Aging Boomers May Stymie Trumponomics

WEEKLY MARKET OUTLOOK NOVEMBER 10, 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. Aging Boomers May Stymie Trumponomics Credit Markets Review and Outlook by John Lonski Aging Boomers May Stymie Trumponomics. » FULL STORY PAGE 2 Topic of the Week by Ben Garber Will Italy Get Trumped? » 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, “A fundamentally questionable jump by Treasury bond yields may curb corporate bond issuance,” begin on page 19. » FULL STORY PAGE 19 Ratings Round-Up by Njundu Sanneh Good Show in Europe, Not in the US. » FULL STORY PAGE 23 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 25 Moody’s Capital Markets Research recent publications Links to commentaries on: Lebanon, inflation, defaults, Italy, shareholders, DB, Saudi, M&A, subpar, Thailand, BP plc, UK, Allstate, ratings, OPEC, Fed, leverage, Greece, worries, ECB, defaults, EDFs. » FULL STORY PAGE 29 Credit Spreads Investment Grade: Year-end 2016 spread to be close to its recent 137 bp. High Yield: After recent spread of 508 bp, it may approximate 550 bp by year-end 2016. Defaults US HY default rate: after October 2016’s 5.6%, Moody’s Credit Policy Group forecasts it near 4.1% by the summer of 2017. Issuance For 2016, US$-denominated IG bond issuance may increase by 6.8% to a record $1.416 trillion, while US$-priced high-yield bond issuance may sink by -5.0% to $336 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 Editor Dana Gordon 1.212.553.0398 dana.gordon@moodys.com CAPITAL MARKETS RESEARCH 2 NOVEMBER 10, 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. Aging Boomers May Stymie Trumponomics Not only did the wide majority of experts incorrectly predict the outcome of the US Presidential election, pundits also were far off the mark regarding how markets might react to an improbable Donald J. Trump victory. Instead of conforming to pre-election expectations of an equity market sell-off and lower interest rates, both share prices and bond yields have soared since Trump’s victory. Whether they remain higher depends on a widely anticipated acceleration by business sales vis-a-vis employment costs that may not materialize. As inferred from recent market performance, the economic, taxation, and regulatory policies of the past eight years curbed business activity considerably and, by doing so, reined in the growth of attractive job opportunities. To the degree existing policies limited US business activity, they very much facilitated Donald Trump’s Presidential upset. Perhaps, “secular stagnation” is partly the offshoot of suboptimal government policies that helped to slash US real GDP’s average annual growth rate from the 3.3% of the 10-years-ended 2006 to the 1.3% of the 10-years-ended 2016. Nevertheless, unprecedented demographic change that is beyond the scope of an immediate government remedy is one of the major drivers of “secular stagnation”. The aging of the US population complements the deceleration of growth quite nicely. When the US economy grew by 3.3% annually during the 10-years-ended 2006, the number of Americans aged 65 years and older rose by 310,000 annually, on average, while the number aged 16 to 64 years — a proxy for the working-age population — expanded by a much greater 2.36-million annually. By the 10-years-ended 2016, the average annual increase in the number aged at least 65 years soared to 1.28 million as the annual addition to the working-age popu