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Weekly Market Outlook: High Leverage Will Help Set Benchmark Interest Rates

Given the Fed's willingness to continue its two-pronged firming of monetary policy amid slower economic growth and below-target inflation, the still benign outlook for corporate credit will be menaced by above-average risk. In view of above-average international and domestic political risk, as well as the uncertainties stemming from trade frictions between China and the U.S., the last thing 2019's outlook needs is elevated interest-rate risk.

December 2018 Pdf John Lonski, Katrina Ell, Barbara Teixeira Araujo, Ryan Sweet, Michael Ferlez

Weekly Market Outlook: Medium-Grade's Worry Differs from High-Yield's Complacency

The investment-grade bond market appears more anxious about the future than the high-yield bond market. A now well above-trend Baa industrial company bond yield spread warns of a wider high-yield bond spread. To the contrary, a trend-like high-yield spread favors a thinner Baa spread. In all likelihood, if the still positive outlook for profits holds, the high-yield bond spread will prove to be more prescient than the now swollen Baa spread.

December 2018 Pdf John Lonski, Yukyung Choi, Katrina Ell, Veasna Kong, Barbara Teixeira Araujo, Kristopher Cramer, Ryan Sweet, Michael Ferlez

At a Crossroads: China Taps the Accelerator

With the economy now facing its most vulnerable window of growth since the global financial crisis, it appears the latter is again more of a priority.

December 2018 Pdf Steven Cochrane, Katrina Ell

Slower Growth amid High Leverage Lessens Upside for Interest Rates

Both the sell-off of equities and the very limited and slight inversion of the Treasury yield curve at the three- and five-year maturities hint of a possible pause for the latest series of Fed rate hikes. Since September 26's last hiking of fed funds to 2.125%, the 10-year Treasury yield has dropped from 3.05% to a recent 2.87%, and the five-year Treasury yield has sunk from 2.95% to 2.74%.

December 2018 Pdf John Lonski, Ryan Sweet, Katrina Ell, Yukyung Choi, Barbara Teixeira Araujo, Michael Ferlez

Gauging CECL Cyclicality

In this paper, we provide empirical support for the conclusion that the CECL standard will be less procyclical than the incurred loss standard.

December 2018 Pdf Mark Zandi, Dr. Cristian deRitis

Profit Emergence under IFRS 17 - VFA

Steven Morrison's second whitepaper, Profit Emergence under IFRS 17, turns its attention to the Variable Fee Approach (VFA). Explore his practical insights on financial risk and its impact on contracts with participation features.

November 2018 WebPage Dr. Steven Morrison

Weekly Market Outlook: Unprecedented Amount of Baa-Grade Bonds Menaces the Credit Outlook

Greater uncertainty surrounding the sustainability of corporate earnings growth has adversely affected the performance of medium- and lower-grade corporate bonds. If fears over the adequacy of future corporate earnings persist, the upside for benchmark U.S. interest rates is probably well under consensus expectations.

November 2018 Pdf John Lonski, Yukyung Choi, Katrina Ell, Veasna Kong, Barbara Teixeira Araujo, Ryan Sweet, Michael Ferlez

Maximize Efficiency: How Automation Can Improve Your Loan Origination Process

Automation has become the latest industry buzzword, but what does this mean? How can automation streamline your commercial loan origination process, increase the productivity of your lending officers and make your customers happier?

November 2018 WebPage Doug Peterson

Workflow: The Key to Efficient Commercial Loan Origination

Today's loan origination landscape is forcing lenders to rethink their workflow engines to adapt to the new environment. Without a strategic approach to designing the workflow engine, lenders will find themselves battling rising costs and inefficiencies in an increasingly fragmented and competitive marketplace.

November 2018 WebPage Todd Classen, Anju Govil

Weekly Market Outlook: Gridlock Stills Fiscal Policy and Elevates Fed Policy

Gridlock is here. Because of the constraints placed on fiscal policy by a Democratic House and a Republican Senate, the Federal Reserve's role at assuring an adequate rate of economic growth has been magnified. Though currently not a pressing issue, a widely anticipated deceleration of corporate revenues and profits may eventually influence Fed policy. Such slowdowns increase the risk of widespread cutbacks in business outlays on capital goods and staff. A severe enough retrenchment in business spending would quickly end the current episode of monetary firming. Both equities and corporate bonds can transcend the slower growth of corporate earnings. However, if an unbending climb by benchmark interest rates amid continually slower profits growth triggers expectations of a prolonged shrinkage of earnings, share prices will sink and corporate credit spreads will swell.

November 2018 Pdf John Lonski, Yukyung Choi, Katrina Ell, Barbara Teixeira Araujo, Ryan Sweet, Michael Ferlez

Redefining loan monitoring and early warning signal detection through an integrated solution

In this article, we explore what monitoring lenders routinely undertake, why it is so difficult and what new technology tools are at their disposal to improve the process, and show how better monitoring can lead to better risk management and lower portfolio losses.

November 2018 WebPage

CECL Roundtable FAQs

In light of the Current Expected Credit Loss accounting standard to be issued by the Federal Accounting Standards Board, Moody's Analytics hosted a CECL Economic Scenario roundtable. The objective was to have an open dialogue around economic forecasting techniques for calculating life-of-loan expected credit losses

November 2018 WebPage

Weekly Market Outlook: Net Stock Buybacks and Net Borrowing Have Yet to Alarm

Recent outsized advances by equity prices probably owe something to either actual or anticipated buybacks of common stock. Both the relative steadiness of corporate credit quality and ample amounts of corporate cash now improve the outlook for equity buybacks. In the Financial Accounts of the United States, the Federal Reserve supplies an estimate of net equity buybacks, where the estimate applies to net buybacks of both common and preferred equity. Because of an often heavy use of preferred stock by financial companies, net buybacks of nonfinancial-corporate equity are the preferred measure when analyzing the behavior of net equity buybacks over time. For example, the $55 billion of total net equity buybacks for the year-ended June 2018 consisted of $485 billion of net stock buybacks by U.S. nonfinancial companies and $281 billion of net equity issuance by U.S. financial institutions.

November 2018 Pdf John Lonski, Yukyung Choi, Katrina Ell, Veasna Kong, Barbara Teixeira Araujo, Ryan Sweet, Michael Ferlez

A Cost of Capital Approach to Estimating Credit Risk Premia

This research paper discusses the credit risk premium adjustment required for constructing discount rates specified by the IFRS 17 accounting rules. Calculating the credit risk premium is a key requirement in the ‘top down' yield curve method. It may also be a useful input in computing (or benchmarking) the illiquidity premium for ‘bottom up' discount rate construction.

November 2018 Pdf Nick Jessop

Weekly Market Outlook: Financial Liquidity Withstands Equity Volatility for Now

Higher interest rates and trade related frictions, including the effective tax hikes brought on by the imposition of tariffs, have lowered the market value of U.S. common stock by 8.1% from its current zenith of September 20, 2018. Thus far, systemic financial liquidity has yet to suffer materially from the latest bout of equity market volatility. However, liquidity will be adversely affected if a further weakening of the equity market substantially increases the cost of both equity and debt capital. A persistently volatile equity market risks swelling the uncertainty surrounding the valuation of business assets. In turn, capital spending and business outlays on staff may be less than otherwise.

October 2018 Pdf John Lonski, Yukyung Choi, Katrina Ell, Veasna Kong, Barbara Teixeira Araujo, Ryan Sweet, Michael Ferlez

Pride and Protectionism: U.S. Trade Policy and Its Impact on Asia

Crafting economically sound trade policy is easier said than done.

Weekly Market Outlook: Stepped Up Use of Loan Debt May Yet Swell Defaults

Credit quality benefits to the degree a borrower has locked in continued access to debt capital and has capped the interest expense of outstanding debt. Basically, long-term debt having a fixed interest rate is preferred to short-term debt having a variable interest rate. Through the first nine months of 2018, U.S. corporate bond issuance incurred year-over-year setbacks of 21% for investment-grade (to $698.9 billion) and 25% for high-yield (to $151.5 billion).

October 2018 Pdf John Lonski, Yukyung Choi, Franklin Kim, Katrina Ell, Veasna Kong, Barbara Teixeira Araujo, Ryan Sweet, Michael Ferlez

Weekly Market Outlook: Financial Market Volatility May Soon Influence Fed Policy

Free-falling share prices might soon drive the 10-year Treasury yield under 3%. The market value of U.S. common equity was recently 7.4% under its record high of August 29, 2018. In the event the equity market sinks 10% under its current zenith, the containment of inflation expectations supplies the Fed with more than enough leeway to temporarily halt its ongoing normalization of monetary policy. When monetary policy lacks precedent, flexibility is necessary. Never before has the Fed simultaneously firmed policy by both hiking fed funds and reducing its holdings of Treasury bonds and agency mortgage backed securities.

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

Weekly Market Outlook: Equities Suggest Latest Climb by Treasury Yields Is Excessive

Share prices recently dropped in response to an unanticipated and possibly fundamentally overdone jump by Treasury bond yields. Nevertheless, the market value of U.S. common equity may need to drop by at least 5% from its current record high if a flight from risk is to prompt a flight to quality that is capable of lowering Treasury yields in a lasting manner. A convincing fundamental justification for the latest ascent by Treasury yields is elusive. U.S. consumer price inflation remains well contained. August 2018's PCE price index rose by merely 0.1% from July as its year-to-year increase dipped from July's 2.3 to 2.2%. More importantly, the core PCE price index, which excludes often volatile food and energy prices, was unchanged from the prior month, which left its yearly increase at 2.0% for fourth consecutive month.

October 2018 Pdf John Lonski, Yukyung Choi, Franklin Kim, Katrina Ell, Barbara Teixeira Araujo, Reka Sulyok, Ryan Sweet, Michael Ferlez

Canada Housing Market Outlook: Time for Slower Price Growth

The housing market in Canada seems to have stabilized. House price growth slowed between early last year and the middle of this year, though home sales and house price growth increased in July and August.

October 2018 Pdf Andres Carbacho-Burgos

Weekly Market Outlook: Profits Determine Effect of High Corporate Debt to GDP Ratio

Profits Determine Effect of High Corporate Debt to GDP Ratio: As of 2018's second quarter, the gross debt of U.S. nonfinancial corporate businesses was at an unprecedented 45.8% of GDP, where the ratio is a moving yearlong average. Data from the “Financial Accounts of the United States,” formerly known as the “Flow of Funds Accounts,” is best viewed from the perspective of a moving yearlong average mostly because the quarterly data are frequently subject to substantial revisions, where even the moving yearlong averages can be altered considerably.

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

CECL: Credit Cards and Lifetime Estimation - A Reasonable Approach

Many institutions are struggling to apply the CECL standard as it pertains to credit cards, and in particular determining the lifetime value for credit card portfolios. In this paper, we explore the different approaches to evaluating lifetime estimates for the credit card portfolio.

September 2018 WebPage Laurent Birade

CECL Impact on Credit Loss Allowances for U.S. Auto Loans

This paper examines the impact of adopting current expected credit loss (CECL) standards for U.S. auto lenders. We use a dataset of national retail auto loans to illustrate potential changes in model-based allowances across the industry. Our analysis shows that on the first day of CECL adoption, loss allowances for U.S. auto lenders could increase by as much as 1.5 to 2.5 times the current allowances.

September 2018 Pdf Moody's Analytics

Weekly Market Outlook: Higher Interest Rates Suppress Corporate Borrowing

An abatement of tariff-related fears reduced the uncertainty surrounding a positive outlook for US corporate earnings. In response, the market value of US common stock quickly approached its record high of August 29, 2018. Moreover, high-yield bonds rallied from already richly-priced levels. In turn, a recent composite high-yield bond spread was thinner than 340 basis points (bp) for the first time since the middle of April 2018.

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

Stress-Testing States 2018

This paper estimates the amount of fiscal stress likely to be applied to state budgets under different recession scenarios and comparing that stress to the amount of money states have set aside in reserve. This year's exercise also expands the scope of stress-testing by including a look at how economic stress translates to public pensions.

September 2018 Pdf Dan White

Weekly Market Outlook: Middling Ratio of Net Corporate Debt to GDP Disputes Record Ratio of Corporate Debt to GDP

First-quarter 2018's record ratio of U.S. nonfinancial-corporate debt to GDP has been cited as the harbinger of a steep upswing by corporate credit defaults once profits shrink materially again. However, first-quarter 2018's ratio of net nonfinancial-corporate debt to GDP supplies a far less ominous outlook, mostly because the liquid assets of nonfinancial corporations have been outpacing the accompanying growth of corporate debt. In terms of moving yearlong averages as of March 2018, the 11.4% annual increase by liquid assets outran the accompanying increases of 6.0% for corporate debt and 4.3% for nominal GDP.

September 2018 Pdf John Lonski, Yukyung Choi, Ryan Sweet, Barbara Teixeira Araujo, Reka Sulyok, Katrina Ell

IFRS 17: Sharing the load

IFRS 17 will require a collaborative approach to ensure that the new calculations, underlying processes and systems are a joint actuarial and accounting responsibility.

September 2018 WebPage Trevor Howes

Weekly Market Outlook: There's No Place Like Home for U.S. Investors

The U.S. economy and financial markets have been pulling away from the rest of the world. Of special importance is the lagging performance of emerging market economies, which, not too long ago, had been the primary driver of world economic growth. The combination of higher U.S. interest rates and the relatively stronger performance of the U.S. economy has triggered a notable and potentially destabilizing appreciation of the dollar versus a host of emerging market currencies.

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

Profit Emergence under IFRS 17

The ability to project financial statements to understand their sensitivity to market risks, insurance risks, and methodology decisions is critical for an effective IFRS 17 implementation.

September 2018 WebPage Dr. Steven Morrison

Mean Reversion in CECL: The What and the How

Mean reversion is an important facet of the upcoming Current Expected Credit Loss accounting standard. Under CECL, lenders will need to estimate, and set aside an allowance for, the expected lifetime loss for each loan they book at the time of origination.

September 2018 WebPage Dr. Sohini Chowdhury, Dr. Cristian deRitis
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