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Weekly Market Outlook: Base Metals Price Drop Suggests All Is Not Well

Though it goes practically unmentioned, one of the more unexpected developments of late has been the stunning collapse of Moody's industrial metals price index. In part, the industrial metals price index's average of July-to-date is a deep 8.2% under its June 2018 average because of uncertainties stemming from trade-related issues. Since worries surrounding a trade war came to the fore following June 14's close, the base metals price index has sunk by 13.0%. Nevertheless, the base metals price index's month-long average had peaked some time ago in February 2018, where the subsequent slide by the index through mid-June reflected a loss of momentum for global industrial activity.

July 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Katrina Ell

Weekly Market Outlook: Markets Suggest the U.S. Fares Best in a Trade War

Financial markets believe that the U.S. is likely to fare better than most other major economies in an all-out trade war. This is because (i) international trade accounts for a smaller share of U.S. business activity, (ii) the U.S. imports far more than it exports, and (iii) the U.S. now well outperforms other major economies. Nevertheless, though the U.S. is better able the withstand the direct and collateral damage of a trade conflict, it is still expected suffer casualties in a trade war. And such casualties might well influence the outcome of November's Congressional elections.

July 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Reka Sulyok, Barbara Teixeira Araujo, Katrina Ell, Faraz Syed

Weekly Market Outlook: Outstandings of Rated U.S. Corporate Bonds Dip from 2018's First to Second Quarter

According to Moody's Capital Markets Research Group, second-quarter 2018's outstandings of Moody's-rated U.S. corporate bonds excluding ABS and MBS rose by 3.3% year-over-year to $7.212 trillion, which was a slight 0.6% under first-quarter 2018's record high of $7.259 trillion. The second quarter's yearly increase of 3.3% was much slower than the 6.3% yearly increase of 2018's first quarter and was the smallest since the 2.1% of 2015's final quarter. The -0.6% dip by U.S. corporate bonds outstanding from the first to the second quarter of 2018 was only the third such sequential decline by the rated outstandings of U.S. corporate bonds during the past five years. The other two quarterly retreats were those of 0.2% of 2016's final quarter and 5.7% in 2015's final quarter.

July 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Katrina Ell, Veasna Kong, Alaistair Chan

Weekly Market Outlook: Trade War Will Turn Ugly if Profits Shrink

Let's start with the good news of operating profits' much faster rise relative to the growth of corporate debt. During 2018's first quarter, the 9.7% year-to-year advance by the pretax operating profits of U.S. nonfinancial corporations far outran the accompanying 5.2% increase by nonfinancial corporate debt. Moreover, for the year-ended March 2018, operating profits' 7.2% increase also outpaced the 5.9% growth of corporate debt. In turn, the moving yearlong ratio of debt to operating profits for nonfinancial corporations eased from third-quarter 2017's cycle high of 699% to the 691% of 2018's first quarter.

June 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Katrina Ell, Veasna Kong

Making Smarter Small Business Lending Decisions

Lenders and credit analysts have been challenged in recent years to make credit decisions quicker and more cost-effective. This pressure has increased given recent competition from growing and maturing fintech lending platforms. While it can be difficult to obtain data on a small business, we believe that our findings demonstrate a scoring approach that supports small business lenders and the efficient use of data sources that are readily available.

June 2018 Pdf

Canada Housing Market Outlook: A Better Long-Term Perspective

Canada's housing market has moved past its previous turning point and seems to have settled into an interlude of slowing house price appreciation, reduced sales, and a looser market in general.

June 2018 Pdf Andres Carbacho-Burgos

The Venezuela Crisis and Consequences for South America

This paper assesses the economic consequences for Venezuela and the rest of South America if Maduro serves out his new presidential term, and if he is cast from office.

June 2018 Pdf Marisa DiNatale

Weekly Market Outlook: Investment-Grade Looks Softer and High-Yield Looks Firmer Compared With Year-End 2007

Since June 14's close, or immediately prior to the latest bout of trade-related stress, the cumulative 0.8% decline by the market value of US common stock has been shallower than the accompanying 2.7% drop by the blue-chip Dow Jones Industrial Average. By comparison, China's Shanghai Composite stock price index incurred a much deeper setback of 5.5%. The latest installment of trade friction has yet to roil all financial markets. The recent VIX of 14.2 points remained well below its long-term median of 15.9 points notwithstanding heightened financial market volatility.

June 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Reka Sulyok, Katrina Ell

Weekly Market Outlook: May's High-Yield Bond Offerings Plunge as New Loan Programs Soar

May 2018's 52% year-to-year plunge by US$-denominated high-yield bond issuance to $20.96 billion grossly understated the overall pace of borrowing by high-yield companies. In stark contrast, May 2018's newly-rated bank loan programs graded Baa or lower soared higher by 52% from a year earlier to a record $104.64 billion. The latter surpassed January 2017's former zenith of $91.42 billion and was well above November 2007's $81.80 billion high of 2002-2007's business cycle upturn. By December 2007, the Great Recession was officially under way.

June 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Reka Sulyok, Katrina Ell

Weekly Market Outlook: Economic Growth Slows as Ratio of Debt to GDP Climbs Ever Higher

Perhaps the speed at which GDP grows relative to debt matters more than the ratio of debt to GDP. The faster GDP grows relative to debt, the lower might be the risks surrounding the repayment of debt obligations. Expressed differently, the greater the return from debt capital, the lower should be the incidence of delinquencies, charge offs, and defaults. When productively employed, debt capital can more than pay for itself. The U.S.' ratio of private and public nonfinancial-sector debt has soared from 1968's 131% to 2017's 253% of 2017. Nevertheless, the 10-year average annualized growth of U.S. real GDP decelerated from the 4.9% of the span-ended 1968 to the 1.4% of the span-ended 2017.

June 2018 Pdf John Lonski, Njundu Sanneh, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Katrina Ell, Veasna Kong, Faraz Syed, Martin Janicko

Weekly Market Outlook: Fewer Defaults Strongly Favor a Higher Equity Market

Notwithstanding the occasional jarring setback, the market value of U.S. common stock need only rise by 4.8% in order to return to its record high of January 26, 2018. Such a recovery appears to be well within reach if profits grow. Moreover, the realization of the projected decline by the U.S.' high-yield default rate from April 2018's 3.7% to 1.5% by April 2019 implies a firming of corporate finances that can only facilitate a recovery by share prices.

May 2018 Pdf John Lonski, Franklin Kim, Yukyung Choi, Ryan Sweet, Kathryn Asher, Michael Ferlez, Barbara Teixeira Araujo, Katrina Ell, Alaistair Chan, Veasna Kong, Faraz Syed

Weekly Market Outlook: Higher Interest Rates Will Be the Source of Their Own Demise

The remedy of higher interest rates is taking effect. The risk of an overheating of financial markets and business activity appears to be waning. The market value of U.S. common stock has been unable to return to its record high of January 26 ever since the 10-year Treasury yield has risen from its 2.56% average of 2018's first 36 days to 2.88% since then. In turn, the S&P 500's forward-looking price-to-earnings ratio has eased from January 26's 18.7:1 to a recent 17.1:1. Not only will a less exuberant equity market rein-in wealth-driven spending by consumers, it will also curb business expenditures by containing the market valuation of business assets and increasing the cost of equity capital. Moreover, a less vibrant equity market may prompt creditors to demand additional compensation for default risk when lending to businesses.

May 2018 Pdf John Lonski, Franklin Kim, Yukyung Choi, Ryan Sweet, Kathryn Asher, Michael Ferlez, Barbara Teixeira Araujo, Katrina Ell

Weekly Market Outlook: 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.

May 2018 Pdf Barbara Teixeira Araujo, Yukyung Choi, Katrina Ell, Franklin Kim, John Lonski, Njundu Sanneh, Ryan Sweet, Reka Sulyok

Weekly Market Outlook: Equities Giveth and Taketh Away from Credit Quality

The net equity buybacks of U.S. nonfinancial corporations fell from 2016's $581 billion to 2017's $391 billion possibly in response to the historically rich valuation of U.S. common stock. Indications are that first-quarter 2018's net stock buybacks were up considerably from 2017's final quarter mostly in response to the volatility that followed the setting of the now record high for the market value of U.S. common stock on January 26, 2018.

May 2018 Pdf Yukyung Choi, Katrina Ell, Franklin Kim, John Lonski, Ryan Sweet, Reka Sulyok, Njundu Sanneh

Weekly Market Outlook: M&A Both Enhances and Diminishes Corporate Credit Quality

Mergers, acquisitions and divestitures (M&A) wield considerable influence over corporate credit quality, where M&A's impact on a single company's credit standing can vary over time. For example, a credit rating may be downgraded early on because of the substantial increase in leverage brought on by a debt-financed acquisition. However, over time, the acquisition may help to boost profitability, liquidity and the company's market value by enough to eventually prompt a credit rating upgrade.

May 2018 Pdf John Lonski, Franklin Kim, Yukyung Choi, Njundu Sanneh, Ryan Sweet, Barbara Teixeira Araujo, Katrina Ell, Alaistair Chan

Weekly Market Outlook: Loan Default Rate May Approach Bond Default Rate

The high-yield bond market continues to shrug off equity market volatility. Notwithstanding a climb by the VIX index's month-long average from December 2017's 10.3 points to April-to-date's 18.6 points, as well as a rise by the U.S.' high-yield default rate from January 2018's 3.3% to March's 3.9%, April 25's composite high-yield bond spread of 352 basis points was thinner than the 359 bp of year-end 2017. Still, thin spreads reflect strongly held expectations of a renewed slide by the high-yield default rate well into 2019.

April 2018 Pdf John Lonski, Franklin Kim, Yukyung Choi, Njundu Sanneh, Ryan Sweet, Barbara Teixeira Araujo, Katrina Ell

Weekly Market Outlook: Debt-to-Profits Outperforms Debt-to-GDP

In 2017's final quarter, the 7.7% yearly advance by nonfinancial-corporate profits from current production outran the accompanying 6.6% increase of nonfinancial-corporate debt. The record shows that if pretax operating profits continue to outpace corporate debt, corporate credit quality will improve. The correlation between the high-yield default rate's quarter-long average and the yearlong ratio of debt-tooperating profits for US nonfinancial corporations is a meaningful 0.82.

March 2018 Pdf John Lonski, Franklin Kim, Yukyung Choi, Ryan Sweet, Kathryn Asher, Michael Ferlez, Thomas Nichols, Barbara Teixeira Araujo, Katrina Ell

Weekly Market Outlook: Foreign Investors Ease Burden of U.S.' Elevated Leverage

Perceived economic and political risks drove share prices sharply lower on March 22. Markets are beginning to ask whether companies will be capable of passing on higher costs to the U.S.' less than financially robust middle class. The U.S.' still relatively low personal savings rate questions how easily consumers will absorb recent and any forthcoming price hikes. Moreover, the recent slide by Moody's industrial metals price index amid dollar exchange rate weakness hints of a leveling off of global business activity.

March 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Reka Sulyok, Katrina Ell

Weekly Market Outlook: Default Rate Defies Record Ratio of Corporate Debt to GDP

Never before have the high-yield bond spread and default rate been so low amid a new record high ratio of U.S. corporate debt to GDP. In terms of a moving yearlong average, U.S. nonfinancial-corporate debt finished 2017 at an unprecedented 45.4% of U.S. nominal GDP. Nevertheless, not only was the U.S.' high-yield default rate of Q4-2017 at a below-trend 3.3%, but the accompanying average high-yield bond spread of 363 basis points reflected expectations of an even lower default rate nine to twelve months hence. Moody's Default Research Group expects the default rate to approximate 2% during early 2019.

March 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Reka Sulyok, Katrina Ell, Faraz Syed

Weekly Market Outlook: Internal Funds Outrun Corporate Debt by Widest Margin Since 2011

Lately, financial markets have grudgingly withstood the broad imposition of tariffs on steel and aluminum. Not even the resignation of the highly respected Gary Cohn was capable of triggering a jarring sell-off of equities. Markets took some comfort from President Trump's indication that countries might be granted exemptions from the tariffs if they resolve issues that led to the imposition of tariffs.

March 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Anna Zabrodzka, Katrina Ell

Weekly Market Outlook: Tariffs Warn of Even Faster Price Inflation and Slower Growth

February was a stormy month for financial markets. Worse yet, March got off to a horrible start in response to President Trump's intention to impose import tariffs of 10% on aluminum and 25% on steel despite how costlier aluminum and steel will diminish the global competitiveness of those U.S. manufacturers using these materials. Remember, after having incurred back-to-back monthly setbacks in January and February, auto sales were expected to decline in 2018 prior to the statement on tariffs.

March 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Reka Sulyok, Katrina Ell, Veasna Kong

Weekly Market Outlook: Borrowing Restraint Elsewhere Makes Room for Federal Debt Surge

Partly as a means of offsetting the loss of business activity to deleveraging by households, businesses, as well as state and local governments, the federal government's share of the U.S.' broadest estimate of public and private nonfinancial-sector debt has soared from year-end 2007's 18% to the 34% of 2017's third quarter. The latter share is the highest since 1960's third quarter.

February 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Reka Sulyok, Katrina Ell, Faraz Syed

Weekly Market Outlook: Declining Default Rate Offsets Drag of Higher Interest Rates

Corporate bond yield spreads have been relatively steady throughout recent equity market tumult. Expectations of a declining high-yield default rate into early 2019 have anchored corporate yield spreads.

February 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Reka Sulyok, Katrina Ell

Weekly Market Outlook: Corporate Bonds Beg to Differ With Their Equity Brethren

Thus far, the corporate credit market has been relatively steady amid equity market turmoil. Corporate credit's comparative calm stems from expectations of continued profit growth that underpins a still likely slide by the high-yield default rate. The record shows that 90% of the year-to-year declines by the default rate were joined by year-to-year growth for the market value of U.S. common stock.

February 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Reka Sulyok, Katrina Ell, Faraz Syed

Weekly Market Outlook: Higher Yields and Lower Equities Might Yet Swell Credit Risk

It has been a volatile week for financial markets. After shrugging off an earlier ascent by the 10-year Treasury yield from year-end 2017's 2.41% to January 26's 2.66% and advancing by 7.1%, the market value of U.S. common stock has since sunk by 1.6% in reaction to a climb by the 10-year Treasury yield to 2.77%. The deeper post-January 26 drop of 3.7% by the interest-sensitive PHLX index of housing-sector share prices underscores the importance of higher Treasury bond yields to the latest retreat by equities. Earlier, or from year-end 2017 through January 26, the index of housing sector share prices was up by 4.9%, which trailed the accompanying advance by the overall equity market.

February 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Anna Zabrodzka, Katrina Ell

Weekly Market Outlook: High-Yield Bond Issuance Thrives Despite Tax Law Changes

Some predicted that the loss of the full deductibility of business interest expense would weigh heavily on the issuance of dollar-denominated high-yield bonds. However, corporate bond issuance has exceeded expectations thus far in 2018.

January 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Reka Sulyok, Faraz Syed, Katrina Ell

Dynamic Model-Building: A Proposed Variable Selection Algorithm

In this article, we propose an innovative algorithm that is well suited to building dynamic models for credit and market risk metrics, consistent with regulatory requirements around stress testing, forecasting, and IFRS 9.

Weekly Market Outlook: Surging Equities and Thinner Spreads Favor Higher Treasury Yields

Earnings-sensitive securities have thrived thus far in 2018. Not only was the market value of U.S. common stock recently up by 4.5% since year-end 2017, but a composite high-yield bond spread narrowed by 23 basis points to 336 bp. The latter brings attention to how the accompanying composite speculative-grade bond yield fell from year-end 2017's 5.82% to a recent 5.72% despite the 5-year Treasury yield's increase from 2.21% to 2.39%, respectively.

January 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Alaistair Chan, Katrina Ell

Weekly Market Outlook: Stocks and Spreads May Transcend Higher Treasury Yields

Markets now focus on early 2018's climb by Treasury bond yields to heights last observed in March 2017. Though the 10-year U.S. Treasury yield climbed from year-end 2017's 2.41% to a recent 2.55%, the latter resembles the 2.6% average predicted for 2018's first quarter by the Blue Chip Financial consensus of late December 2017. Moreover, the 10-year Treasury yield still lags its 2.74% average of the six-monthsended March 2014 that coincided with the taper tantrum.

January 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Kathryn Asher, Reka Sulyok, Alaistair Chan, Katrina Ell

Weekly Market Outlook: Profits Growth and Benign Default Outlook May Offset Higher Interest Rates

Corporate bonds and equities got out of the gate quickly in 2018. Though benchmark interest rates are likely to climb higher, the combination of corporate earnings growth and a benign outlook for corporate defaults should be enough to prevent a deep and extended slide by share prices. Except for late 1987's stock market crash, the historical record shows that since 1982, interest-rate inspired declines by the broad equity indices have been relatively brief and shallow.

January 2018 Pdf John Lonski, Njundu Sanneh, Franklin Kim, Yukyung Choi, Ryan Sweet, Suzanne Schatz, Reka Sulyok, Katrina Ell
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