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Fed Isn’t Popping Champagne (Capital Market Research) (Weekly Market Outlook)

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MOODY’S ANALYTICS          CAPITAL MARKETS RESEARCH / WEEKLY MARKET OUTLOOK

 

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Moody’s Analytics and Moody’s Investors Service maintain separate and independent economic forecasts. This publication uses the

forecasts of Moody’s Analytics. Moody’s Analytics markets and distributes all Moody’s Capital Markets Research materials.

Moody’s Analytics does not provide investment advisory services or products. For further detail, please see the last page.

 

Fed Isn’t Popping Champagne

U.S.  consumers finally got a little relief

on the inflation front in July because of

a significant decline in gasoline prices,

but the Federal Reserve isn’t going to

celebrate as one month isn’t a trend.

The consumer price index was unchanged

in July, compared with our forecast for a

0.1% gain and the consensus forecast for

a 0.2% increase. This comes on the heels

of a 1.3% gain in June.

The CPI for energy was down 4.6% in

July after rising 7.5% in June. Within

energy, the CPI for gasoline dropped

7.7%, shaving 0.4 percentage point off

the monthly changes in the headline CPI.

Food prices continue to rise at a rapid

pace, up 1.1% in July, which is the third

consecutive monthly gain of at least 1%.

Excluding food and energy, the CPI was

up 0.3%, weaker than the 0.7% gain in June. Lower jet fuel prices cut into the CPI for

airfares. The CPI for airfares fell 7.8% in July, the second consecutive monthly decline.

Apparel prices slipped 0.1% in July after rising 0.8% in June.

The CPI for owners' equivalent rent rose 0.6%, a little softer than the 0.7% gain in June. The

CPI for rent of primary residence increased 0.7%, softer than the 0.8% gain in June.

Owners’ equivalent rent was up 0.6%, compared with the 0.7% gain in June. Rents are

normally fairly sticky but will likely accelerate in August, with growth peaking this summer.

All told, it was a better CPI report but inflation is still high and costly. With the CPI up

8.5% on a year-ago basis in July, the typical American household now needs to spend

$460  more per month to buy the same goods and services as it did last year.

Decomposing inflation

The issue facing the Fed is that, even though there is a lengthy list of forces driving

inflation higher, the massive shocks to the supply side of the economy, including the

WEEKLY MARKET 
OUTLOOK

AUGUST 11, 2022

Lead Author

 

 

Ryan Sweet 

Senior Director 

Asia-Pacific

 

Illiana Jain  

Economist 

 

Harry  Murphy  Cruise 

Economist 

Europe

 

Ross Cioffi 

Economist 

U.S.

 

Adam Kamins 

Economist 

 

Olga Bychkova 

Economist 

 

Matt Orefice 

Data Specialist 

Inside Economics Podcast:

 

Join the Conversation 

 

 

 

 

  

 


 

Table of Contents

Top of Mind ...................................... 4

Week Ahead in Global Economy ... 6

Geopolitical Risks ............................ 7

The Long View

U.S.   ................................................................. 8 
Europe   .......................................................... 12 
Asia-Pacific   ..................................................13

Ratings Roundup ........................... 14

Market Data ................................... 17

CDS Movers .................................... 18

Issuance .......................................... 21

 

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Russian invasion of  Ukraine  and the COVID-19 pandemic,

are far and away the most important. The removal of

monetary policy accommodation will not solve the supply-

side issues that are behind our inflation problems.

There was a sizable decline in energy prices in July,

particularly gasoline. However, energy is still adding a ton to

year-over-year growth in the CPI. Energy prices added 3

percentage points to year-over-year growth in the CPI in

July, compared with 3.5 percentage points in June.

There was slightly better news on supply-chain-linked

inflation. Supply-chain-constrained components of the CPI

added 1 percentage point to year-over-year growth in the

CPI in July, compared with the 1.1-percentage point

contribution in June and was the smallest since April.

Reopening-sensitive components of the CPI added 0.1

percentage point to growth in the CPI in July, less than the

0.3-percentage point contribution in the prior month. A

drop in rental car prices helped reduce the contribution to

growth in the CPI. Excluding energy, supply chains and

reopening, year-over-year growth in the CPI in May would

have been 4.3%, compared with 4.1% in June.

 

Energy is important to the inflation outlook. The forecast is

for its contribution to year-over-year growth in the CPI to

continue to decline. This is key as some of the stickier

components of inflation are accelerating, including rents.

The CPI for shelter added 1.9 percentage points to year-

over-year growth in the CPI in July, the largest since the

early 1990s. This is nearly double the contribution seen prior

to the pandemic. Growth in rents hasn’t peaked.

No change to our Fed call, markets rethinking

The July  U.S.  CPI has caused financial markets to modestly

adjust their expectations for the path of the fed funds rate.

Our baseline forecast is for the Fed to increase the target

range for the fed funds rate by 50 basis points in September

and then 25 basis points at each subsequent meeting until

the fed funds rate hits 3.5%. Our subjective odds of a 75-

basis point hike in September have declined following the

July CPI, but a lot can still happen between now and the

September meeting of the Federal Open Market

Committee. However, the August CPI should also be tame

because of the ongoing decline in energy prices. Therefore,

we’re increasingly comfortable with our baseline forecast.

 

Markets have tweaked their expectations. Relative to Tuesday,

markets now anticipate 20 basis points less of tightening over

the next year. The expectation for the fed funds rate is 11 basis

points lower over the next two years and 8 basis points lower

over the next three years. The markets' estimate of the

terminal rate, or the rate where the fed funds rate peaks this

tightening cycle, fell from 3.67% to 3.58%. Though

expectations have been lowered, the implied path for the fed

funds rate is still noticeably higher than what was expected on

July 28,  the day after the July  FOMC  meeting.

The Fed  isn’t celebrating and one month isn’t swaying them.

Minneapolis  Fed President Neel Kashkari said he hasn’t altered

his view that the fed funds rate should be 3.9% at the end of

this year and 4.4% in 2023. Kashkari has moved from of the

Fed’s most dovish regional Fed presidents pre-pandemic to

one of the most hawkish. Separately,  Chicago  Fed President

Charles Evans  described inflation as “unacceptably high” and

anticipated that rate hikes will continue into next year.

August  U.S.  CPI should be another good one

It’s never too early to start thinking about the next CPI report.

There should be continued weakness in airfares, lodging away

from home, and car rental prices as summer travel winds

down. Energy will also be another big drag. Changes in retail

gasoline prices closely track changes in the CPI for gasoline.

Retail gasoline prices in August point toward a 6.5% decline in

the CPI for gasoline in August, which would reduce monthly

growth in the headline CPI by 0.3 percentage point.

 

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This could be conservative as wholesale gasoline prices,

which lead retail gasoline prices by one to two weeks,

suggest that retail gasoline prices should be $4  per gallon

toward the end of this month. Therefore, it wouldn’t be

surprising if gasoline prices fall 10% in August, which would

reduce growth in the CPI by 0.5 percentage point.

Growth in the CPI for food at home should also moderate in

August as there is a lag between changes in diesel prices and

changes in prices at grocery stores. There are also signs that

used-car prices have been falling in August. Depending on

what happens with retail gasoline prices for the rest of

August, early indications are that the headline CPI fell in

August.

Q3  U.S.  GDP on the rise

In each of the past two quarters, our  U.S. high-frequency GDP

model’s tracking estimate steadily declined as new source

data were released, but the opposite is occurring so far in the

third quarter. There is still a ton of missing source data, but

our tracking estimate has been climbing and is now at 1.5% at

an annualized rate, compared with 1.3% prior to the new data

on consumer prices and wholesale inventories.

The July CPI increased our tracking estimate of third-quarter

real consumer spending to 1.8% at an annualized rate.

Separately, wholesale inventories increased 1.8% in June

following a 1.9% gain in May. This raised our estimate of the

inventory build this quarter. It still won’t duplicate the increase

in the second quarter, but the drag on growth this quarter is

smaller than previously thought. Inventories are on track to

shave 0.6 percentage point off third-quarter GDP growth.

 

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TOP OF MIND

Translating Regional Inflation Differences

BY ADAM KAMINS

Regional differences in the rate of price growth are proving

stubbornly persistent. The July Consumer Price Index

revealed that the gap between the highest and lowest rates

of inflation across the nation’s four regions exceeded 2

percentage points for a second straight month. This

represents just the third time this has happened since

monthly tracking began nearly 35 years ago. 
While prior research into components by region or a subset

of metro areas shed some light, not seasonally adjusted

data for each of the nation’s nine census divisions provide

additional granularity, even if the time series dates back

only a few years. This not only helps to better illustrate

what is driving differences, but taken in concert with state-

level expenditure data is used to construct rough estimates

of inflation for each state.

Differing regional trajectories

Among 10 product categories for which there is close

overlap between regional CPIs and personal consumption

expenditures, the contribution to differences in inflation

varies. But for a handful, the combination of pronounced

price increases and regional differentiation indicate outsize

importance. 
Not surprisingly, one of those categories is motor fuel.

Although July brought some long-awaited relief, on a year-

over-year basis, skyrocketing gasoline prices have still

resulted in by far the largest price increases of any category,

ranging from approximately 40% in the West to nearly

50% elsewhere. 
To some extent, these differences reflect the fact that

regions started at different levels. The western  U.S. is home

to the nation’s eight most expensive states for a gallon of

unleaded, according to the American Automobile

Association. Not coincidentally, the region has experienced

a less pronounced rate of motor fuel price increases due to

an elevated base. 
Growth has been more pronounced in middle of the

country and portions of the  Sun Belt . In some ways, this is

simply a function of the arithmetic, as gasoline prices that

are nearly  $2  lower in  Texas  than in  California  mean that a

50-cent  increase in per-gallon prices represents around a

14% increase in the  Lone Star  State, compared with 9% in

California . 
Of course, simple math is not the only factor at play.

Demand for gasoline has been supported by increased

migration into the much of the southern  U.S. , also causing

prices to rise more rapidly.

Similarly, the transportation services category has

experienced well above-average growth throughout much

of the  Sun Belt . The cost of household furnishings,

meanwhile, has risen most rapidly in the Mountain West.

Both of these trends can be traced in some part to

increasing demand, with the latter likely driven in part by

the impact of coastal residents flocking to much cheaper

states and suddenly needing to buy more household goods

to fill their new, larger homes.

What moves the needle

While pronounced price increases for individual categories

can drive regional discrepancies, more subtle differences can

move the needle for especially important categories. To

determine relative importance, CPI categories were

matched with their PCE counterparts so that the share of

spending associated with each could be calculated. 
The consumption data suggest that these 10 categories

account for about two-thirds of overall spending. Broadly,

housing accounts for the largest share of household budgets

followed by medical care; combined, the two represent

more than half of all spending among the 10 categories

examined. The other large category is food, which accounts

for more than a fifth of spending when combining food

consumed at home and away from home. 
Fueled by favorable demographics, the Mountain West and

Southeast are experiencing the most pronounced housing

cost inflation, a finding consistent with an analysis from

spring. Price gains are not as severe on the  West Coast , but

a historically elevated share of monthly spending on

housing means more pain. Medical care costs are rising

more rapidly not just on the  West Coast , but also in

relatively sparsely populated regions such the Plains and in

oil patch states, where access to care can prove more

challenging to access and costly to deliver to sparsely

populated rural areas. 
But of the two, housing matters far more because of an

average rate of inflation that is nearly twice that of medical

care. As house prices and rents begin to cool a tad, this

suggests that cost pressures will be abate some—but for

now, any leveling off has been modest. Medical care may

not matter as much, but as an important driver of spending

in the Midwest, it is having some impact on price gains

there. 
Food and beverage costs vary markedly as well, although

their share of spending is fairly similar across regions. But

more rapid increases in prices in the middle of the country

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could reflect a lack of access to overseas shipping hubs and

a low starting point. 
Finally, while motor fuel is not a large category, price gains

are so significant that its importance to regional inflation

narratives rivals that of housing. The category accounts for

an outsize share of spending in the driving-dependent

Plains, the Mid-South, and the oil patch, suggesting that the

story in those divisions has as much to do with vehicle

usage as it does the vagaries of gasoline prices.

Translating to states

Linking the CPI and PCE makes it possible to not only

determine regional reliance on various categories but to

extend this to states. To do so, the share of expenditures for

each state was calculated based on an eight-quarter

average spanning 2019 and 2020, the most recent years for

which data are available. Next, those shares were used as

state weights for each CPI category and applied to the

relevant census division's growth rates. 
This provided a preliminary estimate of state CPI, but was

incomplete because about a third of spending is associated

with PCE series that do not map neatly to a CPI

counterpart. So, to ensure an appropriate match, state CPI

growth was "squeezed" to make sure that the population-

weighted average equals the corresponding figure for each

division. 
The results, not surprisingly, closely tether states to their

surrounding areas. If the Bureau of Labor Statistics

estimated CPI growth at the state level, there would almost

certainly be more variation, so these figures should not be

interpreted in the same way that data for the roughly two

dozen metro areas that are reported by the source. But by

accounting for the composition of state economies and

incorporating official regional figures, these estimates shed

light on which states are experiencing the most and least

pronounced cost pressures.

Takeaways

As noted, estimated state CPI growth as of July hews closely

to regional patterns. The four oil patch states each rank in

the top 10 for year-over-year CPI growth, with  Oklahoma

and  Arkansas  ranking first and second. The Mountain West

and  Sun Belt  more generally dominate the list of states with

the most severe price pressures, accounting for the entire

top 20. 
On the flip side, less severe inflation in the Northeast is

clear when looking at the four states with the slowest price

gains.  New York  is at the bottom of the list, consistent with

figures for  New York City , as the out-migration of residents

in recent years weighs on house price growth and a reliance

on public transit reduces the  sting  of high gasoline prices.

Some of those dynamics are also at play in  New Jersey ,

Massachusetts  and  Connecticut , where inflation is also

more manageable than elsewhere. 
While broader division-level dynamics are instrumental in

determining state inflation, there are some exceptions. Price

pressures in  Maine  are far stronger than for its neighbors, as

the state's more rural nature makes it the only one in  New

England for which gasoline expenditures as a share of total

are above the national average. 
The story is similar, albeit a bit less extreme, in South

Carolina, where car reliance is more pronounced than

anywhere else in the Southeast division.  Iowa's  outsize

reliance on agriculture is partly to blame for the nation's

highest share of spending on motor fuel, causing it to

struggle with inflation more than most of its neighbors; the

dynamics in  Nebraska  are similar, but not as quite

pronounced. Pennsylvania , meanwhile, is seeing prices grow

much more rapidly than in nearby  New York  and New

Jersey given those two states’ lower fuel consumption, with

a larger proportion of residents in the latter two states

taking a train or bus to work.  
In fact, the relative lack of miles driven per capita in New

York places it comfortably beneath the Mid-Atlantic’s

relatively low inflation, a story that is mirrored to a lesser

degree by  Massachusetts  in  New England . Elsewhere,

below-average gasoline and food consumption as a share of

total in the Dakotas has put those states in a better position

with respect to price gains than the rest of the Plains, as has

an elevated reliance on healthcare spending, for which price

gains have been more modest than almost any other

category. 
Florida  and Hawaii  are also ranked near the bottom for per

capita gasoline consumption, suppressing inflation in both

states. This makes sense given elevated population density

due to the prevalence of vacationers and retirees, groups

that are less likely to drive significant distances. 
With state differences owing largely to structural

characteristics, shifts in the coming months will reflect

national and broader regional patterns. But the nuances will

bear close watching in the months ahead, especially after

2021 state consumption figures are released later this year.

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The Week Ahead in the Global Economy

 

U.S.

The  U.S.  economic calendar is a little busier next week.

Among the key data released are  U.S.  retail sales, industrial

production, housing starts, existing-home sales, and initial

claims for unemployment insurance benefits. Many of these

data will feed into our high-frequency GDP model’s tracking

estimate of third-quarter GDP, which is currently 1.5% at an

annualized rate. We will watch initial claims closely but they

need to be interpreted carefully. Seasonal-adjustment issues

and wild swings in new filings in  Massachusetts  and

Connecticut  are distorting the message. Unadjusted for

seasonal fluctuations, initial claims are not alarming. In fact,

they are running around that seen over the past several

months. Not seasonally adjusted new filings are still near

200,000. Historically, not seasonally adjusted claims are

north of 300,000 when the economy is headed into a

recession. On the monetary policy front, the minutes from

the July meeting of the Federal Open Market Committee

will be released.

 

Europe

Look for the euro zone’s trade balance release next week.

We expect the situation remained grim with the

nonseasonally adjusted deficit deepening to €28 billion in

June from a surplus of €17.2 billion a year earlier and a

deficit of €26.3 billion a month earlier. We expect imports

strengthened disproportionately as countries attempted to

fill their natural gas reserves and demand for fuel rose with

the summer tourism season heating up.

 

Meanwhile, the euro zone’s harmonized index of consumer

prices likely rose by 8.9% on a year-ago basis in July,

speeding up from 8.6% in June. Preliminary estimates have

already been released, so we are not expecting a change.

Despite crude oil prices easing in July compared to June,

food and core inflation accelerated. Food prices will

continue growing as global supplies remain disrupted and

fertilizer shortages persist. Core prices are getting a boost

from the frenzy of tourism this summer. The U.K.  will

publish an inflation reading for July. We foresee the inflation

rate rising to 10% on a year-ago basis from 9.4% a month

earlier. This will happen for similar reasons as in the euro

zone, with food and core inflation providing the impetus.

Furthermore, we do not expect that inflation has reached its

peak yet in the euro zone or the  U.K.  The  U.K.  has much

further to go as the electricity and gas price cap gets

recalculated in October.

 

U.K.  retail sales will likely fall by 0.2% month over month in

July, deepening a 0.1% decline in June. The heatwave in July

likely boosted sales of summer essentials like warm-weather

clothing or fans and air conditioning units. But inflation is

taking a toll and causing households to purchase fewer

goods. Household’s ever-dwindling disposable income is

instead being used on essentials, like food and energy, and

on services.

 

Asia-Pacific

 

Central bank decisions from  New Zealand  and the

Philippines  will be in focus next week. The Reserve Bank of

New Zealand  is expected to lift by 50 basis points to 3%.

We put the odds of a 25-basis point hike in  New Zealand  at

40%. The RBNZ has already hiked the official cash rate by a

cumulative 225 basis points, but inflation remains

uncomfortably high. CPI grew by 7.3% on a year-ago basis

through the June quarter, exceeding the central bank’s

forecast of 7%. Although price growth appears to have

peaked, expectations for where inflation will sit two years

from now are still above the RBNZ’s range of 1% to 3%.

With inflation expectations not yet anchored, it’s important

for the central bank not to let up.

In the  Philippines , we look for Bangko Sentral ng Pilipinas to

lift its policy rate by 50 basis points to 3.75%, building on its

off-cycle 75-basis point increment in mid-July. The BSP is

dealing with significant inflation pressures. Headline

inflation reached 6.4% on a year-ago basis in July, the

highest since October 2018. With commodity prices and

supply-chain stress easing, inflation is likely near its peak.

GDP growth for the June quarter came in below

expectations at 7.4% year over year and contracted from

the previous quarter.

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Geopolitical Calendar

 

 

Date

Country

Event

Economic Importance Financial Market Risk

Aug

Papua New Guinea

Declaration of general election result

Low

Low

18-Aug

Norway

Norges Bank monetary policy announcement

Medium

Low

4-Sep

Chile

Referendum on new constitution

Medium

Low

6-Sep

Australia

Reserve Bank of  Australia  monetary policy announcement

Medium

Low

6-Sep

Chile

Banco Central  Chile  monetary policy announcement

Medium

Low

8-Sep

Euro zone

European Central Bank monetary policy announcement

Medium

Medium

9-Sep

Peru

Banco Central de Reserva monetary policy announcement

Medium

Medium

11-Sep

Sweden

General election

Low

Low

15-Sep

United Kingdom

Bank of  England  monetary policy announcement

Medium

Medium

20-Sep

Sweden

Riksbank monetary policy announcement

Low

Low

21-Sep

Brazil

Banco Central do Brasil monetary policy announcement

Low

Low

20-21-Sep

U.S.

Federal Open Market Committee  meeting

High

High

22-Sep

Japan

Bank of Japan monetary policy announcement

Medium

Low

22-Sep

Switzerland

Swiss National Bank monetary policy announcement

Medium

Low

22-Sep

Norway

Norges Bank monetary policy announcement

Medium

Low

25-Sep

Italy

General election

Low

Low

29-Sep

Mexico

Banxico Monetary Policy announcement

Low

Low

30-Sep

India

Reserve  Bank of India  monetary policy announcement

Medium

Low

30-Sep

Colombia

Banrep monetary policy announcement

Low

Low

2-Oct

Brazil

Presidential and congressional elections

High

Medium

4-Oct

Australia

Reserve Bank of  Australia  monetary policy announcement

Medium

Low

20-21-Oct

European Union

European Council summit

Low

Low

27-Oct

Euro zone

European Central Bank monetary policy announcement

Medium

Medium

28-Oct

Japan

Bank of Japan monetary policy announcement

Medium

Low

Oct/Nov

China

National Party  Congress

High

Medium

1-Nov

Australia

Reserve Bank of  Australia  monetary policy announcement

Medium

Low

1-2-Nov

U.S.

Federal Open Market Committee  meeting

High

High

3-Nov

United Kingdom

Bank of  England  monetary policy announcement

Medium

Medium

3-Nov

Norway

Norges Bank monetary policy announcement

Medium

Low

7-18-Nov

U.N .

U.N . Climate Change Conference 2022 (COP 27)

Medium

Low

8-Nov

U.S.

Midterm elections

High

Medium

15-16-Nov

G-20

G-20 Heads of State and Government Summit, hosted by  Indonesia

Medium

Low

18-19-Nov

APEC

Economic Leaders' Meeting, hosted by  Thailand

Low

Low

24-Nov

Sweden

Riksbank monetary policy announcement

Medium

Low

7-Dec

Australia

Reserve Bank of  Australia  monetary policy announcement

Medium

Low

7-Dec

India

Reserve  Bank of India  monetary policy announcement

Medium

Low

13-14-Dec

U.S.

Federal Open Market Committee  meeting

High

High

15-Dec

United Kingdom

Bank of  England  monetary policy announcement

Medium

Medium

15-Dec

Euro zone

European Central Bank monetary policy announcement

Medium

Medium

15-Dec

Switzerland

Swiss National Bank monetary policy announcement

Medium

Low

15-Dec

Norway

Norges Bank monetary policy announcement

Medium

Low

15-16-Dec

European Union

European Council summit

Low

Low

20-Dec

Japan

Bank of Japan monetary policy announcement

Medium

Low

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THE LONG VIEW: U.S.

Bond Spread Tightening Could Be Short-Lived

 

BY RYAN SWEET

CREDIT SPREADS

 

Moody's long-term average corporate bond spread

remained at 156 basis points. It’s in line with the 156-basis

point average in July. The long-term average industrial

corporate bond spread widened by 1 basis point to 141 basis

points. It averaged 141 basis points average in July.  
The ICE BofA U.S.  high-yield option-adjusted bond spread

narrowed from 454 to 446 basis points. The Bloomberg

Barclays high-yield option-adjusted spread narrowed this

past week from 444 to 432 basis points. This compares to

an average high-yield spread that averages 1,000 basis

points during recent recessions and an average of 350

outside of recessions.  
The recent tightening in high-yield corporate bond spreads

could be short-lived. Equity volatility should increase as the

VIX, as a share of realized volatility, is below its long-term

average. This is odd considering monetary policy and

geopolitical uncertainty. The volatility curve is steepening, as

the spot VIX is dropping more quickly than its forward values.

Also, banks are tightening lending standards on commercial

and industrial loans. The correlation coefficient between the

net percentage of banks tightening lending standards on C&I

loans and the  U.S.  high-yield corporate bond spread is 0.73.

With banks tightening the screws, odds are high that high-

yield corporate bond spreads will resume widening. 
The high-yield option-adjusted bond spreads approximate

what is suggested by the accompanying long-term Baa

industrial company bond yield spread and but wider than

that implied by a VIX of 19.7. The VIX slipped over the

course of the past week.

 

DEFAULTS

Despite the drop in the default count from last month, the

trailing 12-month global speculative-grade default rate held

steady at 2.1% at the end of June, the same reading as at

the end of May. 
The default tally reached 43 in the first half of the year, up

from 29 in the same period last year. Across sectors,

Construction & Building remains the largest contributor to

defaults with 11. The banking sector followed with eight. By

region, North America  had 18 defaults (17 in the  U.S.  and

one in Canada ). The rest were from  Europe  (12), Asia-Pacific

(11), and  Latin America (two). 
In accordance with our credit conditions outlook, we lifted

our one-year baseline global speculative-grade default rate

forecast to 3.7% from last month's 3.3%. If realized, the new

forecast will inch closer to the historical average of 4.1%.

 

U.S. CORPORATE BOND ISSUANCE

First-quarter 2020’s worldwide offerings of corporate bonds

revealed annual advances of 14% for IG and 19% for high-

yield, wherein US$-denominated offerings increased 45%

for IG and grew 12% for high yield.

Second-quarter 2020’s worldwide offerings of corporate

bonds revealed annual surges of 69% for IG and 32% for

high-yield, wherein US$-denominated offerings increased

142% for IG and grew 45% for high yield.

Third-quarter 2020’s worldwide offerings of corporate

bonds revealed an annual decline of 6% for IG and an

annual advance of 44% for high-yield, wherein US$-

denominated offerings increased 12% for IG and soared

upward 56% for high yield.

Fourth-quarter 2020’s worldwide offerings of corporate

bonds revealed an annual decline of 3% for IG and an

annual advance of 8% for high-yield, wherein US$-

denominated offerings increased 16% for IG and 11% for

high yield.

First-quarter 2021’s worldwide offerings of corporate bonds

revealed an annual decline of 4% for IG and an annual

advance of 57% for high-yield, wherein US$-denominated

offerings sank 9% for IG and advanced 64% for high yield.

Issuance weakened in the second quarter of 2021 as

worldwide offerings of corporate bonds revealed a year-

over-year decline of 35% for investment grade. High-yield

issuance faired noticeably better in the second quarter.

Issuance softened in the third quarter of 2021 as worldwide

offerings of corporate bonds revealed a year-over-year

decline of 5% for investment grade.  U.S.  denominated

corporate bond issuance also fell, dropping 16% on a year-

ago basis. High-yield issuance faired noticeably better in the

third quarter.

Fourth-quarter 2021’s worldwide offerings of corporate

bonds fell 9.4% for investment grade. High-yield US$

denominated high-yield corporate bond issuance fell from

$133 billion  in the third quarter to  $92 billion  in the final

three months of 2021. December was a disappointment for

high-yield corporate bond issuance, since it was 33% below

its prior five-year average for the month.

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In the first quarter of 2022, worldwide offerings of

investment grade corporate bonds totaled  $901 billion , up

12% on a year-ago basis.

In the second quarter, corporate bond issuance weakened.

Worldwide offerings of investment grade corporate bonds

totaled  $548 billion , down 21% on a year-ago basis. US$

denominated high-yield corporate bond issuance was  $38

billion in the second quarter, down from  $63 billion  in the

first three months of the year. High-yield issuance is down

79% on a year-ago basis.

In the week ended August 5, US$-denominated high-yield

issuance totaled $5.55 billion , a significant increase from the

prior week when it was less than  $800 million . This puts the

year-to-date total to  $105.6 billion . Investment-grade bond

issuance totaled $60.71 billion . This brings its year-to-date

total to  $966.7 billion . Issuance is still tracking that seen in

2018 and 2019.

U.S.  ECONOMIC OUTLOOK

There were some significant changes to the  U.S. baseline

forecast in August. We cut the forecast for GDP growth in

the second half of this year, which will bleed into the

unemployment rate. We also made an adjustment to our

fiscal policy assumptions, incorporating the Inflation

Reduction Act, but the implications for the near-term

forecast for both GDP and inflation were on the margin.

Fiscal assumptions

The Inflation Reduction Act, which passed the  Senate

recently, has been incorporated in the soon-to-be-published

August baseline forecast, as the legislation is all but certain to

advance through the House and onto the president’s desk.

To obtain the support from  Arizona  Senator Kyrsten Sinema,

Senate Democrats nixed a provision that would have taxed

more carried interest that general partners of investment

funds receive for carrying out investment management

services as ordinary income, limited the scope of the 15%

corporate minimum tax by exempting certain accelerated

cost recovery expenditures, and added extra funding for

drought resiliency. To make up for the loss of revenue,

Senate Democrats revived a 1% excise tax on stock

repurchases, which had been included in the House-passed

Build Back Better Act from November. The  Senate

parliamentarian ruled that the reconciliation bill could not

require drugmakers to pay the government a rebate if drug

prices increase faster than the rate of  U.S.  inflation in the

commercial market. The inflation rebate will still apply to

Medicare. Prior to final passage, an amendment was

adopted to extend for two years the limitation on Section

461(I) business loss deductions of noncorporate taxpayers,

which is scheduled to sunset after 2026 under current law.

The macroeconomic implications are likewise broadly

unchanged. The IRA is estimated to reduce  U.S.  inflation, as

measured by the consumer price index, by 3.3 basis points

per year on average over the next 10 years. Also, the

legislation will add 2 basis points per year to real GDP

growth on average during the same period.

The baseline forecast does not assume that any further

major piece of fiscal legislation will get passed during

President Biden’s current term in office.  Republicans are

poised to seize control of at least the House, which will slam

the door shut on budget reconciliation as an avenue for

Democrats to pass additional areas of the president’s Build

Back Better agenda.

COVID-19 assumptions

Confirmed case counts are elevated but remain below their

January peak. The prevalence of at-home testing and

asymptomatic or mild cases results in significant

undercounting of infections in official statistics. We also

assume that hospitalizations ebb and flow but remain below

prior peaks due to widespread vaccinations and new

treatments. Hospitals are able to manage the demand

without compromising other services. Daily deaths

attributable to COVID-19 remain in the low hundreds or 1.5

per million U.S. residents.

 

Energy price forecast and assumptions

The baseline forecast still assumes  West Texas  Intermediate

crude oil prices peaked in the second quarter. The August

baseline forecast includes the recent slide in West  Texas

Intermediate crude oil prices in July and early August.

Therefore, oil prices are now forecast to average  $97.25  per

barrel this quarter, compared with  $101.93  per barrel in the

July baseline. Recession concerns, appreciation in the  U.S.

dollar, and a number of countries releasing some of their oil

reserves have helped to push global oil prices lower recently.

The forecast assumes a modest increase in oil prices in the

fourth quarter before they steadily decline in 2023 and the

first half of 2024. Oil prices bottom in 2024, a touch below

$65  per barrel.

 

A key assumption is that even with the European ban, the

global oil market will be roughly balanced by the end of

2022. Risks are that it takes longer than expected.  The EU

ban will reduce Russian oil shipments to global markets by

an additional 1 million bpd, but it has been slow to be

implemented. The official bans cover about 4% of total

global supply.

Cutting GDP forecast

The August baseline incorporates the new data on second-

quarter GDP. Real GDP fell 0.9% at an annualized rate in the

second quarter, the second consecutive decline. GDP is only

one of many variables that the National Bureau of Economic

Research, the de facto arbiter of  U.S. business cycles, uses to

define a recession. Its stated definition is a "significant decline

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in economic activity spread across the economy, lasting more

than a few months, normally visible in production,

employment, real income and other indicators." Outside of

GDP, the other key data the NBER relies on have generally

continued to increase, including nonfarm employment, real

consumer spending, industrial production, and weekly hours

worked. Even real personal income—excluding transfers,

another variable it watches—is flat to increasing.

A large portion of the weakness in GDP is due to a dramatic

widening in the trade deficit. This reflects the strength of the

U.S.  economy compared with its trading partners and the

strength of the  U.S. dollar, which is at its highest in decades

against many currencies. Another portion comes from

slowing inventory accumulation, a temporary phenomenon

caused by businesses adjusting to wild swings in demand as

the economy shut down and reopened. Domestic demand,

including consumer spending and fixed business investment,

remains sturdy. Moreover, real gross domestic income,

which totals up the income earned by households and

businesses—and in theory should add up to real GDP—

continues to grow. The difference between real GDP and

real GDI, also known as the statistical discrepancy, has never

been as large as it is now. It would not be surprising if the

Bureau of Economic Analysis is having an especially difficult

time accurately measuring real GDP during the pandemic

given the resulting big swings in global trade and

inventories; real GDP could ultimately be revised higher to

be more consistent with real GDI.

Real GDP growth increases in the second half of this year,

but for all of 2022, it is now expected to increase 1.6%,

compared with 1.9% in the July baseline. We have cut our

forecast for  U.S.  GDP growth this year by a total of 190 basis

points over the past several months. We nudged the

forecast for GDP growth in 2023 down from 1.9% to 1.5%.

The economy is now expected to be below its potential this

year and next, which is likely around 2%.

Our baseline forecast for real GDP growth this year is below

the Bloomberg consensus of 2%. The forecast for next year

is 0.2 percentage point stronger than the Bloomberg

consensus of 1.5%.

Business investment and housing

We lowered the forecast for growth in real business

equipment spending this year, as it is now expected to

increase 4.6%, compared with the 6.4% gain in the prior

baseline. Fundamentals have turned less favorable for the

outlook as financial market conditions have tightened this

year, but there has been some recent relief as investment-

grade and high-yield corporate bond spreads have narrowed

noticeably. This is unlikely to have a noticeable impact on

business investment as spreads should widen soon. The

share of banks tightening lending standards on commercial

and industrial loans breached the threshold that has been

consistent with a recession in the past. We doubt recession

fears will vanish soon and this should boost high-yield

corporate bond spreads. Another reason why spreads will

widen is that corporate profit margins are coming under

pressure. Productivity plunged in the first half of this year

while until labor costs surged. This isn’t a good combination

for corporate profit margins.

The interest rate-sensitive segments of the economy have

weakened, which is not surprising as the  Federal Reserve  is

front-loading rate hikes. Housing starts are expected to be

1.65 million, compared with 1.75 million in the prior baseline.

Housing starts are expected to total 1.56 million next year,

down from 1.81 million in the July baseline. Housing starts are

forecast to increase in 2024, totaling 1.64 million.

There are likely only so many homes that can be built each

year because of labor-supply constraints and a lack of buildable

lots. Some of the labor-supply issues will ease as the pandemic

winds down, but the reduction in immigration is particularly

problematic for homebuilders' ability to find workers.

A decline in affordability has cut into our forecast for home

sales, which are expected to total 6.27 million this year, less

than the 6.46 million in the July baseline. We also cut the

forecast for total home sales next year to 6.14 million,

compared with 6.52 million in the prior baseline.  New-home

sales account for about 10% of total sales and existing-

homes make up the remainder.

There were minor revisions to the forecast for the FHFA All-

Transactions House Price Index this year and next. The July

baseline has it rising 12.9% this year, compared with 12.7%

in the prior baseline. The forecasts for 2023 and 2024

continue to expect little house price appreciation.

Labor market

The  U.S.  labor market remains very strong, but job growth is

set to moderate. Nonfarm employment increased by a net

528,000 in July, and the net revision to the prior two

months was 28,000. The total number of employed women

rose by 327,000 last month, accounting for more than half

of the 528,000 increase in overall payrolls.

July’s gain and the revisions to prior months put

employment above its pre-pandemic level. The seasonal

adjustment factors boosted job growth less than normal for

July. Also, not seasonally adjusted employment fell 385,000

in July, compared with the 1.13 million decline that normally

occurred prior to the pandemic.

We have job growth averaging 370,000 per month this year

before dropping to 110,000 in 2023. Job growth next year is

weaker than that needed to keep the unemployment rate

stable. The unemployment rate fell from 3.6% in June to

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3.5% in July. The forecast is for the unemployment rate to

gradually increase in the second half of this year, averaging

3.7% in the fourth quarter. The unemployment rate keeps

rising in 2023 because of below-potential GDP growth and

job growth that will be weaker than that needed to keep the

unemployment rate stable. Therefore, the unemployment

rate is expected to average 4% in the fourth quarter of 2023.

We assume a full-employment economy is one with

approximately a 3.5% unemployment rate, around a 62.5%

labor force participation rate, and a prime-age employment-

to-population ratio a little north of 80%. The labor force

participation rate is close but still 0.4 of a percentage point

below this threshold.

On the surface, there appears to be a disconnect between

employment and GDP. The correlation coefficient between

average monthly job growth in a given quarter and

annualized growth in real GDP since 2000 is 0.71. Granger

causality tests show that the causation between job and

GDP growth runs both ways. The results didn’t change when

using different lags. This isn’t surprising. Still, job growth has

been stronger than GDP growth—but the disconnect

between it and employment isn’t unusual. Initial reports are

volatile and subject to revision, and thus don’t always tell

similar stories.

Beyond data issues, there are real differences in how output

and the labor market respond during the business cycle. For

example, firms normally adjust workers' hours before adding

or subtracting staff, which can cause output to rise or fall

before employment does. Also, if we factor in productivity

growth, it doesn’t appear that employment and GDP are

telling different stories.

Risks to our employment forecast are weighted to the

downside. Per Okun’s law, a 1-percentage point deceleration

in GDP growth over the course of a year would amount to

around 800,000 jobs per year. This would also increase the

unemployment rate by about 0.5 percentage point.

Monetary policy

The  Federal Reserve continues to quickly remove monetary

policy accommodation as it attempts to tame inflation. The

Federal Open Market Committee unanimously raised the

target range for the fed funds rate by 75 basis points to

2.25% to 2.5% at the July meeting.  The Fed  has raised the

target range for the fed funds rate by 150 basis points over

the past two meetings. There were very few changes to the

statement.  The Fed  didn’t alter its forward guidance but did

mention that spending and production have softened while

job gains have been robust.

There was only a slight change in the forecast for the fed

funds rate. The new forecast wasn't attributed to any

changes to our assumptions. Rather, we adopted a new

approach for forecasting the fed funds rate on a monthly

basis to better align changes with the fed funds rate and

updates from the FOMC  meetings. The monthly forecast is

then rolled up into our quarterly forecast.

The forecast is for a 50-basis point hike at the September

meeting. This will be followed by a 25-basis point rate hike

at the November and December meetings. The terminal fed

funds rate remained at 3.5%, less than the median

projection from the latest Summary of Economic

Projections. The assumption is that the Fed will keep the fed

funds rate at 3.5% for less than a year before gradually

cutting by 100 basis points over the course of 2024,

returning it to its neutral rate of 2.5%.

The 10-year Treasury  yield has dropped recently and we

incorporated this into the August baseline. The 10-year

Treasury  yield is now forecast to average 3.1% in the fourth

quarter of this year, compared with 3.33% in the July

baseline. The 10-year averages 3.48% in 2023, 3 basis

points lower than in the prior baseline. The July and August

baseline forecasts for the 10-year  Treasury  yield converge in

early 2024. The forecast has the yield curve, or the

difference between the 10- and two-year Treasury  yields,

remaining inverted for the remainder of this year. The

August baseline has the difference between the 10-year and

three-month  Treasury  yields flattening but avoids inverting.

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THE LONG VIEW:  EUROPE

Drought, Heat Cause More Problems

BY ROSS CIOFFI

Over the past year,  Europe has fallen victim to

uncooperative weather. During the summer of 2021,

sluggish wind speeds slashed energy output, which triggered

natural gas shortages that afflicted the economy. Now we

are looking at the effects of a particularly dry year as

droughts mess with the Continent's energy supply while

creating physical trade disruptions on internal waterways.

The Rhine river is back in the headlines as water in the key

artery is close to reaching unnavigable levels. In 2018, the

Rhine dropped to levels where transport was halted, costing

nearly €5 billion in damage, according to estimates from

ABN Amro Bank . Meanwhile, the  Danube  river, which

connects Central  Europe  to the Black Sea, is also running

low. The  Danube  is used to transport grain and other

commodities out of  Ukraine  as Black Sea ports are still stuck

in the crossfire of the  Russia - Ukraine  military conflict.

Waterways are a major source of trade in Europe ,

transporting an estimated 1 tonne of freight for each EU

resident annually. An interruption in trade along these rivers

may result in shortages of shipped material and higher

shipping costs.

Meanwhile, France’s utility giant, Électricité de  France , was

forced to cut power production at nuclear plants along the

Rhone  and Garonne rivers this month as heat waves brought

the water temperature higher, making it less effective at

cooling the generators and more likely to harm fish and the

delicate ecosystems in the river. EDF now expects power

output in 2022 to be its lowest in over 30 years. Droughts

have also been stunting the ability of hydroelectric plants to

produce electricity. This has been an issue in  Portugal :

Between January and June, energy production fell, on

average, by 12.3%, on a yearly basis. Norway  has also been

struggling because of its heavy reliance on hydroelectric

plants to produce energy.  Norway  is typically a massive

electricity exporter, but the country is now discussing limits

on electricity exports in light of water levels falling so low in

reservoirs. The goal is to secure the domestic energy supply

and alleviate energy price inflation, which has averaged

55.8% year on year over the past 12 months.

What does all this bad weather mean for the European

economy? Price pressures will heat up, increasing the

likelihood of recession in the bloc. Already we’ve been

expecting consumers to retrench at the end of this summer

as prices continue growing, but they have already spent big

over the past months on satisfying pent-up demand for

services and travel. With the prospect that inflation will peak

at a higher level because of these further disruptions to

energy supply or shipping, the effect on consumers and

firms will be even stronger. As of our August baseline

forecast, we do not have a recession pencilled in, though we

do expect a 0.3% quarter-on-quarter contraction in euro

zone GDP during the fourth quarter and minor growth in the

first quarter of 2023.

Industrial production has mixed results

 

Industrial production in  Austria  dropped by 2.1% month

over month this June, breaking a five-month streak of

growth. Output fell considerably in each of the main

industrial groupings, except for capital goods. In the

Netherlands , industrial production also declined, by a more

modest 0.5%, but this comes after a 1.8% decline in May. In

contrast, output rose in Finland  and Sweden . In Finland ,

industrial production gained by 1.3% in June, on top of a

0.4% increase in May. In Sweden , industrial production rose

1.8% after a 0.1% increase previously.

Despite the good news in  Finland and Sweden , the overall

view is quickly darkening in Europe . Inflation and short

supplies of inputs have been significant pains for firms over

the past year. But they also benefitted from resilient client

demand. Survey data are reflecting a change in this

situation, however, with consumer demand faltering.

Manufacturing PMIs and confidence indexes have been

trending lower because of worsening views on incoming

orders. Inflation and dismal confidence are starting to weigh

on consumer and other businesses’ demands for industrial

goods.

In  Ireland , industrial production soared by 22.7% on a year-

ago basis in June, following a 6.5% increase in May. In

monthly terms, output was 6.7% higher in June as a 12%

rise in manufacturing outweighed a 20.6% drop in

electricity, gas, steam and air conditioning supply. Despite

the strong monthly and yearly change in June, over the

second quarter, industry weakened by 0.1% quarter over

quarter and 6.7% year over year. Unfortunately,  Ireland's

industrial sector will have a hard go of it later this year. The

dependence on exports will leave businesses open to

slowing global demand.

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THE LONG VIEW:  ASIA-PACIFIC

Rising Prices and Falling Confidence

BY HARRY  MURPHY  CRUISE

Russia’s invasion of  Ukraine , mounting geopolitical tensions,

lockdowns in  China , cost-of-living pressures, and rising

borrowing costs are making households anxious. Measures

of consumer confidence have accordingly fallen. In New

Zealand, confidence is at near-record lows. In  Australia ,

Japan  and  South Korea , surveys show a steady decline, while

in  India , Hong Kong  and Thailand , confidence is well below

historic levels, albeit with some improvement in recent

months.

With households nervous, fears of a global recession have

grown.  Google  searches for “recession” in July reached their

highest level since March 2020.  But the tentacles of fear

haven’t reached each country equally. In the  U.S. , searches

for “recession” were higher than at the peak of the

pandemic. Likewise, searches spiked in Russia  and Eastern

Europe . In the  Asia-Pacific region , this search is highest in Sri

Lanka, Myanmar and  Thailand . In  Australia  and New

Zealand, households seem far less fazed by the global

goings-on, at least according to their  Google  search

histories.

Prices: Up, up and away

Rising prices are driving the confidence collapse. Supply-

chain frustrations and elevated energy costs have pushed up

inflation across the globe. Prices in  Australia  and New

Zealand are rising at their fastest rate since the early 1990s.

In India , prices are more than 15% higher than pre-pandemic

levels. In Cambodia  and the  Philippines , prices are up more

than 10%.

But others have been more sheltered from the price party.

Vietnam  and  Malaysia  have seen price growth just half that

of their neighbours, shielded by government subsidies and

domestic food supplies. In  Japan  and China , weak domestic

demand has meant prices have barely budged over the past

two-and-a-half years.

Central banks are taking their time

To combat rising prices, central banks around the world are

tightening monetary policy. But many in the APAC region

are dragging their feet, and rate hikes there have been

substantially slower than elsewhere. Some central banks

haven't crossed the starting line. In Japan , Indonesia  and

Thailand , interest rates are still at emergency COVID-19-

support levels.

New Zealand has been the most aggressive in the region,

raising borrowing costs by 225 basis points since October.

South Korea , Hong Kong , Australia  and the  Philippines  have

delivered consecutive rate hikes as policymakers look to

stamp on inflation. Even still, these central banks have

lagged the Fed’s movements.

Budgets under pressure

COVID-19 threw a pandemic-sized spanner in government

budgets. At the peak of the crisis, policymakers announced a

raft of spending supports for families and businesses as

lockdown restrictions ground economies to a halt.

Revenues also took a hit, with falling company profits and

elevated unemployment shrinking tax receipts. Even today,

revenues for many countries are well below pre-pandemic

levels. But some countries have been luckier. In  Australia ,

soaring commodity prices are boosting company profits

(and thereby tax receipts), while the country’s job bonanza

has increased the pool of income tax revenue. In  India , a

crackdown on tax compliance has given the country’s tax

receipts a boost. Rising prices are also playing a role.

Although inflation is pinching households, it’s boosting sales

tax receipts.

Disparate labour market recoveries

At the onset of the pandemic, many feared long-term

scarring of the labour market would see younger and

disadvantaged workers excluded. It’s a trend we’ve seen in

downturns past; it took more than six years for jobs in the

U.S.  to return to pre-Global Financial Crisis levels. But for

some countries, the opposite has occurred with COVID-19.

Buoyed by massive fiscal stimulus programs and elevated

domestic demand, employment in Australia ,  New Zealand

and South Korea  has soared. That’s also driven participation

rates higher and unemployment rates to near-record lows.

These pressures have been severe enough to cause labour

shortages, particularly in  Australia and New Zealand . Both

economies rely heavily on overseas workers to fill key labour

gaps. Closed international borders for the better part of two

years have left many businesses struggling to fill open roles.

Other countries in the region haven’t seen the same labour

market recovery. Economies that have experienced longer

and more frequent lockdowns have struggled to regain jobs

momentum. Likewise, economies tied closely to tourism

and international travel are struggling to regain the

employment losses of the last two-and-a-half years.

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RATINGS ROUNDUP

Downgrades in  U.S. , Europe Credit Improves

BY  OLGA BYCHKOVA

U.S.

U.S.  credit downgrades outnumbered upgrades in the latest

weekly period. The changes issued by Moody’s Investors

Service spanned a diverse set of speculative-grade industrial

firms and one investment-grade financial company.

Downgrades comprised six of the nine rating changes and

61% of affected debt.

 

The largest downgrade, accounting for 35% of debt affected

in the period, was issued to  Carnival Corporation with its

senior secured note and senior secured credit facility ratings

lowered to Ba3 from Ba2. The company has lowered select

prices to drive higher occupancy amid increased

cancellations due to the Omicron variant of COVID-19,

Russia's  invasion of  Ukraine , materially higher fuel costs, and

food cost inflation. The downgrade reflects a weaker-than-

expected recovery, which will result in Carnival generating

negative EBITDA this year, and the risk around the

company's ability to generate sufficient free cash flow to

materially reduce debt, particularly in a rising interest rate

environment. The rating outlook is negative, reflecting

Moody's concerns that the company will not be able to

generate sufficient cash flow to reduce debt. Moody's could

further downgrade the ratings if liquidity weakened in any

way, including a slower-than-anticipated earnings recovery,

which could raise refinancing risk, or if the company was not

able to consistently produce positive free cash flow. An

upgrade would require material debt reduction or earnings

expansion with consistently positive free cash flow and

maintenance of good liquidity.

 

Upgrades were headlined by Citigroup Global Markets

Holdings Inc., which saw its senior debt ratings raised to A2

from A3 and accounted for 36% of debt affected in the

period, reflecting the company's status change to become a

Material Legal Entity and a beneficiary of the secured

support agreement within Citigroup's Resolution Plan, which

in Moody's view now credibly results in incremental

protection and a lower severity of loss for its senior creditors

in the event of the company's failure.

Europe

Corporate credit rating change activity was much stronger

across Western Europe  with upgrades outstripping

downgrades 2:1 and comprising 96% of affected debt.

 

The largest upgrade was made to  Stellantis N.V. , which saw

its long-term issuer and senior unsecured instrument ratings

raised to Baa2 from Baa3. The upgrade was motivated by

Stellantis'  progress in terms of margin and leverage

improvements to levels that meet Moody’s criteria for the

upgrade and the continued realization of synergies following

the merger between  Fiat Chrysler  Automobiles N.V. and

Peugeot S.A. , which should provide sufficient headroom

even in a weaker macroeconomic environment.

 

The lone downgrade was issued to Fly Leasing Limited.

Moody’s Investors Service cut Fly’s corporate family rating

to B3 from B1 and its senior unsecured rating to Caa2 from

B3. The downgrade was prompted by the lack of a

meaningful turnaround in the company's profitability and

cash-generating capacity and the level of uncertainty

concerning its ability to generate sufficient cash to satisfy or

refinance its debt obligations. This uncertainty includes the

timing and valuation of aircraft sales that appear to be

necessary to alleviate its liquidity needs. The company's

financial flexibility is further limited by its high reliance on

secured funding, leaving little in the form of unencumbered

assets, and its lack of a committed revolving credit facility.

All of these factors create refinancing risk for Fly's  $400

million senior unsecured notes that mature in October

2024.

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RATINGS ROUND-UP

 

 

 

0.0

0.2

0.4

0.6

0.8

1.0

0.0

0.2

0.4

0.6

0.8

1.0

Apr01

Aug04

Dec07

Apr11

Aug14

Dec17

Apr21

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

By Count of Actions

By Amount of Debt Affected

* Trailing 3-month  average
Source: Moody's

FIGURE 2

BCF

Bank Credit Facility Rating

MM

Money-Market

CFR

Corporate Family Rating

MTN

MTN Program Rating

CP

Commercial Paper Rating

Notes

Notes

FSR

Bank Financial Strength Rating

PDR

Probability of Default Rating

IFS

Insurance Financial Strength Rating

PS

Preferred Stock Rating

IR

Issuer Rating

SGLR

Speculative-Grade Liquidity Rating

JrSub

Junior Subordinated Rating

SLTD

Short- and Long-Term Deposit Rating

LGD

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 Subordinated

LTIR

Long-Term Issuer Rating

STD

Short-Term Deposit Rating

Rating Key

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FIGURE 3
Rating Changes: Corporate & Financial Institutions - US

Date

Company

Sector

Rating

Amount 

($ Million)

Up/

Down

Old LTD

Rating

New LTD

Rating

IG/S

G

8/3/2022

HARBOR FREIGHT TOOLS USA , INC.

Industrial

SrSec/BCF/LTCFR/PDR

D

Ba3

B2

SG

8/4/2022

CITIGROUP INC.-CITIGROUP GLOBAL 
MARKETS HOLDINGS INC.

Financial

SrUnsec/LTIR/MTN

14729.64

U

A3

A2

IG

8/4/2022

CENTURY COMMUNITIES, INC.

Industrial

SrUnsec/LTCFR/PDR

1000.00

U

Ba3

Ba2

SG

8/4/2022

SHINGLE ACQUISITION HOLDINGS, INC.-SRS 
DISTRIBUTION INC.

Industrial

SrSec/BCF

650.00

D

B2

B3

SG

8/5/2022

CAST & CREW LLC

Industrial

SrSec/BCF/LTCFR/PDR

U

B2

B1

SG

8/8/2022

CARNIVAL CORPORATION

Industrial

SrSec/SrUnsec/BCF/
LTCFR/PDR

14299.81

D

Ba2

Ba3

SG

8/8/2022

ROYAL CARIBBEAN CRUISES LTD.

Industrial

SrSec/SrUnsec/LTCFR/
PDR

9920.00

D

Ba2

Ba3

SG

8/8/2022

NEOVIA LOGISTICS INTERMEDIATE 
HOLDINGS, LP-NEOVIA LOGISTICS, LP

Industrial

SrSec/BCF/LTCFR/PDR

D

Caa1

Ca

SG

8/8/2022

CPV SHORE HOLDINGS, LLC

Industrial

SrSec/BCF

D

Ba2

Ba3

SG

Source: Moody's

FIGURE 4
Rating Changes: Corporate & Financial Institutions -  Europe

Date

Company

Sector

Rating

Amount 

($ Million)

Up/

Down

Old 
LTD

Rating

New

LTD

Rating

IG/

SG

Country

8/4/2022

FLY LEASING LIMITED

Financial

SrUnsec/SrSec/BCF/
LTCFR

700.00

D

B3

Caa2

SG  IRELAND

8/5/2022

STELLANTIS N.V.

Industrial

SrUnsec/LTIR/MTN/CP

17274.24

U

Baa3

Baa2

IG  NETHERLANDS

8/5/2022

FERROGLOBE  PLC-FERROGLOBE FINANCE 
COMPANY, PLC

Industrial

SrSec

690.00

U

Caa1

B3

SG  UNITED KINGDOM

Source: Moody's

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MARKET DATA

 

 

 

 

0

200

400

600

800

0

200

400

600

800

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Spread (bp)

Spread (bp)

Aa2

A2

Baa2

Source: Moody's

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

0

400

800

1,200

1,600

2,000

0

400

800

1,200

1,600

2,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Spread (bp)

Spread (bp)

Ba2

B2

Caa-C

Source: Moody's

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

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CDS MOVERS

 

CDS Implied Rating Rises
Issuer

Aug. 10

Aug. 3

Senior Ratings

JPMorgan Chase & Co.

A3

Baa1

A2

Comcast Corporation

A2

A3

A3

Citibank, N.A.

Baa2

Baa3

Aa3

Home Depot, Inc.  (The)

Aa1

Aa2

A2

Lowe's Companies, Inc.

A1

A2

Baa1

FedEx Corporation

A2

A3

Baa2

Kinder Morgan, Inc.

Baa1

Baa2

Baa2

Duke Energy Carolinas, LLC

Aaa

Aa1

A2

FirstEnergy Corp.

Baa1

Baa2

Ba1

Cisco Systems, Inc.

Aa1

Aa2

A1

CDS Implied Rating Declines
Issuer

Aug. 10

Aug. 3

Senior Ratings

Cargill, Incorporated

A3

A1

A2

Toyota Motor  Credit Corporation

Aa3

Aa2

A1

John Deere  Capital Corporation

A3

A2

A2

Microsoft Corporation

Aa2

Aa1

Aaa

Coca-Cola Company (The)

A1

Aa3

A1

Merck & Co., Inc.

A1

Aa3

A1

Amgen Inc.

Aa3

Aa2

Baa1

Raytheon Technologies Corporation

Aa3

Aa2

Baa1

Enterprise Products  Operating, LLC

A2

A1

Baa1

Nissan Motor  Acceptance Company LLC

Ba3

Ba2

Baa3

CDS Spread Increases
Issuer

Senior Ratings

Aug. 10

Aug. 3

Spread Diff

Nabors Industries, Inc .

Caa2

667

593

75

Pitney Bowes Inc.

B3

1,176

1,136

40

Ball Corporation

Ba1

233

206

27

Unisys Corporation

B3

436

423

13

Bunge Limited  Finance Corp.

Baa2

132

124

9

Mohawk Industries, Inc.

Baa1

161

152

9

Meritage Homes Corporation

Ba1

213

204

9

Corning Incorporated

Baa1

90

82

8

Cargill, Incorporated

A2

66

59

7

Hershey Company  (The)

A1

47

40

7

CDS Spread Decreases
Issuer

Senior Ratings

Aug. 10

Aug. 3

Spread Diff

Staples, Inc.

Caa2

1,518

1,759

-241

Rite Aid Corporation

Caa2

1,509

1,702

-193

Pactiv LLC

Caa1

650

813

-163

Liberty Interactive LLC

B2

1,279

1,429

-150

American Airlines Group Inc.

Caa1

1,291

1,431

-140

Anywhere Real Estate Group LLC

B2

617

730

-113

Carnival Corporation

B3

916

1,014

-99

TRW Automotive Inc.

Ba1

359

448

-89

DPL Inc.

Ba1

182

269

-87

Royal Caribbean Cruises Ltd.

B3

957

1,032

-75

Source: Moody's, CMA

CDS Spreads

CDS Implied Ratings

CDS Implied Ratings

CDS Spreads

Figure 3.  CDS Movers - US ( August 3, 2022 – August 10, 2022)

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CDS Movers

 

CDS Implied Rating Rises
Issuer

Aug. 10

Aug. 3

Senior Ratings

Banco Bilbao Vizcaya Argentaria, S.A.

A3

Baa1

A3

Commerzbank AG

Baa1

Baa2

A2

Veolia Environnement S.A.

A1

A2

Baa1

Orsted A/S

Aa3

A1

Baa1

Iceland , Government of

A1

A2

A2

Pearson plc

Baa1

Baa2

Baa3

ENGIE Alliance

Baa1

Baa2

Baa1

United Kingdom , Government of

Aaa

Aaa

Aa3

Italy , Government of

Baa3

Baa3

Baa3

Germany , Government of

Aaa

Aaa

Aaa

CDS Implied Rating Declines
Issuer

Aug. 10

Aug. 3

Senior Ratings

EWE AG

Baa3

A1

Baa1

SES S.A.

Ba1

Baa2

Baa2

France , Government of

Aa1

Aaa

Aa2

Spain , Government of

A1

Aa3

Baa1

Credit Agricole S.A.

A2

A1

Aa3

ING Bank N.V.

Aa3

Aa2

A1

Electricite de France

Baa2

Baa1

Baa1

Sanofi

Aa2

Aa1

A1

KBC Bank N.V.

Aa3

Aa2

A1

GSK plc

Aa2

Aa1

A2

CDS Spread Increases
Issuer

Senior Ratings

Aug. 10

Aug. 3

Spread Diff

Casino Guichard-Perrachon SA

Caa1

2,387

2,261

126

EWE AG

Baa1

115

55

60

Vedanta Resources Limited

B3

1,920

1,867

53

SES S.A.

Baa2

165

114

51

Credit Suisse Group AG

Baa2

198

192

6

Banco Sabadell, S.A.

Baa3

136

131

5

Credit Suisse AG

A2

163

157

5

Coca-Cola HBC Finance B.V .

Baa1

109

104

5

CECONOMY AG

Ba1

625

620

5

de Volksbank N.V.

A2

98

94

4

CDS Spread Decreases
Issuer

Senior Ratings

Aug. 10

Aug. 3

Spread Diff

Vue International Bidco plc

C

759

968

-209

Novafives S.A.S.

Caa2

1,236

1,329

-93

Ardagh Packaging Finance plc

Caa1

910

977

-66

Boparan Finance plc

Caa3

1,754

1,817

-62

Piraeus Financial Holdings S.A.

Caa1

880

932

-52

Deutsche Lufthansa Aktiengesellschaft

Ba2

419

469

-50

Stena AB

B2

518

565

-48

Jaguar Land Rover Automotive Plc

B1

855

896

-41

Premier Foods  Finance plc

B2

329

368

-40

Ziggo Bond Company B.V .

B3

426

464

-37

Source: Moody's, CMA

CDS Spreads

CDS Implied Ratings

CDS Implied Ratings

CDS Spreads

Figure 4.  CDS Movers -  Europe  ( August 3, 2022 – August 10, 2022)

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CDS Movers

 

CDS Implied Rating Rises
Issuer

Aug. 10

Aug. 3

Senior Ratings

Export-Import Bank of China  (The)

A3

Baa1

A1

Korea Electric Power Corporation

Aa2

Aa3

Aa2

Mitsui & Co., Ltd.

Aa2

Aa3

A3

ICICI Bank Limited

Baa2

Baa3

Baa3

KT Corporation

Aa2

Aa3

A3

State Bank of India

Baa2

Baa3

Baa3

Japan , Government of

Aaa

Aaa

A1

China , Government of

A3

A3

A1

Australia , Government of

Aaa

Aaa

Aaa

Korea , Government of

Aa2

Aa2

Aa2

CDS Implied Rating Declines
Issuer

Aug. 10

Aug. 3

Senior Ratings

National Australia Bank Limited

A3

A2

Aa3

SoftBank Group Corp.

B2

B1

Ba3

MUFG Bank, Ltd .

A1

Aa3

A1

Kansai Electric Power Company, Incorporated

Aa2

Aa1

A3

Telstra Corporation Limited

A1

Aa3

A2

Toyota Motor Corporation

Aa1

Aaa

A1

Japan Tobacco Inc.

A1

Aa3

A2

Tokyo Electric Power Company Holdings, Inc.

Baa1

A3

Ba1

Mitsui Fudosan Co., Ltd.

Aa1

Aaa

A3

Woolworths Group Limited

Baa1

A3

Baa2

CDS Spread Increases
Issuer

Senior Ratings

Aug. 10

Aug. 3

Spread Diff

SK Hynix Inc.

Baa2

144

129

15

Tokyo Electric Power Company Holdings, Inc.

Ba1

82

76

6

SP PowerAssets Limited

Aa1

40

35

5

Flex Ltd.

Baa3

135

130

5

Suncorp-Metway Limited

A1

104

100

4

Hong Kong  SAR,  China , Government of

Aa3

29

25

4

SoftBank Group Corp.

Ba3

452

449

4

Telstra Corporation Limited

A2

55

50

4

Mitsui Fudosan Co., Ltd.

A3

26

24

2

Australia , Government of

Aaa

24

23

1

CDS Spread Decreases
Issuer

Senior Ratings

Aug. 10

Aug. 3

Spread Diff

Pakistan , Government of

B3

1,748

3,544

-1,796

Kazakhstan , Government of

Baa2

261

284

-23

Indonesia , Government of

Baa2

97

115

-18

LG Electronics Inc.

Baa2

100

117

-18

SK Innovation Co.  Ltd.

Baa3

154

171

-17

Philippines , Government of

Baa2

92

104

-13

Tata Motors Limited

B1

318

331

-13

Malayan Banking Berhad

A3

82

94

-12

India , Government of

Baa3

124

135

-11

Reliance Industries Limited

Baa2

109

121

-11

Source: Moody's, CMA

Figure 5.  CDS Movers - APAC ( August 3, 2022 – August 10, 2022)

CDS Implied Ratings

CDS Implied Ratings

CDS Spreads

CDS Spreads

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MOODY’S ANALYTICS          CAPITAL MARKETS RESEARCH / WEEKLY MARKET OUTLOOK

21

 

 

ISSUANCE

 

 


 

0

700

1,400

2,100

2,800

0

700

1,400

2,100

2,800

Jan Feb Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Issuance ($B)

Issuance ($B)

2018

2019

2020

2021

2022

Source:  

Moody's  / Dealogic

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

0

200

400

600

800

1,000

0

200

400

600

800

1,000

Jan Feb Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Issuance ($B)

Issuance ($B)

2018

2019

2020

2021

2022

Source:  

Moody's / Dealogic

Figure 7. Market Cumulative Issuance - Corporate & Financial Institutions: Euro  Denominated

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MOODY’S ANALYTICS          CAPITAL MARKETS RESEARCH / WEEKLY MARKET OUTLOOK

22

 

 

ISSUANCE

 

 

 

Investment-Grade

High-Yield

Total*

Amount

Amount

Amount

$B

$B

$B

Weekly

60.709

5.550

66.678

Year-to-Date

966.698

105.559

1,107.080

Investment-Grade

High-Yield

Total*

Amount

Amount

Amount

$B

$B

$B

Weekly

3.124

0.000

3.198

Year-to-Date

464.798

28.087

500.941

* Difference represents issuance with pending ratings.

Source: Moody's/ Dealogic

USD Denominated

Euro Denominated

Figure 8. Issuance: Corporate & Financial Institutions

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MOODY’S ANALYTICS          CAPITAL MARKETS RESEARCH / WEEKLY MARKET OUTLOOK

23

 

 

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Report Number: 1338971

Contact Us

 

Editor

Reid Kanaley

help@economy.com

 

Americas

+1.212.553.1658

clientservices@moodys.com

Europe

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clientservices.emea@moodys.com

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+85 2 2916 1121

clientservices.asia@moodys.com

Japan

+81 3 5408 4100

clientservices.japan@moodys.com

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MOODY’S ANALYTICS          CAPITAL MARKETS RESEARCH / WEEKLY MARKET OUTLOOK

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such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is

not the subject of a particular credit rating assigned by MOODY’S.

 

To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or 
compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of

liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors,

officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such

information.

 

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY 
CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.

 

Moody’s Investors Service, Inc ., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities

(including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc . have, prior to assignment of

any credit rating, agreed to pay to Moody’s Investors Service, Inc . for credit ratings opinions and services rendered by it fees ranging from  $1,000  to approximately $5,000,000 . 
MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes.

Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors

Service and have also publicly reported to the  SEC  an ownership interest in MCO of more than 5%, is posted annually a

www.moodys.com

 under the heading “Investor

Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

  

 

 

Additional terms for  Australia  only: Any publication into Australia  of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s 
Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document

is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within

Australia , you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent

will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating

is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

 

 

Additional terms for  Japan  only: Moody's Japan  K.K. (“MJKK”) is a wholly owned credit rating agency subsidiary of Moody's Group  Japan  G.K., which is wholly owned by

Moody’s Overseas Holdings Inc ., a wholly owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly owned credit rating agency subsidiary of MJKK. MSFJ is not a

Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are

assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under  U.S.  laws. MJKK and MSFJ are credit

rating agencies registered with the  Japan  Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. 

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and

preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions

and services rendered by it fees ranging from  JPY100,000  to approximately  JPY550,000,000 .


MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.