the macroeconomic costs of mistakenly hiking rates too early are viewed as well exceeding the potential inflationary costs of waiting too long to confront inflation. The damage done by a premature rate hike may be harder to repair than the damage resulting from above-target price inflation. However, there is an alternative view that views ultra-low interest rates as doing more harm than good because of how cheap money (i) boosts savings in order to compensate for negligible interest income and (ii) forces investors to purchase riskier assets offering higher, though volatile, returns. -9.5%-7.0%-4.5%-2.0%0.5%3.0%5.5%8.0%10.5%2004006008001,0001,2001,4001,6001,8002,000Mar-93Jan-95Nov-96Sep-98Jul-