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CAPITAL MARKETS RESEARCH

JULY 30, 2015

WEEKLY
MARKET OUTLOOK
Moodys Capital Markets Research, Inc.
Weekly Market Outlook Contributors:
David W. Munves, CFA
1.212.553.2844
david.munves@moodys.com
John Lonski
1.212.553.7144
john.lonski@moodys.com
Ben Garber
1.212.553.4732
benjamin.garber@moodys.com
Njundu Sanneh
1.212.553.4036
njundu.sanneh@moodys.com
Yukyung Choi
1.212.553.0906
yukyung.choi@moodys.com
Irina Baron
1.212.553.4307
irina.baron@moodys.com
Franklin Kim
1.212.553.4419
franklin.kim@moodys.com
Xian (Peter) Li
1.212.553.1404
Xian.li@moodys.com

Moody's Analytics/Europe:

Tomas Holinka
1.420 ( 221) 666-384
Tomas.holinka@moodys.com

Moody's Analytics/Asia-Pacific:

Matthew Circosta
1.612.9270.8118
Matthew.Circosta@moodys.com
Faraz Syed
1.612.9270.8146
Faraz.Syed@moodys.com

Editor

Dana Gordon
1.212.553.0398
dana.gordon@moodys.com

Credit Concerns Surpass Rate Risks


Credit Markets Review and Outlook by John Lonski
Credit Concerns Surpass Rate Risks.

FULL STORY PAGE 2

Topic of the Week by Ben Garber

One Company Mirrors the Worldwide Economic Slowdown.


FULL STORY PAGE 5

The Week Ahead

We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions.
FULL STORY PAGE 8

The Long View

Check our chart here for forecast


summaries of key credit market
metrics. Full updated stories, Julys
worldwide offerings of corporate
bonds may advance by 65%
annually for investment grade, but
dip by -5% for high yield, begin on
page 19.

Credit
Spreads

Investment Grade: Year-end 2015 spread to resemble


its recent 152 bp.
High Yield: Recent spread of 529 bp should approximate
500 bp by year-end 2015.

Defaults

US HY default rate: June 2015, 2.0%; Moodys Credit Policy


Group forecasts 3.0% in 1H2016

Issuance

For 2015, US$ IG bond offerings may grow by 24% to


$1.401 trillion, while US$ HY bond issuance sinks by
-5% to $401 billion. In 2014, US$ IG bond issuance
rose by 0.9% to $1.129 trillion, while US$ HY bond
issuance dropped by -2.3% to $421 billion.
FULL STORY PAGE 19

Ratings Round-Up by Njundu Sanneh


US Credit Quality Rises.

FULL STORY PAGE 21

Market Data

Credit spreads, CDS movers, issuance.


FULL STORY PAGE 23

Moodys Capital Markets Research recent publications

Links to commentaries on: Ford, Campbell, AXP, risk, GS, M&A, UBS, issuance, WFC, C, MS, JPM, IP.
FULL STORY PAGE 27

Click here for Moodys Credit Outlook, our sister publication containing Moodys rating agency analysis
of recent news events, summaries of recent rating changes, and summaries of recent research.

Moodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research, Inc is a subsidiary of Moodys Corporation. Moodys
Analytics does not provide investment advisory services or products. For further detail, please see the last page.

CAPITAL MARKETS RESEARCH

Credit Markets Review and Outlook

Credit Markets Review and Outlook

By John Lonski, Chief Economist, Moodys Capital Markets Research, Inc.

Credit Concerns Surpass Rate Risks


Markets have become more accepting of the limited upside for benchmark interest rates. Forthcoming
trajectories for short- and long-term interest rates are more likely to resemble mild inclines than steep lift-offs.
A global surfeit of production capacity vis-a-vis expenditures should rein in inflation risks indefinitely. If
inflation expectations are well contained and real economic growth remains modest, 3% should be the new
6% for the 10-year Treasury yield.
The FOMCs policy statement of July 29 did not strongly indicate the likelihood of a rate hike at the
September 17 meeting. Accordingly, the 83% of surveyed economists who predicted in early July that the first
rate hike will occur at Septembers FOMC meeting might be proven wrong.
Real GDP averages just 1.8% growth for current recovery to date
The latest bout of industrial commodity price deflation stems from above-average underutilization of global
production capacity that should keep inflation well contained. Like the rest of the world, the US is now mired
in the dullest business cycle upturn since the 1940s.
The second quarter of 2015 marked the end of the sixth year of the current recovery. The 1.8% average
annualized real GDP growth of the first six years of the ongoing upturn was far slower than the 2.7% average
annual growth of 2002-2007s upturn, the 3.6% growth of 1991-2000s recovery, and the 4.3% advance of
1983-1990s upswing. Moreover, US real GDPs average annual growth plunged from the 3.4% of the 10years-ended Q2-2005 to the 1.4% of the 10-years-ended Q2-2015. The latter helps to explain why fed funds
remains stuck at nearly 0%.
Figure 1: Worldwide Slack, Industrial Commodity Price Deflation, and Costlier Dollar Curb Growth of Sales and
Operating Profits
Operating Income:
Operating
Sales Ex
S&P 500
Income ex
excluding financial Energy
Energy
companies
4
5
6

Sales: S&P
500

Operating
Income:
S&P 500

Sales: S&P 500


excluding financial
companies

2010-2011

9.4

27.6

10.7

23.2

2012

2.4

4.7

2.1

1.5

2013

2.3

5.0

2.3

2.7

2014

3.3

7.2

3.6

7.8

Average annual percent changes:

Yearly percent changes by quarter:


13Q1

0.6

2.7

0.3

1.9

13Q2

2.6

3.8

1.8

-1.3

13Q3

3.2

4.8

3.7

4.2

13Q4

2.6

8.8

3.5

6.0

14Q1

3.0

5.4

3.6

5.1

14Q2

4.6

10.3

5.1

11.3

14Q3

4.0

8.8

3.8

7.9

14Q4

1.5

4.2

1.7

7.0

4.2

15Q1

-3.0

0.7

-3.7

-0.9

2.0

7.8

15Q2: 65% of S&P500

-1.7

1.7

-2.1

0.9

0.8

5.1

6.6

Latest projections:
EST 15Q2

-2.8

EST 15Q3

-4.5

-4.2
-5.5

EST 15Q4

2.3

-0.5

EST 16Q1

6.6

7.6

Sources: Bloomberg News, Moody' s Capital Markets Research Group

Revenues are mostly sluggish after excluding plunge by energy sales


Subpar corporate revenues mirror below-trend economic growth. The revenues of the 65% of the S&P 500
that have reported for 2015s second quarter were down by -1.7% year-over-year. After excluding the -30.1%
annual plummet incurred by energy companies, the annual percent change of sales for the remainder of the
S&P 500 improved to a still mediocre rise of 0.8%. Because the latter includes the 1.0% yearly gain of
2

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CAPITAL MARKETS RESEARCH

Credit Markets Review and Outlook


financial company sales, the revenues of non-financial companies excluding energy companies rose by less
than 0.8%.
Other broad non-financial company categories incurring an annual drop by sales thus far in Q2-2015 included
the -10.9% of materials, the -4.7% of consumer staples, the -2.6% of the industrials, and the -2.3% of utilities.
On the positive side, Q2-2015s sales growth for the non-financial company members of the S&P 500
excluding energy has been led by annual increases if 6.7% for health care, 3.9% for information technology,
2.5% for telecommunication services, and 2.4% for discretionary consumer spending. (Figure 1.)
Lets be frank, no broad category of S&P 500 sales, outside of health care, appears to be growing rapidly
enough to justify average hourly wage growth much above 2%. Very mild sales growth, if any, would compel
businesses to spend more cautiously on capital goods and labor.
Subpar sales growth is hardly confined to the US. For 2015s first half, Chinas industrial sales rose by merely
1.4% year-over-year, which was down from their 8.6% annual rise of 2014s first half and was the categorys
worst first-half showing since the 0.4% annual uptick of 1H/2009. In stark contrast, for the three January-June
spans of 2011 through 2013, Chinas industrial sales advanced by 17.5% annually, on average.
Severe base metals price deflation may rein in rates
The global slack implicit to the extraordinarily slow growth of Chinas industrial sales also has helped to slash
the prices of a broad array of industrial commodities. A decisive firming of base metals prices would indicate a
fuller utilization of global production capacity.
At the current annual rate of base metals price deflation, the 10-year Treasury has always been less than its
year earlier reading, while fed funds has never been hiked.
Moodys industrial metals price index was recently down by -25% from a year earlier. During the last 13
weeks, the base metals price index has declined by -16% year-over-year.
Since year-end 1982, the base metal price indexs moving three-month average has declined by at least -15%
year-over-year for 46 months. In each of the 46 months not only was the 10-year Treasury yields monthlong average down from a year earlier, but the federal funds rate was either left unchanged or cut. Since 1982,
the federal funds rate has never been hiked when the base metals price indexs moving three-month average
sank by at least -15% from year to year.
Wider spreads, subpar profits and rising default risk favor low rates
Also, the latest widening of corporate bond yield spreads, the subpar growth rate of profits, and the recent
ascent by the average expected frequency of high-yield defaults weigh against significantly higher interest
rates.
The recent 215 bp spread of Moodys long-term Baa industrial company bond yield was well above its 151 bp
median of the previous two economic recoveries. Moreover, the 215 bp spread was even further above its
averages just prior to the fed fund rate hikes of June 2004 and February 1994, where each was the first in a
series of rate hikes following a recession. The initial rate hike of June 2004 was preceded by a 132 bp average
for the Baa yield spread, while February 1994s commencement of monetary tightening was preceded by a
similar 131 bp average for the Baa spread.
Likewise, not only was the recent high-yield bond spread of 529 bp much wider than its 418 bp of the previous
two upturns, it was also much broader than its pre-rate hike averages of 381 bp for June 2004 and 378 bp for
early 1994.
Profits now perform meekly compared to their showings when Fed rate hikes were first implemented in June
2004 and February 1994. During the years-ended Q2-2004 and Q1-1994, the annual increases for pretax
profits from current production were 20% and 15%, respectively. By contrast, for the year-ended March 2015,
the annual increase by this measure of core profits was merely 3.4% and may be no greater than 2% for
yearlong 2015.
The rising default risk of US high-yield corporates now limits the upside for fed funds. At the Feds last firsthike of rates after a recession in June 2004, the average high-yield expected default frequency (EDF) metric
had declined by -42 bp over the previous three months and -286 bp over the past 12 months, to 4.26%. By
contrast, July 29ths high-yield EDF metric of 4.54% was up by +112 bp over the previous three months and by
+243 bp from a year earlier.
Because the measurement of the average high-yield EDF metric did not commence until 1996, the trend of the
actual high-yield default rate at the time of February 1994s first rate hike will be employed. January 1994s
3

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CAPITAL MARKETS RESEARCH

Credit Markets Review and Outlook


default rate of 3.7% was down from both July 1993s 5.1% and February 1993s 4.6%. Moreover, the default
rate was on its way to forming a localized bottom at the 1.9% of June and July 1994.
Thus, the end of the Feds 0% rate policy will probably not be followed by an aggressive tightening of
monetary policy. Instead of peaking in a range of 5% to 6%, fed funds may rise no higher than 2% during the
next tightening cycle. In turn, the 10-year Treasury yield might do well to reach 3%. (Figure 2.)
Figure 2: 10-year US Treasury Yield Should Remain Well Under Its 2.75% Average of August 2013
thro
through March 2014
Quantitative Easings Are Shaded
4.25

10-year Treasury Yield: %


1

4.00
3.75
3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.25
0
Nov-07 Aug-08 May-09 Feb-10 Nov-10 Aug-11 May-12 Feb-13 Nov-13 Aug-14 May-15

JULY 30, 2015

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CAPITAL MARKETS RESEARCH

TopicMarkets
of the Week
Credit
Review and Outlook

Topic of the Week

By Ben Garber, Economist, Moodys Capital Markets Research, Inc.

One Company Mirrors the Worldwide Economic Slowdown

Diminished global growth prospects stem from the fading dynamism of major emerging market countries, a
trend that is manifest in the collapse of commodity prices. One major industrial firm sits amid the epicenter
of this malaise Caterpillar, Inc. (CAT), the Peoria, Illinois based manufacturer of engines and equipment for
construction and mining. With sales declining for three consecutive years, CAT is rooted in the industries
facing the highest risk of credit default. Such weaknesses in the mining and energy sectors also inhibit
inflation, which in turn keeps the lid on interest rates.
Slumping global growth has sapped industrial output
The ongoing slowdown in Chinese economic activity is a leading cause of restrained global output growth,
following the initial burst of activity after the financial crisis. Actual and projected figures from the IMF see
Chinese real growth slowing from 10.4% in 2010 to the 25-year low of 6.8% in 2015. That tracks with a
decline in global growth of 5.4% in 2010 to 3.3% in 2015, marking the fourth consecutive year of growth
under 3.5%. With Chinas construction boom leveling off and demand for natural resources falling, the
negative effects on global industrial business results are substantial.
Slowing manufacturing and construction activity in China and the world in general in recent years lines right
up with the challenges facing CAT. In 2013, the company saw revenue declines in its mining, construction, and
energy segments from which it has yet to recover. Reuters quotes CAT CFO Brad Halverson as saying that
revenues are slated to fall for the third straight year for the first time since the 1930s. Monthly retail sales of
machines to end-users have declined annually in every month going back to December 2012. Such sales grew
sharply alongside the rebound from the recession, expanding as much as 66% year-over-year during the 20102012 period (Figure 1). The subsequent slump continues unabated, with the 14% year-over-year decline in
machine sales to June equaling a five-year low. The sour outlook has weighed on the companys stock, which
at $77.33 per share is down 26% yearly.
Figure 1: Global GDP vs Caterpillar Retail Sales
Caterpillar Retail Sales of Machines to End Users: YoY % Change ( L )
Global GDP: Yearly % Change ( R )
64
48
32

5.4
4.4

16

3.4

2.4

-16

1.4

-32
-48
-64

0.4
-0.6

Sources: IMF, Caterpillar, Inc.

Commodity price freefall hurts business results


The sales slump at CAT dovetails with the plunge in commodity prices (Figure 2). Moodys Industrial Metals
Price Index was down 25% from a year ago on July 29, and only marginally above six-year lows. The Index
now stands 41% under the record high set in 2011, as robust projections for global growth at that time now
seem like fantasies. In addition CATs performance now much more closely tracks global trends compared to
its more US-centric results in the previous decade. When commodity prices were booming at the 33%
annualized rate for the Metals Index in the five years ending 2007, CATs sales were sporting minimal growth
in the final years of that period as construction activity in the US fizzled out. But with the North American
5

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CAPITAL MARKETS RESEARCH

Topic Markets
of the Week
Credit
Review and Outlook
share of CATs revenue sliding from 53% in 2006 to 44% last year, risks from all regions in world can seriously
weigh on operations.
Figure 2: Industrial Metals Prices vs Caterpillar Retail Sales
Caterpillar Retail Sales of Machines to End Users: YoY % Change
Moody's Industrial Metals Price Index: YoY % Change
110%
90%
70%
50%
30%
10%
-10%
-30%
-50%
-70%

Sources: Moody's Analytics, Caterpillar, Inc.

Falling import prices restrain US interest rate increases


The decline in raw materials prices plus the poor sales outlook for CAT and many other firms will limit the
increase in borrowing costs for US businesses. Though policymakers generally look past the large fluctuations
of energy costs and other imported goods, core price measures are not likely to accelerate greatly under
current conditions. The Import Price Index already had fallen 10% year-over-year to June prior to the renewed
large-scale drop-off in the price of oil and other commodities of recent weeks. The core Personal
Consumption Expenditures Price Index does not appear immune to this global disinflationary pressure, only
rising at the 15-month low rate of 1.2% yearly to May (Figure 3). The last stretch of growth in core PCE at or
above 2% in late 2011 and early 2012 came when the Import Price Index reached its highest level of the past
seven years. With low commodity costs restraining observed core price trends and limiting expected price
growth, long-term interest rates will not rise sharply.
Figure 3: PCE and Import Price Indices
Import Price Index: YoY % Change ( L )

PCE Price Index: YoY % Change ( R )

Core PCE Price Index: YoY % Change ( R )


25.0%

6.0%

20.0%

5.0%

15.0%
10.0%

4.0%

5.0%

3.0%

0.0%

2.0%

-5.0%

1.0%

-10.0%
-15.0%

0.0%

-20.0%

-1.0%

-25.0%

-2.0%

Sources: BYA, BLS

JULY 30, 2015

CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM

CAPITAL MARKETS RESEARCH

Topic of
the Week
Credit
Markets
Review and Outlook
Default risk elevated for energy and mining firms
The energy and mining sectors on which CAT depends are showing much higher levels of distress than the
broader US corporate credit market (Figure 4). The overall high yield US corporate bond spread of 529 bp in
the Barclays index is only slightly more than half of the 1,028 bp spread for the combined sectors of
independent energy, oil field services, and metals & mining. Historically the spread for these three sectors has
averaged 55 bp less than the rest of the US high yield market. But now if you exclude the energy and mining
sectors from the overall index, the high yield spread drops over 100 bp to 426 bp. At 426 bp, the high yield
spread would fall comfortably under the historical average of 580 bp, indicating investor confidence in sectors
other than energy and mining. Yet the latter account for 17% of the outstanding high yield market, which
means the fate of these firms broadly weighs on high risk credit. Without substantial relief from slow global
growth and the long-term commodity price declines, business sales growth will lag and corporate defaults may
surprise.
Figure 4: US High Yield Bond Spread by Sector
US High Yield Bond Spread: bp
US High Yield Energy & Mining Sectors* Spread: bp
US High Yield Spread ex Energy & Mining: bp
1050
950
850
750
650
550
450
350
250

*Includes Independent Ynergy, Oil Field Services and Metals & Mining sectors
Source: Barclays

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CAPITAL MARKETS RESEARCH

The Week Ahead

The Week Ahead US, Europe, Asia-Pacific


THE US
By John Lonski and Ben Garber
Moodys Capital Markets Research Group
Estimates are consensus views. Release times are US Eastern Daylight Time

FRIDAY, JULY 31

University of Michigan Consumer Sentiment July Final


Time: 10:00 am
Forecast: 94.0
The final reading in the July Michigan sentiment survey can limit the initial decline recorded against Junes
five-month high. The potential for renewed declines in gasoline prices can give consumer attitudes a lift. A
supply glut and falling demand as weather in the US turns colder can give US consumers greater spending
power on non-fuel items well into next year.
MONDAY, AUGUST 3

Personal Income & Spending June


Time: 8:30 am
Forecast: 0.4% income, 0.2% spending
A dud result for last months retail sales implies likewise for June consumer spending. Retail sales excluding
autos and gasoline rose 3.3% annualized last quarter, pointing to a positive but tepid pace for overall
spending. Yet with wage and salary income rising 5.0% yearly to May, there is room for some limited
acceleration in consumer outlays during the second half of this year.
Construction Spending June
Time: 10:00 am
Forecast: 0.7%
Construction spending can expand for the seventh straight month in June on the heels of gains in residential
activity. Building permits reached the eight-year high in June and rose 19% year-over-year in the second
quarter, promising much future gains in homebuilding. Additionally, an index of architectural billings
jumped to the nine-month high in June, indicating broad based gains are likely across the construction
industry.
ISM Manufacturing Index July
Time: 10:00 am
Forecast: 53.5
Julys ISM Manufacturing Index is projected to equal Junes six-month high amid evidence of rising industrial
sector demand. The new orders component of the survey averaged a solid 55.1 in the second quarter,
improving on the first quarters lackluster 52.4. That pick-up in orders is a sign that manufacturing output
measured in the industrial production report is poised to improve greatly after failing to expand in four of
the first six months of this year.
Vehicle Sales July
Forecast: 17.1 million
July vehicle sales will do well to hold on the volume recorded in June, keeping such activity moving along at
a sturdy long-term pace. On a moving yearlong basis, auto sales are up 6%, adding to economic growth at a
pace faster than other areas of consumer spending. But the boost from auto sales has slowed from the
double-digit percentage annual pace last seen in 2013, as spending on a broader mix is goods in needed to
greatly lift the overall expansion.
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CAPITAL MARKETS RESEARCH

The Week Ahead


TUESDAY, AUGUST 4

Factory Orders June


Time: 10:00 am
Forecast: 1.6%
Bright results for durable goods orders can lift overall factory orders to largest gain in three months in June.
Yet despite a strong June gain for core durable orders, such items fell 2% annualized in the second quarter.
While domestic demand can lead a rebound in industrial activity, weakness overseas restrains the potential
for manufacturing sector output.
WEDNESDAY, AUGUST 5

Trade Balance June


Time: 8:30 am
Forecast: -$42.5 billion
The US trade deficit is projected to widen to a three month high as exports struggle to gain traction. Soft
readings on Chinese economic activity and dollar strength add substantial headwinds to export activity. Yet
renewed declines in the prices of oil and other commodities will prevent a substantial widening of the trade
gap in the months ahead.
ISM Non-Manufacturing Index July
Time: 10:00 am
Forecast: 56.0
The ISM Non-Manufacturing Index is forecast to hold firm in July as consistent hiring indicates that domestic
service sector sales are rising at a decent pace. Unlike the slowdown in manufacturing, the NonManufacturing Index maintained sturdy readings above 55 for 15 straight months through June. During that
streak the private service sector added 214,000 jobs per month, up 29% from the previous 15-month period.
FRIDAY, AUGUST 7

Employment Report July


Time: 8:30 am
Forecast: 218,000 nonfarm payrolls, 5.3% unemployment rate
July nonfarm payrolls are in line to expand by over 200,000 for the third straight month. Yet more
attention may fall on the monthly change in average hourly wages after showing no growth in June. Signs
that labor market slack is dissipating raise the probability that wage growth will accelerate in the near future.
The broad underemployment rate that includes part-time workers who want full-time jobs fell 1.5% yearly
in June to the seven-year low of 10.5%.

EUROPE
By the Dismal (Europe) staff in London and Prague
Release times are Greenwich Mean Time.

Focus: Industrial production to show little effect of Greek crisis


The resumption of official talks between the Greek government and its euro zone creditors was the
economic highlight of the week. It followed passage of two reform packages in as many weeks, which were
required by the creditors as preconditions for the talks. The talks will have to be very rapid in order to
conclude before the Aug. 11 regular meeting of euro zone finance ministers. Nevertheless, even if an
agreement is not reached before Aug. 20the due date for a large bond repayment to the European Central
Bankthe European partners will provide Greece with another portion of temporary financing.
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CAPITAL MARKETS RESEARCH

The Week Ahead


Data due in the week ahead will show whether the Greek saga has had an effect on economic activity in the
rest of the euro zone. The four largest euro zone economies, together with the U.K., will publish industrial
production data for June, the first month when bond markets around European periphery began to
significantly respond to developments in Greece. Moodys Analytics expects moderate acceleration in yearly
growth of industrial production in Germany and France, substantial acceleration in Spain and a moderate
slowdown in monthly growth in Italy and the U.K. Additionally, data for retail sales in Germany and the euro
zone will be published, which we expect continued strong growth from year-ago levels. This is in line with
the most recent consumer and business confidence surveys, including the ZEW and Ifo indicators, which
point toward only restrained loss of momentum in the last months. Similarly, the July flash composite
Purchasing Managers Index for the euro zone showed only a small decrease, which left it close to its
multiyear high. Final data for euro zone manufacturing, retail and composite PMI will provide more detail.
Bank of England policymakers meet Aug. 6. While the bank's first rate increase since the financial crisis of
2008-2009 is probably still a few months away, any sign of change in the views of policymakers will be
closely watched.

FRIDAY, JULY 31

France Household Consumption Survey June


Time: 7:45 a.m. BST
Forecast: 0.1%
French household consumption likely increased 0.1% m/m and strengthened 1.6% y/y in June on the
back of low oil prices and a slow, yet firming, recovery in the country. Still, although households are
slightly more optimistic about the country's economic future, the savings rate is still high, as households
remain under pressure from high and long-term unemployment, the number of temporary jobs, and tight
credit. This particularly affects spending on durable goods.
France Producer Price Index June
Time: 7:45 a.m. BST
Forecast: -1.8%
Year-on-year producer prices in France likely decreased again in June on the back of low energy prices,
particularly oil and oil derivatives. In month-ago terms, domestic producer prices probably increased a
little. Also, demand for industrial products in France remains subdued and creates no significant price
pressures, although the weaker euro is raising prices of some imported goods outside of the euro zone.
Germany Employment Situation July
Time: 9:00 a.m. BST
Forecast: 6.4% unemployed
German unemployment dropped by 1,000 in June, and the unemployment rate remained at 6.4%.
Another decrease in the number of unemployed points to improved confidence in Germanys further
expansion despite worse than expected results for the economy at the start of this year. According to the
June Markit composite PMI, employment continued to increase during the month, although the pace was
marginal. The unemployment rate is forecast to remain at 6.4% in coming months.
Spain Business Confidence July
Time: 9:00 a.m. BST
Forecast: 0
Spain's business confidence likely eased in July from June. The debt dramas in Greece likely dampened
sentiment in July as the ructions created widespread uncertainty and discontent throughout the euro
zone. Yet, the index is at multiyear highs thanks to the strengthening economy, and forward economic
indicators suggest ongoing strength.
Spain Government Finance June
Time: 9:00 a.m. BST
Forecast: -8.3 billion
Spain's fiscal deficit likely narrowed in June, from May's 9.8 billion deficit, not seasonally adjusted.
Improved GDP growth is somewhat helping government finances, but they remain under pressure from
high unemployment keeping a lid on income taxes, the largest source of Spanish government revenue.
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CAPITAL MARKETS RESEARCH

The Week Ahead


Italy Employment Situation June
Time: 9:00 a.m. BST
Forecast: 12.3% unemployed
Italys unemployment rate likely fell in June from 12.4% in May thanks to the improving economy. The
economy emerged from recession in the three months to March, with real GDP rising 0.3% q/q. The
purchasing managers index suggests that the recovery continued in the second quarter, supported by the
weaker euro, low oil prices, and improved investor optimism in the euro zone. Nevertheless, we expect
the unemployment rate will trend downward only gradually, as the weak outlook discourages companies
from major hiring.
Euro Zone Preliminary Consumer Price Index July
Time: 10:00 a.m. BST
Forecast: 0.3%
Euro zone inflation likely accelerated in July from a year earlier, with consumer prices increasing 0.3% y/y,
following the 0.2% growth in the previous month. The improving economy, weaker euro, and higher oil
prices should drive up inflation in coming months. To accelerate price growth the European Central Bank
continues to buy assets and provide long-term liquidity. The five-year forward break-even inflation rate
has risen around 30 basis points to 1.8% since mid-January, approaching the ECBs 2% target.
Euro Zone Unemployment June
Time: 10:00 a.m. BST
Forecast: 11% unemployed
The euro zones unemployment rate likely ticked down 0.1 percentage point in June after reaching a
multiyear low the previous month. This reflects the regions increased pace of recovery, which reached
0.4% in quarter-ago terms in the first quarter of 2015. All confidence indicators across the euro zone
point towards gradually improving spirits, supported by the lower price of oil and euro and the
quantitative easing policy initiated by the ECB. Nevertheless, the recovery is too weak to make a
substantial dent in the elevated unemployment rate. The greatest risk to recovery comes from
uncertainty surrounding the political situation in Greece, which could reignite the region's crisis.
Russian Federation Monetary Policy August
Time: 10:30 a.m. BST
Forecast: 10%
We expect the Bank of Russia to continue cutting the policy rate, to 10%, as the current high price of
borrowing does not bode well and there is a dire need to revive investment and domestic demand. The
decision will arrive on the back of decelerating inflation and a likely second quarter of annual GDP
decline.
Italy Producer Price Index June
Time: 11:00 a.m. BST
Forecast: -1.7%
Italys producer price deflation likely eased further in June. Slowly recovering manufacturing and the
weakening euro will likely contribute to higher inflation in coming months. According to the May PMIs,
inflation pressures are returning, with input costs rising at the fastest rate since February 2012 in
manufacturing and at the fastest rate in almost two years in services. Nevertheless, price growth will be
moderate because of ongoing structural rigidities.
MONDAY, AUGUST 3

Germany Retail Sales June


Time: 8:00 a.m. BST
Forecast: 0.3%
German retail sales increased 0.5% m/m in May, following a revised 1.3% rise a month earlier. Sales
continued to grow in year-ago terms, and the rate accelerated. Consumption has been robust even as
German households stay cautious because of the uncertain outlook, but sentiment has been strong. Still,
the GfK consumer climate indicator for July fell to 10.1 from Junes 10.2, as a result of uncertainty
surrounding a possible Greek exit from the euro. Meanwhile, the Markit retail PMI retreated to 54 in June
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from the 11-month high of 55.8 in May, but continued to point to a stronger increase in retail sales in
coming months. We expect retail sales continued to increase in June although at a slightly weaker rate.
TUESDAY, AUGUST 4

United Kingdom Nationwide Housing Price Index July


Time: 7:05 a.m. BST
Forecast: 3.5%
The U.K. Nationwide house price index is forecast to rise in year-ago terms in July by more than in the
previous month. The end of political uncertainty after the Conservatives won a parliamentary majority in
the general election in May probably unleashed pent-up demand for residential properties. Political
uncertainty typically prompts potential homebuyers to postpone purchases until the outlook becomes
clearer. Yet the residential property market is likely to be under pressure in the coming months from the
prospect of official interest rates starting to rise next year, the recent introduction of tighter mortgage
loan standards, and already-high prices in some areas including London and South-East England.
Euro zone Producer Price Index June
Time: 10:00 a.m. BST
Forecast: -1.8%
Euro zone producer prices likely moderated their decline in June in year-ago terms because of
stabilization of Brent oil prices in the first half of 2015. In year-ago terms the producer price decline is
driven by a drop in energy prices, which reflects the large decrease in oil prices in the last months of
2014. This effect will persist into coming months. Longer term, the euro zones producer prices should be
lifted by the ECBs quantitative easing, which began in March, and by depreciation of the euro during the
past 12 months.
Russian Federation Consumer Price Index July
Time: 1:40 p.m. BST
Forecast: 1.1%
Consumer price inflation in Russia will likely accelerate to 1.1% month over month in July, on the back of
the depreciation of the ruble since the second half of May. Given the huge drop in imports due to anemic
domestic demand, we expect the effects of the depreciation pass-through to fade quickly. Still, annual
inflation will likely remain in double-digit territory in the coming months.
WEDNESDAY, AUGUST 5

Italy Industrial Production June


Time: 9:00 a.m. BST
Forecast: 0.3%
Italys industrial production growth likely slowed in June, in line with other high-frequency data. Growth
in manufacturing, according to the purchasing managers index, moderated slightly in June as the PMI fell
to 54.1 from Mays 49-month high of 54.8. Furthermore, Italy's new industrial orders shrank 2.5% month
over month and 0.5% year over year in May, while manufacturing confidence declined to 103.6 in July
from 103.9. Despite subdued high-frequency data, we still expect that Italys manufacturing will improve
in coming months, supported by the weaker euro and low oil prices. Nevertheless, the risk of a Greek exit
from the euro zone remains a concern.
Euro Zone Retail Trade June
Time: 10:00 a.m. BST
Forecast: 0.1%
Euro zone retail sales are expected to have advanced only 0.1% month over month in June. At 50.4, the
retail PMI was down from Mays 49-month high of 51.4. Data signaled another rise in sales, albeit at a
slower pace than previously. Also, this could be a sign that consumer spending in the single-currency area
is perhaps about to turn a corner. Still, persistent unemployment above 11%, geopolitical risks,
uncertainty about Greece, and low inflation continue to be the main dampeners of retail sentiment.

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THURSDAY, AUGUST 6

United Kingdom Industrial Production June


Time: 9:30 a.m. BST
Forecast: -0.2%
The U.K. industrial production index rose 0.4% month over month in May and the annual increase
accelerated strongly to 2.1%. Industrial production should benefit in the next month or so from the end
of political uncertainty in the U.K. but will remain under pressure from the stronger pound, the euro
zones weak recovery, and uncertainty surrounding Greek debt. Meanwhile, the U.K. manufacturing PMI
fell to a 26-month low of 51.4 in June from 51.9, pointing to weaker improvement in business conditions
in coming months. Industrial production likely retreated somewhat in June from the previous month.
Germany Manufacturing Turnover and Orders Received June
Time: 11:00 a.m. BST
Forecast: -0.5%
German manufacturing orders fell 0.2% month over month in May but advanced 4.8% year over year.
Germany's Markit manufacturing PMI for June rose to 51.9 from 51.1 the previous month, it continued to
point to an only moderate improvement in business conditions in coming months. Details of the report
showed new orders rose for a seventh consecutive month, and the rate of increase accelerated slightly
but remained marginal overall. Industrial orders likely retreated somewhat in June from the previous
month but continued to grow robustly in year-ago terms.
United Kingdom Monetary Policy August
Time: 12:00 p.m. BST
Forecast: 0.5%
The Bank of England is expected to keep the main refinancing rate at 0.5%, and maintain the asset
purchase program at 375 billion. The minutes of the previous meeting showed that policymakers
remained focused on domestic demand-driven inflation pressures. The central bankers said there was at
least some spare capacity remaining in the labor market. We expect the BoE will raise its key rate by 25
basis points to 0.75% in the first quarter of next year.
FRIDAY, AUGUST 7

France Industrial Production June


Time: 7:45 a.m. BST
Forecast: 0.2%
Frances industrial production is expected to have ticked up in June on both a month-over-month and a
year-ago basis. Demand for local products likely remained under pressure from the slow recovery, tight
credit, and slack demand from Frances key euro zone trading partners, together with uncertainty due to
developments surrounding Greece and in Ukraine and Russia. The manufacturing PMI in France increased
to 50.7 in June from 49.4 in the previous stanzaan emergence from contractionary territory. Also, it
was the first time in 14 months that the manufacturing sector expanded in France.
France Fiscal balance June
Time: 8:00 a.m. BST
Forecast: -59 billion
Frances fiscal deficit is expected to be 59 billion for June, a 0.7% improvement from a year earlier.
France's 2014 deficit was 4% of GDP, 0.1 percentage point lower than in 2013, and likely will not go
below 3% until 2017. Spending by central and local governments, including for social welfare programs,
was cut by about 15 billion in 2014 and will be trimmed by an additional 50 billion by 2017. A freeze
on public sector salaries, a cap on other state expenditures, and lower contributions to the EU budget
have also helped with consolidation.
France Trade balance June
Time: 8:00 a.m. BST
Forecast: -3.9 billion
Frances foreign trade deficit likely shrank somewhat (seasonally adjusted) in June because of stronger
exports. Nevertheless, despite recent improvements, export activity remains subdued, and will creep
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forward only slowly as France struggles with relatively low competitiveness and external demand from
other euro zone countries picks up at a snail's pace.
Spain Industrial Production June
Time: 8:05 a.m. BST
Forecast: 5%
Spains industrial production likely expanded 5% in June from a year earlierits best result in more than
five years. Export-manufacturing has picked up its pace in recent months thanks to improved price
competitiveness, reflecting lower unit labor costs and a weaker euro. Euro zone demand is also increasing
as the regions economies recover.
Russian Federation House Prices 2015Q2
Time: 9:20 a.m. BST
Forecast: 1.2%
The inflation of house prices in Russia likely decelerated to 1.2% quarter over quarter in the second
quarter, from 1.7% previously. While still positive, the price growth is decelerating on account of lack of
demand. According to Rosstat, construction posted a 5.2% annual decline in the second quarter, and a
10% decline in June alone.
United Kingdom Foreign Trade June
Time: 9:30 a.m. BST
Forecast: -9.3 billion
The U.K. foreign trade deficit probably widened in June after it narrowed substantially in the previous
month. Exports likely remained under pressure from the weak economic recovery in the euro zone, which
contains key destinations for U.K. exports, and the recent strengthening of the trade-weighted pound
making British goods and services less cost competitive. Meanwhile, solid domestic demand probably
supported imports.
Germany Industrial Production June
Time: 11:00 a.m. BST
Forecast: 0.2%
German industrial production was unchanged in May from the previous month but advanced 2.2% year
over year. Manufacturing will remain under pressure in the coming months, as weak domestic and
external demand has been weighing on the economy. The ZEW indicator of economic sentiment fell to
29.7 from 31.5 in June, while the ZEW indicator for the current situation rose to 63.9 from 62.9.
Meanwhile, the Markit manufacturing PMI for June rose to 51.9 from 51.1 the previous month. We expect
that industrial production added 0.2% in June from the previous month.

ASIA-PACIFIC

By Matthew Circosta and the Asia-Pacific Staff of Moodys Analytics


Release times are Greenwich Mean Time

India's central bank is expected to cut rates while Australia, Thailand and Japan sit pat
Central bank decisions are in the spotlight this week. We expect the Reserve Bank of India to cut rates by 25
basis points to 7%, reflecting slower inflation and healthier external balances. Central banks in Australia and
Thailand will keep rates on hold but maintain firm easing biases. The Bank of Japan will maintain its
expansionary monetary stance, continuing to expand asset purchases at an annual rate of 80 trillion. On
the data front, Indonesia's second quarter GDP headlines releases, and expectations point to continued
below-trend economic growth as the government reform program stalls. Labor market data will show
unemployment rates hover around 6% in Australia and New Zealand as economic performances converge.
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FRIDAY, JULY 31

Thailand Private Consumption June


Time: 7:30 a.m. GMT
Forecast: -0.4% y/y
Thailand's private consumption likely fell 0.4% y/y in June, as consumers across the nation continue to
struggle. The spending impulse has evaporated in 2015, and the Bank of Thailand's interest rate cuts have
not yet encouraged consumers to open their wallets. Political uncertainty still weighs on sentiment, as
democratic elections aren't expected until 2016. Lower inflation and oil prices haven't helped much either,
so it's up to the military junta government to induce spending by increasing fiscal stimulus measures.
Thailand Foreign Trade June
Time: 7:30 a.m. GMT
Forecast: US$2.6 billion
Thailand's anemic export growth likely continued in June. The trade surplus likely narrowed to US$2.6 billion.
Exports and imports continued to fall on a year-ago basis. Weak commodity prices are weighing on export
receipts, as is the mixed global and regional demand. The import bill continues to decline on lower oil prices,
but weak domestic demand is also playing its part. Without fiscal stimulus and an increase in investment,
Thai industries will continue to struggle, and exports are likely to fall further.
Thailand Industrial Production June
Time: 5:00 p.m. GMT
Forecast: -4.3% y/y
Thailand's industrial production likely fell 4.3% y/y in June, after decreasing more than 7% in May. The
precipitous fall in production is worrying for the Thai economy. It shows that interest rate cuts have not
spurred investment in manufacturing. Export-oriented manufacturers are struggling the most as a result of a
lack of external competitiveness. The problem is exacerbated by structural problems in production, namely a
lack of innovation across industries. Further fiscal stimulus is needed to encourage investment in Thai wares.
South Korea Industrial Production June
Time: 11:00 p.m. GMT
Forecast: -3% y/y
Industrial production likely fell 3% year on year in June, after dropping 2.8% in May. Manufacturing
sentiment slid to its lowest level since September 2012, with new orders continuing a downward trend. Tech
production was likely a bright spot in the data, as new products came on line. Accommodative monetary
policy and the recently announced fiscal stimulus package should bolster production in coming months,
while a pickup in U.S. growth will lead to a rebound in late 2015.
Japan Consumer Price Index June
Time: 11:30 p.m. GMT
Forecast: 0% y/y
Japans core inflation rate has weakened markedly as the effects of the April 2014 tax hike fade. June data
probably showed that underlying inflation is flat from a year earlier. All in all, the Bank of Japan may need to
ease monetary policy further to reach its 2% inflation goal by mid-2016.
Japan Employment Situation June
Time: 11:30 p.m. GMT
Forecast: 3.4% Unemployed
Japans unemployment rate likely rose to 3.4% in June, after sitting at 3.3% in the prior two months. The
improving economy and rising wages likely prompted many to re-enter the workforce in June, though labour
demand probably wasnt strong enough to absorb these new entrants.
Japan Household Expenditures Survey June
Time: 11:30 p.m. GMT
Forecast: 4.5% y/y
Workers household expenditure likely slowed on a year-ago basis in June, after Mays strong but
unsustainable 8.3% gain. Spring wage increases are supporting household budgets, though not as much as
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Mays report suggested. Household expenditure data are a better indicator of private consumption than
retail sales and will be closely watched for insight on how consumers are faring.
South Korea Retail Sales June
Time: 12:00 a.m. GMT
Forecast: -0.5% m/m
Korean retail sales likely fell 0.5% in June after being unchanged in May. The Middle East Respiratory
Syndrome outbreak hurt consumer confidence in June, halting a recovery in domestic spending. High levels
of household debt are also dampening retail spending. Monetary easing and fiscal stimulus should kick-start
the flagging economy in coming months, but it may take time to boost spending.
Taiwan GDP 2015Q2
Time: 12:30 a.m. GMT
Forecast: 2% y/y
Taiwans economy likely softened in the June quarter, growing 2% year on year compared with 3.4% in the
first quarter. Softer Chinese growth is dragging on the export-driven economy as manufacturing sentiment
and exports orders fall. Domestic demand remains fairly buoyant as the damage caused by food scandals
dissipates. Robust U.S. growth should boost growth through the latter half of 2015.
Japan Housing Starts June
Time: 5:00 a.m. GMT
Forecast: 3% y/y
Housing starts have risen on a year-over-year basis since March, and that trend is likely to continue for the
rest of 2015. The gains largely reflect a low base from 2014, when the tax hike cut consumption and the
tsunami reconstruction ended. Underlying housing demand is also recovering as reforms to land tax, rising
house prices, monetary easing, and wage gains offer support to residential construction.
MONDAY, AUGUST 3

South Korea Foreign Trade July


Time: 2:00 AM GMT
Forecast: US$8.7 billion
Koreas monthly trade surplus likely narrowed to US$8.7 billion in July from US$10.2 billion in June. Stronger
global tech demand likely supported exports, partly offsetting softer sales to China. Imports likely eased in
July, driven by a drop in raw materials and softer domestic demand.
TUESDAY, AUGUST 4

South Korea Consumer Price Index July


Time: 11:00 p.m. GMT
Forecast: 0.6% y/y
Koreas consumer price index likely rose 0.6% year on year in July, down slightly from June's 0.7% gain. Low
global energy prices and soft domestic demand are dampening price growth across the economy. Dry
weather across the region is expected to provide an offsetting boost as food prices edge upwards. Inflation
should remain subdued through 2015, enabling the Bank of Korea to keep rates at an accommodative 1.5%.
Australia Foreign Trade June
Time: 1:30 a.m. GMT
Forecast: -A$2.9 billion
Australia's monthly trade deficit likely remained relatively large in June, after May's A$2.8 billion deficit.
Service exports have been improving, with the lower Australian dollar supporting price competitiveness. But
goods trade is down because of sustained weakness in iron ore and coal prices. The significant fall in capital
imports in May is unlikely to be repeated in June, ensuring a relatively large monthly deficit.
Australia Retail Sales June
Time: 1:30 a.m. GMT
Forecast: 0.4% m/m
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Australian retail trade likely grew a respectable 0.4% m/m in June, from 0.3% in May. Low interest rates and
rising house prices have spurred higher discretionary spending in Australia's most populated cities, Sydney
and Melbourne. The sustained low interest rate environment should keep households in these cities
spending in the foreseeable future. Retail trade is trailing in mining-exposed Western Australia as income
growth has cooled and job shedding has intensified.
Australia Monetary Policy August
Time: 4:30 a.m. GMT
Forecast: 2%
The Reserve Bank of Australia will keep the cash rate steady at 2% in August. The central bank has left the
door open for further easing, but we think this is unlikely. The Australian dollar is depreciating and is helping
the economy rebalance. Further interest rate cuts risk further heating up frothy housing markets in Sydney
and Melbourne.
India Monetary Policy August
Time: 5:30 a.m. GMT
Forecast: 7%
The Reserve Bank of India will likely cut the repo rate by 25 basis points to 7% in August. India's disinflation
trend and stronger external balances give the central bank room to cut rates again. With commodity prices
continuing to fall, inflation will likely weaken in coming months. Fears of drought during the monsoon
season have also dissipated, as rainfalls have been above average. This will cap gains in food prices. Weak
industrial production and auto sales will likely sway the RBI towards another rate cut. If the RBI cuts by 25
basis points as expected, that will bring the total easing to 100 basis points in 2015.

WEDNESDAY, AUGUST 5

New Zealand Employment Situation 2015Q2


Time: 10:45 p.m. GMT
Forecast: 5.9% Unemployed
Increased labor market participation from higher net migration and excess capacity are keeping upward
pressure on unemployment in New Zealand. The unemployment rate likely rose to 5.9% in the June quarter,
from 5.8% in the March quarter. Domestic demand has lost momentum in recent months as lower dairy
prices hit national incomes. Employment growth should pick up in the second half of the year amid easier
monetary policy and the falling exchange rate.
Taiwan Consumer Price Index July
Time: 12:30 a.m. GMT
Forecast: -0.7% y/y
Taiwans headline inflation rate likely fell 0.7% year on year in July, after June's 0.6% decline. Low global
energy prices are pushing down transportation and utility costs, which are filtering through the broader
economy. Soft domestic demand is also dampening price growth as the export-driven economy suffers from
a slowdown in global demand. Subdued inflation will enable the central bank to keep rates on hold through
2015.
Malaysia Foreign Trade June
Time: 4:00 a.m. GMT
Forecast: MYR4.5 billion
Malaysias trade surplus likely narrowed to MYR4.5 billion June from MYR5.5 billion in May. Malaysia is a net
energy exporter, and low global energy prices are hurting the countrys trade surplus. The country's relatively
weak currency is putting upward pressure on the import bill. With global oil prices expected to remain
subdued through 2015, Malaysias trade surplus will likely weaken further in coming months.
Thailand Monetary Policy August
Time: 7:00 a.m. GMT
Forecast: 1.5%
The Bank of Thailand will likely keep its official policy rates unchanged at 1.5% in August. The Thai economy
is far from healthy. GDP is growing below potential, while partial indicators show little upward momentum.
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Given the 50 basis points worth of rate cuts already delivered this year, the BoT will likely take a wait-andsee approach. The BoT maintains an easing bias, and we think the central bank will cut rates again later this
year.
THURSDAY, AUGUST 6

Australia Employment Situation July


Time: 1:30 a.m. GMT
Forecast: 6.1% Unemployed
Australia's seasonally adjusted unemployment rate has been volatile in recent months, and we expect this
trend continued in July. The unemployment rate likely rose to 6.1%, from 6% in June. We look for a modest
10,000 jobs to have been created over the month, as businesses remain cautious. Job creation in
construction and real estate in the service states is going strong, but mining has cooled, hitting once-thriving
industries such as professional services.
FRIDAY, AUGUST 7

Indonesia GDP 2015Q2


Time: 5:00 p.m. GMT
Forecast: 5% y/y
The Indonesian economy likely expanded 5% y/y in the June quarter, after growing 4.7% in the March
quarter. President Joko Widodo's reform agenda has struggled in recent times, as infrastructure investment
remains low. Meanwhile, the ASEAN powerhouse continues to be hurt by lower commodity prices. Exports
have fallen, and the external sector will likely be a drag on growth in the coming year. Low import demand
also suggests that government spending and private investment failed to increase strongly in the second
quarter. We expect below potential growth to continue until reforms are delivered.
Australia Housing Finance June
Time: 1:30 a.m. GMT
Forecast: 3.6% m/m
Owner-occupied housing finance likely partially rebounded in June, after slumping by 6.1% m/m in May.
Demand for housing in the eastern states is strong, fuelling mortgage finance. But conditions are subdued
elsewhere. The Australian Prudential Regulation Authority, Australia's financial regulator, is working behind
the scenes to cool investor participation, particularly in the Sydney and Melbourne markets. This is having an
effect at the margins, and with big banks forced to increase the cost of lending to investors, further cooling
in home loan demand can be expected.
Japan Monetary Policy August
Time: 5:00 a.m. GMT
Forecast: 80 trillion
The Bank of Japan will maintain its expansionary monetary stance, continuing to expand asset purchases at
an annual rate of 80 trillion. The BoJ refrained from reopening the stimulus taps in July even as Greek debt
woes and Chinas stock turmoil caused gyrations in financial markets. On balance, the BoJ will probably need
to ease monetary policy again in 2015, as energy prices are likely to stay lower for longer if sanctions are
eased on Iranian production, throwing its inflation target in doubt.
Taiwan Foreign Trade July
Time: 8:00 a.m. GMT
Forecast: US$1.8 billion
Taiwans trade surplus is expected to narrow to US$1.8 billion in July from US$2.2 billion in June. Weak
global demand is hurting exports, while low global oil prices keep a lid on import prices. Taiwan has few
major trade agreements outside China, making it highly reliant on mainland demand for export growth.
While stronger U.S. demand will boost Taiwan exports somewhat, softening Chinese demand will continue
to be a drag through the second half of 2015.

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The US: Julys worldwide offerings of corporate bonds may advance by 65%
annually for investment grade, but dip by -5% for high yield
By John Lonski, Chief Economist, and Ben Garber, Economist, Moodys Capital Markets Research Group,
July 30, 2015
CREDIT SPREADS

As measured by Moody's long-term average corporate bond yield, the recent investment grade corporate
bond yield spread of 152 bp was above its 122-point mean of the two previous economic recoveries. Any
narrowing by this spread may be limited by more cash- or debt-funded acquisitions, spin-offs, stock
buybacks, and dividends. Subpar growth by business sales and profits will also add to credit risk, as will a
rising risk of high-yield defaults.
The recent high-yield bond spread of 529 bp approximates what might be inferred from a forecasting model
that employs the average high-yield expected default frequency metric, the Chicago Feds national activity
index, and the VIX index. In view of how the investment-grade financial company bond yield spread
widened from its 110 bp average of the 12-months-ended May 2015 to a recent 137 bp, the financial system
may be slightly less willing to supply liquidity in the event of an adverse shock. Moreover, the implications
for liquidity of regulatory changes merit above-average scrutiny.
DEFAULTS

The US's trailing 12-month high-yield default rate was 2.0% in June 2015, which inched up from the 1.9% of
both May 2015 and June 2014. The default rate is projected to approach 3% by December 2015.
Sufficient liquidity and core profits growth should rein in defaults for now.
US CORPORATE BOND ISSUANCE

After advancing by 33% annually in 2012 to a record $1.134 trillion, 2013s US$-denominated investment
grade (IG) bond issuance dipped by -1.5% to $1.119 trillion. Following 2012s 48% annual surge, US$denominated high yield bond issuance advanced by 11% to a record $431 billion in 2013. Also, after gaining
5% in 2012, newly rated high yield bank loan programs increased by 38% annually to $579 billion in 2013.
In 2014, US$-denominated bond issuance edged up by 0.7% annually for IG, to $1.127 trillion and dropped
by -2.7% to $419 billion for high yield. Also, newly rated bank loan programs from high yield issuers plunged
by -17% in 2014 to $480 billion, which was far under 2007s record $661 billion.
Second-quarter 2014s worldwide corporate bond issuance posted year-over-year advances of 15% for IG
and 53% for high-yield, wherein dollar-denominated bond offerings increased by 5% for IG and advanced by
32% for high-yield.
Q3-2014s worldwide corporate bond issuance revealed annual decline of -10.2% for IG and a rise of 0.4%
for high-yield that included setbacks for US$-denominated issuance of -15% for IG and -1% for high-yield.
Q4-2014s worldwide corporate bond issuance showed annual percent changes of a 3.8% increase for IG
and a -19.7% plunge for high-yield. At the same time, US$-denominated offerings advanced by 17% for IG
and sank by -9% for high yield.
Q1-2015s worldwide corporate bond issuance increased annually by 9.5% for investment-grade and by
12.1% for high-yield; US$-priced offerings the advances were 23% and 29%, respectively.
According to a preliminary estimate, Q2-2015s worldwide offerings of corporate bonds showed annual
percent changes of +5% for IG and -35% for high-yield, wherein US$-denominated supply soared higher by
31% for IG and plunged by -21% for high yield.
For yearlong 2015, worldwide corporate bond offerings are likely to rise by 6% annually for IG and fall by
-11% for high yield.
Through the first 30 weeks of 2015, the year-over-year percent changes for corporate bond issuance were
+23.3% for US$-denominated investment-grade, -3.9% for US$-denominated high-yield, -12.8% for eurodenominated investment-grade, and -39.0% for euro-denominated high-yield.
In 2015, a growing number of bond issues and newly-rated bank loan programs will fund acquisitions and
shareholder compensation. Companies will resort to acquisitions and divestitures in order to better cope
with the USs subpar recovery. To the degree companies fear significantly higher bond yields, pre-fundings
will rise.
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The Long View

US ECONOMIC OUTLOOK

Fed funds should finish 2015 no greater than 0.50%. In view of how persistently high unemployment will
contain wages, low inflation should help to rein in Treasury bond yields. As long as labor is grossly
underutilized and the global economy operates below trend, the 10-year Treasury yield may not remain
above 2.25% for long. A fundamentally excessive climb by Treasury bond yields and a pronounced slowing
by expenditures in dynamic emerging market countries are among the biggest threats to the adequacy of
economic growth and credit spreads going forward.

EUROPE

By Tomas Holinka of Moodys Analytics


July 30, 2015

The Eurozones economic recovery should pick up modestly this year. Moodys Analytics expects the
economy to grow 1.4% this year, up from around 1% in 2014. The European Central Bank is likely to keep
monetary policy very loose for an extended period and maintain its bond purchases through its Expanded
Asset Purchase Program, under which the bank buys 60 billion in assets per month. The program will
continue until September 2016 or until inflation moves closer to target. The yield on Eurozone 10-year
government bonds will remain low longer thanks to the ECBs purchases. Meanwhile, the ECB will gradually
start monetary policy normalization in the first quarter of 2018, pushing the euro zones 10-year
government bond yield to 2.9% by late 2020. The annual inflation rate eased to 0.2% in June from 0.3% in
the previous month. The improving economy, weaker euro, and higher oil prices should put upward pressure
on inflation in coming months. The quantitative easing program has improved credit availability and
continues to support the regions economy. Although Greece and its creditors agreed to a new bailout deal,
avoiding a Greek exit, political uncertainty in Greece remain the greatest threat to the outlook.
U.K. economic growth should moderate in 2015 but remain solid. The economy faces pressure from the
weak recovery in the Eurozone one of Britain's top export markets and the recent strengthening of the
pound against the euro making U.K. exports to the region less cost competitive. Moodys Analytics expects
the economy to grow about 2.4% in 2015, a little down from 3% last year. The Bank of England is likely to
start raising interest rates in the first quarter of next year. Policymakers remain focused on domestic
demand-driven pressures, particularly from the tightening labor market, because they consider that the
downward cost-push pressure on inflation from the recent sharp fall in crude oil prices will be temporary.
The central bankers expect inflation to rise and hit the BoEs target of 2% within the next one to two years.
The U.K. annual headline CPI held steady in June, after increasing 0.1% previously. The main risk to the
outlook is the political uncertainty in Greece and also a threat from U.K. voters deciding to quit the
European Union in the referendum due by the end of 2017.

ASIA PACIFIC

By Faraz Syed and the Asia-Pacific Staff of Moodys Analytics


July 30, 2015

Indias negative output gap is showing little signs of closing in 2015. Though the economy has been in a
cyclical upswing since late 2014, it has failed to gain broader momentum. Green shoots are slowly emerging,
but the governments failure to deliver promised reforms is the major impediment.
Ameliorated by low inflation and better external balances, the once-hawkish Reserve Bank of India has been
proactively cutting rates in 2015. We expect at least one more benchmark rate reduction in 2015 to
complement the 75 basis points already delivered this year. Accommodative monetary policy will lift GDP
to 7.6% in 2015, increasing to 8% in 2016.
Indias political infighting is denting business confidence. Without a majority in the upper house, the ruling
Bharatiya Janata Partys power has been nullified and the opposition has blocked proposed reforms. Key
reforms such as the land acquisition bill, flexible labor laws, and the goods and services tax have failed to
pass parliament. And given the political seesaw, these are unlikely to be delivered until later this year or even
2016.
The downside of not delivering reforms will be punishing. GDP growth is not likely to rise above 7.5% if the
government overpromises and does not deliver.

20

JULY 30, 2015

CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM

CAPITAL MARKETS RESEARCH

The Week Ahead


Ratings Round-Up

Ratings Round-Up
By Njundu Sanneh

US Credit Quality Rises

Weekly rating change data for the US continues to point to enhanced corporate credit quality even as the
ratings of certain sectors such as speculative grade energy companies remain under pressure. The US count
was 13 changes, little different from the 15 of the week before. The percentage of upgrades was 62%, well
above the 50% threshold that shows credit quality advancement.
A more stable metric of credit quality advancement is our three-month moving average of the count of
favorable rating changes as percent of total rating changes, which for the first time since September 2014
scaled the 50% mark at 52% in June. The three-month moving average for the ratio of debt affected by
favorable rating changes to debt affected by total rating changes has also risen above 50% for the past two
months at 57% and 60% for May and June, respectively. While Moodys bank methodology rating changes
have a lot to do with these improvements, the metrics persistently point to credit quality progress after the
effects of the banking methodology review were last felt some three weeks ago.
Advanced Micro Devices, Inc. and Approach Resources, Inc. were notable downgraded companies. The
latter, a speculative grade energy company, is the latest to be downgraded by Moodys as low energy prices
continue to challenge the credit metrics of this sector. Among the upgraded companies were Hawaiian
Holdings, Inc., and Aramark.
The weekly rating change activity for Europe was again muted at only three, comprising two financial
institutions and one industrial. Downgrades bested upgrades by two to one.
FIGURE 1
Rating Changes - US Corporate & Financial Institutions: Favorable as % of Total Actions
By Count of Actions

By Amount of Debt Affected

1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0
Oct03

Sep06

Aug09

Jul12

0.0
Jun15

* Trailing 3-month average


Source: Moody's

FIGURE 2
Rating Key
BCF
CFR
CP
FSR
IFS
IR
JrSub
LGD
LTCF
LTD
LTIR

21

JULY 30, 2015

Bank Credit Facility Rating


Corporate Family Rating
Commercial Paper Rating
Bank Financial Strength Rating
Insurance Financial Strength Rating
Issuer Rating
Junior Subordinated Rating
Loss Given Default Rating
Long-Term Corporate Family Rating
Long-Term Deposit Rating
Long-Term Issuer Rating

MM
MTN
Notes
PDR
PS
SGLR
SLTD
SrSec
SrUnsec
SrSub
STD

Money-Market
MTN Program Rating
Notes
Probability of Default Rating
Preferred Stock Rating
Speculative-Grade Liquidity Rating
Short- and Long-Term Deposit Rating
Senior Secured Rating
Senior Unsecured Rating
Senior Subordinated
Short-Term Deposit Rating

CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM

CAPITAL MARKETS RESEARCH

The
WeekRound-Up
Ahead
Ratings

FIGURE 3 Rating Changes: Corporate & Financial Institutions US


Amount Up/
($ Million) Down

Date

Company

Sector

Rating

7/22/15
7/22/15
7/23/15
7/23/15
7/23/15
7/23/15
7/24/15
7/27/15
7/27/15
7/28/15
7/28/15
7/28/15
7/28/15

ARAMARK - Aramark Services, Inc.


DHM HOLDINGS COMPANY, INC. - Dole Food Company, Inc.
AMERICAN DENTAL PARTNERS, INC.
GROUP 1 AUTOMOTIVE, INC.
MANPOWERGROUP INC.
SVMK INC. - SurveyMonkey Inc.
HAWAIIAN HOLDINGS, INC.
ALTA MESA HOLDINGS, LP
APPROACH RESOURCES INC.
ADVANCED MICRO DEVICES, INC.
IHF HOLDINGS, INC.
MILLENNIUM HEALTH, LLC
PC NEXTCO HOLDINGS, LLC

Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial

SrUnsec/SrSec/LTCFR/PDR/BCF
SrSec/LTCFR/PDR/BCF
SrSec/LTCFR/PDR/BCF
SrUnsec/LTCFR/PDR
SrUnsec
SrSec/LTCFR/PDR/BCF
LTCFR/PDR
SrUnsec/LTCFR/PDR
SrUnsec
SrUnsec/LTCFR/PDR
LTCFR/PDR
SrSec/LTCFR/PDR/BCF
SrUnsec/SrSec/LTCFR/PDR/BCF

1,000
300
550
384
445
450
250
2,050

700

U
U
U
U
U
D
U
D
D
D
U
D
U

Old
New
IG/
LTD
LTD
SG
Rating Rating
B3
Caa1
B2
B1
Baa2
B2
B3
Caa1
B3
Caa1
B3
B2
Caa1

B2
B3
B1
Ba2
Baa1
B3
B2
Caa2
Caa1
Caa2
B2
Caa2
B3

SG
SG
SG
SG
SG
SG
SG
SG
SG
SG
SG
SG
SG

Source: Moody's

FIGURE 4 Rating Changes: Corporate & Financial Institutions EUROPE

Date

Company

7/22/15 CREDINS BANK SH.A.


7/23/15 BANK TECHNIQUE OJSC
7/22/15 ADECCO S.A.

Sector

Rating

Financial
Financial
Industrial

LTD
LTD
SrUnsec/LTIR/MTN

Amount Up/
($ Million) Down

1,900

D
D
U

Old
New
IG/
LTD
LTD
SG
Rating Rating
B1
Caa1
Baa2

B2
SG
Caa2 SG
Baa1 IG

Country
ALBANIA
AZERBAIJAN
SWITZERLAND

Source: Moody's

22

JULY 30, 2015

CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM

CAPITAL MARKETS RESEARCH

Market Data
Spreads
Figure 1: 5-Year Median Spreads-Global Data (High Grade)
Aa2
Spread (bp)

A2

Baa2
Spread (bp)

800

800

600

600

400

400

200

200

0
2003

0
2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Moody's

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


Ba2

B2

Caa-C
Spread (bp)

Spread (bp)

2,000

2,000

1,600

1,600

1,200

1,200

800

800

400

400

0
2003

0
2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Moody's

23

JULY 30, 2015

CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM

CAPITAL MARKETS RESEARCH

CDS Movers
Figure 3. CDS Movers - US (June 17, 2015 June 24, 2015)
CDS Implied Rating Rises
Issuer
Bank of New York Mellon Corporation (The)
Virginia Electric and Power Company
Genworth Holdings, Inc.
Crown Americas LLC
Principal Financial Group, Inc.
Massachusetts Mutual Life Insurance Company
National Retail Properties, Inc.
KB Home
Avon Products, Inc.
Darden Restaurants, Inc.

CDS Implied Ratings


Jun. 24
Jun. 17
Aa2
Aa3
Aa1
Aa2
B2
B3
B3
Caa1
Baa1
Baa2
Baa1
Baa2
B1
B2
B2
B3
Caa1
Caa2
Baa2
Baa3

Senior Ratings
A1
A2
Ba1
Ba2
Baa1
Aa3
Baa1
B2
Ba3
Ba1

CDS Implied Rating Declines


Issuer
John Deere Capital Corporation
Cigna Corporation
General Electric Capital Corporation
AT&T Inc.
Caterpillar Financial Services Corporation
Pfizer Inc.
Amgen Inc.
McDonald's Corporation
Time Warner Inc.
Exxon Mobil Corporation

CDS Implied Ratings


Jun. 24
Jun. 17
A1
Aa2
Aa3
Aa1
A3
A2
Baa2
Baa1
Baa1
A3
Aa1
Aaa
A2
A1
Aa3
Aa2
A1
Aa3
Aa1
Aaa

Senior Ratings
A2
Baa1
A1
Baa1
A2
A1
Baa1
A3
Baa2
Aaa

CDS Spread Increases


Issuer
Sears Holdings Corp.
Nine West Holdings, Inc.
AK Steel Corporation
Chesapeake Energy Corporation
ConAgra Foods, Inc.
Transocean Inc.
Toys 'R' US, Inc.
Frontier Communications Corporation
PHH Corporation
R.R. Donnelley & Sons Company
CDS Spread Decreases
Issuer
Claire's Stores, Inc.
Advanced Micro Devices, Inc.
RentPath, Inc.
McClatchy Company (The)
Peabody Energy Corporation
KB Home
Beazer Homes USA, Inc.
Cincinnati Bell Telephone Company
Southern Copper Corporation
KCP&L Greater Missouri Operations Company
Source: Moody's, MarkIt

24

JULY 30, 2015

Senior Ratings
Caa2
Caa2
Caa1
Ba1
Baa2
Ba1
Caa2
Ba3
Ba3
Ba3

Jun. 24
1,304
1,980
873
498
104
647
1,411
496
345
241

CDS Spreads
Jun. 17
1,043
1,857
824
465
76
619
1,385
473
322
220

Spread Diff
260
122
49
33
29
28
26
23
23
21

Senior Ratings
Caa3
Caa1
B3
Caa2
B3
B2
Caa1
Ba2
Baa2
Baa2

Jun. 24
3,056
710
406
1,049
2,544
301
417
276
173
108

CDS Spreads
Jun. 17
3,219
773
450
1,086
2,579
335
446
302
195
132

Spread Diff
-163
-63
-45
-37
-35
-34
-29
-26
-23
-23

CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM

CAPITAL MARKETS RESEARCH

Figure 4. CDS Movers - Europe (June 17, 2015 June 24, 2015)
CDS Implied Rating Rises
Issuer
France, Government of
Barclays Bank PLC
Ireland, Government of
Portugal, Government of
ABN AMRO Bank N.V.
ING Groep N.V.
Landesbank Baden-Wuerttemberg
ENEL S.p.A.
Volkswagen Aktiengesellschaft
Banca Monte dei Paschi di Siena S.p.A.

CDS Implied Ratings


Jun. 24
Jun. 17
Aa1
Aa2
Baa1
Baa2
A2
A3
Ba1
Ba2
Baa1
Baa2
Baa1
Baa2
A3
Baa1
Baa2
Baa3
A3
Baa1
Ba3
B1

Senior Ratings
Aa1
A2
Baa1
Ba1
A2
Baa1
A1
Baa2
A2
B3

CDS Implied Rating Declines


Issuer
MAN SE
Dexia Credit Local
Nationwide Building Society
DNB Bank ASA
Merck KGaA
DONG Energy A/S
Finmeccanica S.p.A.
Tyco Electronics Group S.A.
Alliander N.V.
Henkel AG & Co. KGaA

CDS Implied Ratings


Jun. 24
Jun. 17
Baa2
A2
Ba2
Ba1
Baa1
A3
Baa1
A3
Aa3
Aa2
Baa2
Baa1
Ba2
Ba1
A3
A2
Baa1
A3
Aa1
Aaa

Senior Ratings
A2
Baa3
A1
Aa3
Baa2
Baa1
Ba1
Baa1
Aa3
A2

CDS Spread Increases


Issuer
MAN SE
Faurecia SA
Vedanta Resources plc
Imerys S.A.
Dexia Credit Local
Coca-Cola HBC Finance B.V.
Banque Federative du Credit Mutuel
ISS Global A/S
Nationwide Building Society
Pohjola Bank plc
CDS Spread Decreases
Issuer
Greece, Government of
Norske Skogindustrier ASA
Alpha Bank AE
Abengoa S.A.
Piraeus Bank S.A.
Portugal Telecom International Finance B.V.
Unilabs Subholding AB
New Look Bondco I plc
Ardagh Packaging Finance plc
VTB Capital S.A.
Source: Moody's, MarkIt

25

JULY 30, 2015

Senior Ratings
A2
B1
Ba3
Baa2
Baa3
Baa1
Aa3
Baa3
A1
Aa3

Jun. 24
79
306
567
162
175
84
64
57
62
87

CDS Spreads
Jun. 17
50
278
553
150
171
80
61
54
60
86

Spread Diff
29
29
14
11
4
4
3
3
2
2

Senior Ratings
Caa2
Caa3
Caa3
B2
Caa3
Ba2
Caa2
B3
Caa1
Ba1

Jun. 24
2,166
2,799
1,384
985
1,628
476
388
125
379
497

CDS Spreads
Jun. 17
3,448
2,994
1,515
1,114
1,731
526
435
168
421
534

Spread Diff
-1,281
-196
-131
-129
-103
-49
-47
-43
-42
-37

CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM

CAPITAL MARKETS RESEARCH

Issuance
Figure 5. Market Cumulative Issuance - Corporate & Financial Institutions: USD Denominated
2012

Issuance ($B)

2013

2014

Issuance ($B)

2015

1,800

1,800

1,500

1,500

1,200

1,200

900

900

600

600

300

300

0
Jan Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Source: Moody's / Dealogic

Figure 6. Market Cumulative Issuance - Corporate & Financial Institutions: Euro Denominated
Issuance ($B)

2012

2013

2014

Issuance ($B)

2015

1,000

1,000

800

800

600

600

400

400

200

200

0
Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Source: Moody's / Dealogic

Figure 7. Issuance: Corporate & Financial Institutions

Weekly
Year-to-Date

Weekly
Year-to-Date

Investment-Grade
Amount
$B
28.607
754.186

USD Denominated
High-Yield
Amount
$B
6.000
227.498

Total*
Amount
$B
34.892
1,025.601

Investment-Grade
Amount
$B
2.529
389.877

Euro Denominated
High-Yield
Amount
$B
0.253
59.573

Total*
Amount
$B
3.165
474.878

* Difference represents issuance with pending ratings.


Source: Moody's/ Dealogic

26

JULY 30, 2015

CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM

CAPITAL MARKETS RESEARCH

Moodys Capital Markets Research recent publications

https://www.moodys.com/research/Market-Signals-Review-Ford-Motor-Co-Market-Signals-on-Cruise-PBC_1007073
https://www.moodys.com/research/Market-Signals-Review-Campbell-Soup-Co-EDF-and-Bond-Implied-PBC_1007056
https://www.moodys.com/research/Market-Signals-Review-American-Express-Co-CDS-Implied-Rating-Rises-PBC_1007016
https://www.moodys.com/research/Sovereign-Risk-Report-Emerging-Markets-Sovereign-Default-Risk-Rises-In-PBC_1006915
https://www.moodys.com/research/Market-Signals-Review-Goldman-Sachs-CDS-Implied-Rating-Advances-PBC_1006916
https://www.moodys.com/research/Market-Comment-MA-Frenzy-Roils-Ratings-and-Pumps-Up-Debt-PBC_1006900
https://www.moodys.com/research/Market-Signals-Review-Wells-Fargo-Companys-Market-Signals-FollowDissimilar--PBM_1006858
https://www.moodys.com/research/US-Bond-Offerings-to-Slow-As-Risks-Rise-Capital-Markets--PBC_183308
https://www.moodys.com/research/Market-Signals-Review-UBSs-Market-Implied-Ratings-All-Improve-PBM_1006874
https://www.moodys.com/research/Market-Signals-Review-Citigroup-Inc-Two-Market-Implied-Ratings-Rally-PBM_1006826
https://www.moodys.com/research/Market-Signals-Review-Morgan-Stanley-Two-Market-Implied-RatingsImprove--PBM_1006811
https://www.moodys.com/research/Market-Signals-Review-JPMs-Market-Implied-Ratings-Follow-Different-Paths-PBM_1006795
https://www.moodys.com/research/Market-Signals-Review-International-Paper-Co-Market-Implied-RatingsFollow--PBC_1006750

These and others are also available at: http://www.moodys.com/cmrg

27

JULY 30, 2015

CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM

CAPITAL MARKETS RESEARCH

To order reprints of this report (100 copies minimum), please call 212.553.1658.

Report Number: 183469

Contact Us
Americas :

Editor
Dana Gordon

Europe:
Asia:

1.212.553.4399
+44 (0) 20.7772.5588
813.5408.4131

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CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM