WEEKLY MARKET OUTLOOK DECEMBER 21, 2017 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. Benign Credit Outlook Comes With Blemishes Credit Markets Review and Outlook by John Lonski Benign Credit Outlook Comes With Blemishes » FULL STORY PAGE 2 The Week Ahead We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. » FULL STORY PAGE 6 The Long View Full updated stories and key credit market metrics: The percent changes for 2017’s US$-priced corporate bond issuance were -23% for Aaa/Aa to $226 billion, +0.2% for single-A to $564 billion, and +29% for Baa to $715 billion. Begins on page 16 . » FULL STORY PAGE 16 Ratings Round-Up by Njundu Sanneh Positive Rating Changes on the Rebound » FULL STORY PAGE 22 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 24 Moody’s Capital Markets Research recent publications Links to commentaries on: Greece and Spain, dangers in the outlook, high-yield borrowing, Saudi Arabia, defaults, credit/stocks, China, yields/prices, debt/growth, Spain, upside surprise, bulls, less fear, Fed & BoJ, inflation, market triggers, hurricanes, data in sync. » FULL STORY PAGE 29 Credit Spreads Investment Grade: We see year-end 2018’s average spread exceeding its recent 104 bp. High Yield: Compared to a recent spread of 365 bp, it may approximate 425 bp by year-end 2018. Defaults US HY default rate: Compared to November 2017’s 3.4%, Moody's Default and Ratings Analytics team forecasts that the US' trailing 12-month high-yield default rate will average 2.4% during 2018’s third quarter. Issuance In 2016, US$-IG bond issuance grew by 5.6% to a record $1.412 trillion, while US$-priced high-yield bond issuance fell by 3.5% to $341 billion. For 2017, US$-denominated IG bond issuance may rise by 6.8% to a new zenith of $1.508 trillion, while US$-priced high-yield bond issuance may increase by 32.7% to $452 billion, surpassing 2014’s record $435 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 Analytics Research Weekly Market Outlook Contributors: John Lonski 1.212.553.7144 john.lonski@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Yuki Choi 1.212.553.0906 yukyung.choi@moodys.com Moody's Analytics/Europe: Kristopher Cramer 1.610.235.5199 Kristopher.Cramer@moodys.com Barbara Teixeira Araujo +420 (224) 106-438 Barbara.TeixeiraAraujo@moodys.com Moody's Analytics/Asia-Pacific: Katrina Ell +61 (2) 9270-8144 Katrina.ell@moodys.com Faraz Syed +61 (2) 9270-8146 Faraz.syed@moodys.com Editor Reid Kanaley 1. 610.235.5273 reid.kanaley@moodys.com Editor’s note: The Weekly Market Outlook will not be published Thursday, December 28, due to the holiday week. Next issue: January 4. CAPITAL MARKETS RESEARCH 2 DECEMBER 21, 2017 CAPITAL MARKETS RESEARCH / 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. Benign Credit Outlook Comes With Blemishes No forecast is free of downside risks. In a manner that is consistent with (1) the recent increase in the incidence of high-yield credit rating downgrades relative to upgrades and (2) a roughly unchanged reading for the average high-yield EDF (expected default frequency) metric since the EDF’s month-long average last bottomed in February 2017, Moody’s Default Research Group upwardly revised its projected U.S. high-yield default rates for each of the 11 months ended October 2018 by 24 basis points (bp), on average. For example, the projected average default rate for 2018’s third quarter was raised from the 2.14% of the November 2017 forecast to 2.40% as of December’s projection. Because the upwardly revised default rates were joined by an improved outlook for corporate earnings, December’s set of upwardly revised default rates may not be the first of a series. The upward revision of the projected default rates occurred despite how December’s Blue Chip consensus’ estimates of pretax operating profits growth topped those of November 2017’s survey. More specifically, the projected annual increases by core profits were revised up from 4.1% to 4.8% for 2017 and from 4.8% to 5.4% for 2018. For now, December’s upwardly revised default forecasts might be viewed as more closely aligning the default projections with what is suggested by other leading indicators of default such as the ratio of corporate