WEEKLY MARKET OUTLOOK MAY 17, 2018 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. Low Utilization Rate Favors Profits Growth and Fewer Defaults Credit Markets Review and Outlook by John Lonski Low Utilization Rate Favors Profits Growth and Fewer Defaults » 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: A marked drop by corporate bond issuance would be an early indication of burdensome Treasury yields. » FULL STORY PAGE 11 Ratings Round-Up by Njundu Sanneh Retail Shows Some Signs of Improvement » FULL STORY PAGE 15 Market Data Credit spreads, CDS movers, issuance. » FULL STORY PAGE 18 Moody’s Capital Markets Research recent publications Links to commentaries on: Credit quality, default rates, profit growth, foreign investors, internal funds, tariffs, borrowing restraint, corporate bonds, tax law changes, stocks and spreads, Greek drama, South Korea, Brazil sovereign credit, Greece and Spain. » FULL STORY PAGE 23 Credit Spreads Investment Grade: We see year-end 2018’s average investment grade bond spreads exceeding its recent 122 bp. High Yield: Compared to a recent 346 bp, the high-yield spread may approximate 425 bp by year-end 2018. Defaults US HY default rate: Moody's Default and Ratings Analytics team forecasts that the U.S.' trailing 12-month high-yield default rate will sink from April 2018’s 3.7% to 1.5% by April 2019. Issuance In 2017, US$-denominated IG bond issuance grew by 6.8% to a record $1.508 trillion, while US$-priced high-yield bond issuance advanced by 33.0% to a new record calendar-year high of $453 billion. For 2018’s US$-denominated corporate bonds, IG bond issuance may drop by 6.2% to $1.415 trillion, while high-yield bond issuance is likely to fall by 8.0% to $417 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 Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Yuki Choi 1.212.553.0906 yukyung.choi@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Moody’s Analytics/U.S.: Ryan Sweet 1.610.235.5213 ryan.sweet@moodys.com Moody's Analytics/Europe: Reka Sulyok +420.224.106.435 reka.sulyok@moodys.com barbara Teixeira Arajuo +420.224.106.438 barbara.teixeiraarajuo@moodys.com Moody's Analytics/Asia-Pacific: Katrina Ell +61.2. 9270.8144 katrina.ell@moodys.com Editor Reid Kanaley 1. 610.235.5273 reid.kanaley@moodys.com CAPITAL MARKETS RESEARCH 2 MAY 17, 2018 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. Low Utilization Rate Favors Profits Growth and Fewer Defaults Markets are now torn between upbeat outlooks for corporate earnings and the risks posed to these outlooks by a very low jobless rate. A recent consensus forecast has S&P 500 operating income growing by 22% in 2018 and by 11% in 2019. Moreover, the Blue Chip consensus believes that the pretax operating profits of all U.S. corporations will increase by 5.2% in 2018 and 4.4% in 2019. In addition, an expected drop by the U.S.’ high-yield default rate from April 2018’s 3.7% to 1.5% by April 2019 complements the positive outlook for profits. Nevertheless, April’s historically low unemployment rate of 3.9% hints of limited upsides for both domestic spending and U.S. output that may thwart expectations of operating earnings growth and fewer defaults. Lack of Qualified and Available Workers May Limit Upside for Growth The high rate of labor market utilization suggested by the now 3.9% jobless rate raises several risks. For one thing, markets question whether businesses will be able to secure additional workers possessing sufficient levels of productivity. To the degree new hires are relatively inefficient and require substantial training, an effective increase in labor costs will trim profit margins. Not to be overlooked is how a tighter labor market adds to labor costs by compelling businesses to either offer higher wages or risk losing valued employees. Once businesses sense that employee compensation is unduly burdensome they will respond first with hiring freezes, next with attrition, and finally with outright layoffs. If firm-specific shortages of skilled labor can on