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WEEKLY MARKET OUTLOOK

MARCH 5, 2015

CAPITAL MARKETS RESEARCH

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Corporate Issuance Surge Lifts Treasury Yields

Credit Markets Review and Outlook by John Lonski Corporate Issuance Surge Lifts Treasury Yields.

FULL STORY PAGE 2

Topic of the Week by Ben Garber An Aggressive Fed Would Roil Corporate Credit.

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 9

The Long View Check our chart here for forecast summaries of key credit market metrics. Full updated stories: For January-February 2015, the issuance of US$-denominated corporate bonds surged higher by 21% for investment grade and by 30% for high yield, begin on page 19.

FULL STORY PAGE 19

Ratings Round-Up by Njundu Sanneh Downgrade of Russia Has Repercussions, Part Two.

FULL STORY PAGE 22

Market Data Credit spreads, CDS movers, issuance.

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Moodys Capital Markets Research recent publications Links to commentaries on: Bank risk, STT, US risk, HCA, Greece, defaults, STI, PEMEX, HIG, RF, Ukraine, Greece, Cigna.

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Credit Spreads

Investment Grade: Year-end 2015 spread to be under its recent 132 bp. High Yield: Recent spread of 447 bp could dip to 435 bp by year-end 2015.

Defaults US HY default rate: Jan 2015, 1.9%; 2.4% average in 2H/2015

Issuance For 2015, US$ IG bond offerings may grow by 10% to $1.246 trillion, while US$ HY bond issuance sinks by -5% to $398 billion. In 2014, US$ IG bond issuance rose by 0.9% to $1.129 trillion, while US$ HY bond issuance dropped by -2.3% to $421 billion.

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 Capital Markets Research, Inc.

Weekly Market Outlook Contributors: David W. Munves, CFA 1.212.553.2844 [email protected] John Lonski 1.212.553.7144 [email protected] Ben Garber 1.212.553.4732 [email protected] Njundu Sanneh 1.212.553.4036 [email protected] Yukyung Choi 1.212.553.0906 [email protected] Irina Baron 1.212.553.4307 [email protected] Franklin Kim 1.212.553.4419 [email protected] Xian (Peter) Li 1.212.553.1404 [email protected]

Moody's Analytics/Europe: Zach Witton 44 (20) 7772-1678 [email protected]

Moody's Analytics/Asia-Pacific: Alaistair Chan 1.612.9270.8118 Alaistair.Chan @moodys.com

Editor Dana Gordon 1.212.553.0398 [email protected]


2 MARCH 5, 2015 CAPITAL MARKETS RESEARCH, INC. / MARKET OUTLOOK / MOODYS.COM

Credit Markets Review and Outlook

Credit Markets Review and Outlook By John Lonski, Chief Economist, Moodys Capital Markets Research, Inc.

Corporate Issuance Surge Lifts Treasury Yields Though the 10-year Treasury yield jumped up from February 2015s month-long average of 1.97% to a recent 2.12%, higher Treasury bond yields may not be largely the offshoot of more strongly held expectations of Fed rate hikes. To the contrary, the futures market still projects a year-end 2015 federal funds rate that is no higher than a range of 0.5% to 0.75%, where the first rate hike may not occur until September 2015. Better yet, the futures markets estimate of the average effective federal funds rate for December 2015 has dropped from the 0.575% of mid-February 2015 to a recent 0.500%.

Instead, Treasury bond yields have been pushed higher by a powerful surge in corporate bond issuance. The hedging of new inventories of corporate bonds and the replacement of existing Treasury bonds with new corporate debt has, at least, temporarily lifted Treasury yields. A clearer view regarding the likely direction for Treasury bond yields must wait for forthcoming data that will reveal whether or not the world economy can shoulder much higher US Treasury yields. The strength of the dollar exchange rate is but one indication showing how markets are not demanding a rate hike from the Fed. Nevertheless, the Fed probably wants to begin gradually hiking rates later in 2015 provided that doing so will not disrupt financial markets by enough to materially weaken business activity.

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Euro Investment-grade Financial Company Bond Yield

US Investment-grade Financial Company Bond Yield

Figure 1: Euro Investment-Grade Financial Company Bond Yield Was Recently -131 bp Under Compar Comparable US Yield: %; source: Barclays Capital, MCMRG

ECB policy drives euro borrowing costs well under dollar interest rates Barclays Capitals recent investment grade corporate bond yields for financial companies were 2.73% when denominated in dollars and 1.41% when denominated in euros. For investment grade industrial companies, the yields were 3.17% in dollars and 1.26% in euros. (Figure 1.)

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EU Investment-grade Financial Company Bond Yield Spread

US$ Investment-grade Financial Company Bond Yield Spread

Figure 2: Euro Investment-Grade Financial Company Bond Yield Spread Is Only 19 bp Thinner Than Than Comparable US Spread: bp; source: Barclays Capital, MCMRG




In addition, the accompanying investment grade yield spreads were (i) 112 bp in dollars and 93 bp in euros for the financials and (ii) 130 bp in dollars and 79 bp in euros for the industrials. (Figure 2.)

Despite the lackluster pace of global expenditures, each of the aforementioned spreads is significantly thinner than its average of the year-ended June 2012, or just prior to Mario Draghis pledge to do whatever it takes to save the euro. The average spreads of the year-ended June 2012 were (i) 274 bp in dollars and 347 bp in euros for the financials and (ii) 166 bp in dollars and 199 bp in euros for the industrials. (Figure 3.)

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Euro Investment-grade Industrial Company Bond Yield Spread

US$ Investment-grade Industrial Company Bond Yield Spread

Figure 3: US$ Investment-Grade Industrial Company Bond Yield Spread Goes from 33 bp Less Than Than Euro Spread During Year-ended June 2012 to Topping Euro Spread by 51 bp: source: source: Barclays Capital, MCMRG

The now thinner spreads of euro-denominated corporate bonds compared to dollar-denominated corporates must be interpreted with caution. Major differences in the expected direction of monetary policy across countries add to the difficulty of comparing the yield spreads across currencies.

For example, in response to the ECBs forthcoming bond buying program that has already pushed the five-year German government bond yield below 0%, a stronger-than-otherwise demand for euro-priced investment grade corporate bonds has helped to narrow the spread of euro-denominated corporate bonds relative to the spread of dollar-denominated corporates.

Baa-grade yields in euros now trail Aaa yields in dollars It should be noted that the benefits of extraordinarily cheap euro-priced corporate bonds apply to companies based outside of Europe. In early March, Kelloggs issued a 10-year Baa2-rated euro-denominated bond at an offering yield of 1.25%, where the latter was well under the 2.71% yield of Exxons recent 10-year Aaa-rated dollar-denominated bond.

In February, the median offering yield of 10-year dollar-denominated bonds from medium grade US corporate issuers approximated 3.45%. By contrast, the median offering yield of 10- to 12-year euro-denominated bonds from medium-grade US corporate issuers approximated a much lower 1.72%. (Figure 4.)

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Euro Investment-grade Industrial Company Bond Yield

US$ Investment-grade Industrial Company Bond Yield

Figure 4: US$ Investment-Grade Industrial Company Bond Yield Was Recently 191 bp Above Euro Euro Industrial Yield: source: Barclays Capital, MCMRG




Yield spreads are unlikely to return to four-year averages of mid-2007 During the prime years of the previous credit cycle upturn, or the four-years- ended June 2007, Barclays Capitals investment grade yield spreads averaged (i) 74 bp in dollars and 50 bp in euros for financial companies and (ii) 106 bp in dollars and 66 bp in euros for the industrials. Even if global business activity well exceeds expectations, a quick return to those four-year averages is unlikely, first, because of a diminution of credit quality and, second, because of heightened uncertainty surrounding the adequacy of liquidity during the next outbreak of pronounced systemic stress.

Medium grade now dominates outstandings and issuance of US investment-grade The downshifting of the US investment grade corporate bond market from high grade to medium grade highlights the riskier tone of investment grade. During 2003-2007, medium grade bonds, or those rated A3 or Baa, averaged 37% of the outstandings of US investment grade bonds. As of 2014s final quarter, that share had soared to 64%. Prior to 2010, medium grades share of outstandings had peaked at the 45% of 1993s third quarter. (Figure 5)

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Medium-Grade Bonds (Rated A3 or Baa) as % of US Investment-grade Corporate Bonds (excludes ABS & MBS)

Figure 5:Medium-Grade's Share of Outstanding US Investment-Grade Corporate Bonds Soars from 2003-2007's 37% 37% to Q4-2014's 64%: excludes ABS & MBS

For 2015s first two months, the 21% annual increase by dollar-denominated investment grade bond issuance consisted of gains of 25% for medium grade offerings and 16% for high grade supply. During the 12-months-ended February 2015, medium grade supplied 57% of dollar-denominated investment grade bond offerings. By contrast, that share was a much smaller 31% during the four-years-ended June 2007. The danger with this changed distribution is that medium grade borrowers might be quicker to downsize outlays compared to high grade companies once macro risks mount.

Regulatory unknowns now limit spread narrowing All else the same, bondholders now demand greater risk premiums than in the past because of worry regarding the adequacy of liquidity amid considerable stress. Concern over sufficient liquidity when such adequacy matters the most stems from the more stringent regulatory capital requirements now facing banks and uncertainty as to whether or not the Fed and US Treasury will expeditiously rescue systemically important companies that are on the brink of failure. By slowing or blocking the remedial powers of the Fed and Treasury, regulatory changes following from the financial crisis may have the unintended effect of amplifying contagion risks during the next bout of surging defaults and diminished access to liquidity.




Topic of the Week By Ben Garber, Economist, Moodys Capital Markets Research, Inc.

An Aggressive Fed Would Roil Corporate Credit Currently promising job and wage growth is making the Federal Reserve increasingly comfortable with the idea of lifting policy interest rates. But a steady tightening pace would conflict with credit market investor projections for much more infrequent rate hikes. Corporate credit markets could face substantial losses if the Feds policies contradict the subdued inflation expectations that are implied by current bond yields. Ultimately, restricted growth for wages and prices can prevent a disorderly constriction of monetary policy.

Historically, rate hikes have fueled substantial credit market losses Following remarkably steady hiring strength, wages appear to be perking up, with average hourly earnings making an eight-year-high monthly advance of 0.5% in January. Seeking to get ahead of any potential inflationary outbreak, the Federal Reserve is likely to drop its pledge to be patient about lifting the fed funds target at its March meeting. This would open the door to a possible June rate increase, the first such move in nine years. The timing of policy tightening will substantially affect the value of corporate credit.

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Figure 1: Annual Change In Fed Funds Rate vs High Grade Corporate Bond Price Returns

X-Axis: YoY Change in Fed Funds in %Y-Axis: YoY % Price Return of US Investment Grade Corporate Bond IndexOrange Line: Line of Best Fit

Sources: Federal Reserve, Barclays

When fed funds hikes have come in rapid succession, some of the poorest credit market returns on record have been recorded (Figure 1). In data stretching back over 40 years, when the fed funds rate has risen at least 0.25% yearly, the median yearly change in the price of investment grade US corporate bonds in the Barclays index has been a decline of 3.7%. However, in the lower range of rate hikes losses are greatly limited. Indeed, when the yearly change in fed funds ranged from 0.25% to 1%, investment grade bond prices actually showed a median increase of 0.2%. Shifting up to an annual rate hike pace of 1% to 2% greatly increased incidence of credit losses, with a median yearly price decline of 3.1%. Given that the current average coupon on investment grade corporates is now at a record low of 4.42%, rapid rate hikes would leave little room for generating positive returns.

The last rate tightening cycle was a prime example of Fed policy weighing on credit markets. Consistent quarter-point rate increases in 17 meetings from mid-2004 to mid-2006 brought an extended stretch of 2% annual gains in the fed funds target. The peak price decline for investment grade corporate bonds of 7.5% yearly came toward the end of that period. Current FOMC projections for the fed funds rate to rise from 1.125% at the end of this year to 2.5% at the end of 2016 are not as hurried a the pace as seen a decade ago. Yet markets are not prepared for even this somewhat measured course of interest rate rises.

Topic of the Week




Markets foresee an especially slow tightening pace The fed funds futures market foresees a far more protracted tightening cycle than what the FOMC projects (Figure 2). The market projects a 0.51% target for the fed funds in December of this year rising to just 1.37% at the end of next year. Limited inflation and weak global growth prospects can direct the Fed to slow down to the markets cautious pace. The projected divergence between the Feds forecast and that of the futures market widens over time, with the FOMC end of 2017 rate target of 3.625% far above the futures markets 1.675% value. Investors are far more skeptical than the Fed that the US economy can break out of below average economic and price growth trends in the long term.

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Figure 2: Fed Funds Rate Projected by the FOMC and the Futures Market

Fed Funds Rate Projected by Futures Market Fed Funds Rate Projected by FOMC

Sources: Federal Reserve, Bloomberg

Diminished expectations about the future are seen in long-term market-derived inflation expectations. The five-year five-year forward inflation expectations rate derived from nominal Treasury and real TIPS yields recently projected average annual inflation of 2.0% from five to ten years from now. That value is significantly under the 2.6% average of the past five years and gives little prospect for upside inflationary breakouts. Yet the Fed is highly skeptical of this development, citing in recent meeting minutes that falling market inflation expectations are coming from the decline in term premiums as opposed to rising inflation compensation built into Treasury prices. The term premium measures the portion of debt yields that investors demand for the risk of buying longer-term debt. Robust overseas demand for Treasuries in light of global economic weakness and the strong dollar is suspected to have erased the term premium. If this is the case, then the Fed can be assured that inflation will trend higher over time, given consistently elevated measures in consumer and business surveys.

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Figure 3: 2-yr Treasury Yield vs 1-yr 1-yr Forward Rate2-year Treasury Yield: % 1-year 1-year Forward Rate: %

Sources: Federal Reserve, Bloomberg

Topic of the Week




If long-term inflation signals are in doubt, predictions of short-term rate measures still reflect some skepticism of the FOMCs rate hike plans (Figure 3). The recent two-year Treasury yield is closely attuned to the path of monetary policy. With the latest rate on this security at 0.68%, holders of this debt envision the fed funds rate falling well short of the 3% mark projected by the FOMC when this note matures. Locking in borrowing costs over a years time frame starting one year from now carries an interest rate of 1.36% as seen in the one-year one-year forward swap rate. That value similarly points to a very sporadic approach to interest rate increases from the Fed. Investors have concluded that medium-term inflation pressures will be subdued, holding back potential interest rate gains.

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Figure 4: Unemployment Rate vs Core PCE Price Index

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Sources: BLS, BEA

X-Axis: Unemployment Rate: %Y-Axis: Core PCE Price Index: YoY % Change

Falling unemployment has not pressured prices Credit market participants suspect that the substantial decline in unemployment will not greatly lift prices and wages. The relationship captured in the traditional Phillips curve that would have falling unemployment greatly boosting inflation has not been strongly evident in recent history (Figure 4). Since 1990, the unemployment rate has been under 5% for a cumulative 77 months, yet the average annual gain in the core Personal Consumption Expenditures Price Index in those observations has been just 1.8%. Factors such as the increasingly globalized labor force and remaining domestic slack have complicated the tradeoff between prices and job growth. Inflation trends have been greatly moderated since the 1970s and 1980s, when core PCE grew an annualized 5.5%. It therefore should behoove the Fed to look for more decisive evidence of rising prices, going beyond the falling unemployment rate and strong monthly nonfarm payroll gains.

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Figure 5: Price Growth vs Wage and Benefit Growth less ProductivityCore PCE Price Index: YoY % Change

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*2-year annualized change in productivity, sources: BLS, BEA

Topic of the Week




Looking directly at trends in wage and productivity growth gives little upside for price growth. One way to estimate potential inflation is observing the degree to which the Employee Cost Index measure of compensation is exceeding the growth in non-farm productivity (Figure 5). Last quarter, yearly compensation growth of 2.3% exceeded the two-year annualized 0.9% pace of productivity growth by 1.4%. That 1.4% rate exactly equals the 1.4% yearly advance for the core PCE price index over the same period. So although productivity is not advancing at an especially quick rate, restrained compensation growth is dampening price growth. Unless wage growth is observed to accelerate for an extended period, inflation risks with be minimal. Without evidence of rising inflation, the Fed will approach policy tightening with the extreme caution that credit market investors expect.

Topic of the Week

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, MARCH 6

Employment Report February Time: 8:30 am Forecast: 235,000 nonfarm payrolls, 5.6% unemployment rate The unemployment rate may slide to a seven-year low as the robust pace of hiring continues in February. Nonfarm payrolls have increased by over 200,000 jobs per month for 11 consecutive months, which hasnt happened in almost 20 years. Yet the number of workers with part-time jobs who want full-time work remains well above the levels of the previous expansion, limiting upward pressure on wages.

Trade Balance January Time: 8:30 am Forecast: -$41.5 billion The US trade deficit can narrow substantially in January after widening to a two-year high in December. Exports fell significantly in the last two months of 2014, with diminished overseas growth prospects curtailing demand for US goods. Yet firmer growth in Europe can help stabilize US exports, and reduce the drag on overall US growth.

THURSDAY, MARCH 12

Retail Sales February Time: 8:30 am Forecast: 0.5% overall, 0.5% ex auto Perkier wage growth can feed a strong February result for retail sales. Wage and salary income growth has maintained an annual pace near 5% since the middle of last year, giving the means for solidly positive retail results. This is seen in the recent 4.8% year-over-year gain in quarterly retail sales excluding autos and gasoline, which equals the fastest pace in almost three years.

Import Price Index February Time: 8:30 am Forecast: 0.1% A respite from oils relentless decline can help the Import Price Index rise in February for the first time in eight months. But continued oil supply growth argues against a lasting reversal of the deflationary commodity price trend. In January the Import Price Index stood 12% below its high of the current expansion, helping reduce costs for many US firms.

Business Inventories January Time: 10:00 am Forecast: 0.1% A more cautious business outlook can limit the rise in January business inventories. This trend was seen in substantial downward revisions to fourth quarter inventory increases, which took a large chunk out of overall GDP growth. Yearly business sales growth slowed to the three quarter low of 2.1% last quarter, which can dampen the pace of business investment.

FRIDAY, MARCH 13

Producer Price Index February Time: 8:30 am

The Week Ahead



Forecast: 0.3% overall, 0.1% core Higher fuel costs in February will only partly reverse the deep monthly dive in Januarys Producer Price Index. The core PPI showed more widespread evidence of price weakness, slowing to an annual rate of 1.6% from 2.1% in the previous month. That brings core business price growth in line with weak consumer price trends, pointing to a widening picture of especially weak inflation.

University of Michigan Consumer Sentiment March Preliminary Time: 10:00 am Forecast: 96.0 Consumer confidence in the Michigan survey can turn higher amid evidence of decent job and wage growth. With major retailers raising their minimum wage, low income earners are given more security and higher spending potential. If this trickles up to middle-income workers, the economy will find itself much closer to being healed.

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

Focus: Inflation and industrial production remain concerns Falling consumer prices remain a major concern for the European Central Bank, which on Thursday was to begin its government bonds purchase scheme. According to the preliminary estimate, consumer prices fell 0.3% y/y in February, less than the 0.6% decline recorded in the previous month. The drop in oil prices appears to be moderating, with Brent crude even rising to $61.8 per barrel at the end of February.

Next week will bring disaggregation of the euro zone's inflation number. We expect it to show prices increased marginally in year-ago terms in Germany, following their first contraction since September 2009 in the previous month. In Italy, inflation likely reached 0.1% y/y in February following a 0.5% drop in the previous month, and the fall in prices in Spain likely eased to 1.1% y/y from 1.3% in January. Meanwhile in France, the CPI contraction likely held steady at 0.4%.

High-frequency data will shed light on industrial production at the start of the year. On average, euro area production likely ticked up in January from the previous month but remained almost flat in year-ago terms. Production in France and Italy continued to improve in January, though the rates of increase for both countries remained sluggish.

Still, production will remain under pressure in the single-currency area. The Markit manufacturing PMI for the region was unchanged at 51 in February, indicating continued improvement in business conditions, though at a slow rate. The state of manufacturing continues to diverge across the region. While Irelands PMI jumped to a 15-year high in February, in France the reading dropped to a 2-month low, falling below that of Greece. Countries where PMIs improved slightly in February include Italy and Germany, though the sluggish expansion of German manufacturing remains a concern. Output growth in Spain slowed slightly over the month.

FRIDAY, MARCH 6

France Fiscal balance January Time: 8:00 a.m. GMT Forecast: -10 billion Frances fiscal balance is expected to have started the new year with a deficit of 10 billion, improving slightly on a year-ago basis. France's budget deficit is likely to have been around 4.4% of GDP for all of 2014, and will not go below 3% until 2017. Spending by central and local governments, including for social welfare, was cut by about 15 billion in 2014 and is expected to be trimmed by an additional 50

The Week Ahead



billion by 2017. Still, tax relief for businesses, phased in in mid-2014, continue to weaken budget revenues.

France Trade balance January Time: 8:00 a.m. GMT Forecast: -3.6 billion Frances foreign trade deficit likely widened somewhat, seasonally adjusted, in January. Cheap energy, low GDP numbers, high unemployment, and tight credit have likely kept a lid on imports. Nevertheless, export activity remains subdued as well and will continue to improve only very slowly. France is still struggling with low competitiveness, and external demand from other euro zone countries is picking up only at a snail's pace.

Spain Industrial Production January Time: 8:05 a.m. GMT Forecast: -0.6% y/y Spains industrial production likely declined moderately, not seasonally adjusted, on a year-ago basis in January, extending the declines from the previous two months. The main driver was likely contraction in the energy sector, which reflects the global decrease in energy prices and not domestic conditions. In coming months industrial production will be supported by continued strong domestic demand and the euro's depreciation, which lifts demand from outside of the euro zone. High-frequency indicators signaled a good economic performance in the first quarter. On the other hand, the increased uncertainty due to political developments in Greece is likely to put downward pressure on industrial production. Longer term, industrial production should benefit from the drop in Spains unit labor costs in recent years on the back of improved labor market flexibility.

United Kingdom Halifax Housing Price Index February Time: 9:30 a.m. GMT Forecast: 8.9% y/y The U.K. Halifax house price index is expected to have increased in annual terms in the three months to February by more than in the previous period. Recent changes to stamp duty on residential properties likely boosted activity. Yet house prices probably remained under pressure from uncertainty about the outcome of the general election in May, the recent introduction of tighter mortgage loan standards, and the prospect of official interest rates starting to rise before the end of the year.

Euro Zone GDP 2014Q4 Time: 10:00 a.m. GMT Forecast: 0.3% q/q The euro zones real GDP growth accelerated 0.3% q/q in the three months to December from a 0.2% gain in the previous quarter, according to the preliminary estimates. Among the euro zone countries, Germany's and Spain's economies climbed 0.7% and France's economy grew 0.1% on a quarterly basis, while Italy remained stagnant. Growing real wages and reduced energy prices likely supported household consumption, while the weakening euro boosted demand for exports outside the region. The biggest downside risk in coming months comes from the risk of a Greek disorderly default and exit from the euro zone.

Germany Industrial Production January Time: 11:00 a.m. GMT Forecast: 0.8% m/m German industrial production rose marginally in December from the previous month. More worryingly, output fell in year-ago terms for a second consecutive month. Manufacturing will remain under pressure in the coming months, as weak domestic and external demand has been weighing on the economy. Germany's Markit manufacturing PMI for January fell to 50.9 from 51.2 in the previous month, pointing to only modest growth in the sector in coming months. Still, thanks to stronger manufacturing orders at the end of last year, we expect that industrial production expanded from the previous month in January.

Italy Producer Price Index January Time: 11:00 a.m. GMT Forecast: -1.8% y/y

The Week Ahead



Italys producer prices likely continued to decline in January from a year earlier. The weak economy and falling oil prices contribute to the deflationary environment. Energy costs will ease further, as the price of Brent crude oil dropped by around 50% in year-ago terms by mid-February, while food prices will also remain low because of oversupply in Europe after Russias food import ban. On the other side, the weakening euro will likely increase import prices, contributing to higher inflation.

MONDAY, MARCH 9

Germany Foreign Trade January Time: 8:00 a.m. GMT Forecast: 21 billion Germany's trade surplus jumped to 21.8 billion in December from 17.9 billion in the previous month as exports rose while imports fell. The surplus expanded from December 2013 when it reached 16.9 billion. The weaker euro supported German exports at the end of last year and will boost them this year. The euro fell to $1.16 on average in January from $1.23 in December and weakened further to $1.13 in February. On the other hand, the trade surplus will be dampened by the euro zones stalling recovery, while continued political tensions with Russia and a slowdown in Asia have affected exports outside the euro area. We expect the surplus narrowed slightly to 21 billion in January.

Germany Vehicle Registration February Time: 11:30 a.m. GMT Forecast: 3% y/y Registrations of passenger cars increased in year-on-year terms in January, although the rate of growth eased markedly from the previous month. Consumers are remaining cautious because of the uncertain outlook, though sentiment has been improving. The Markit Germany retail PMI rose to 52.3 in January from 51.7 in November, indicating improvement in retail sales in coming months, which could also support new-car registrations. Registration likely continued to increase in February with the pace ticking up to 3% y/y.

TUESDAY, MARCH 10

France Industrial Production January Time: 7:45 a.m. GMT Forecast: 0.1% m/m Frances industrial production likely expanded in January both q/q and y/y. French manufacturing business conditions improved a little in January, with the headline Markit PMI for manufacturing at 49.2, up from 47.5 in December. 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 in Ukraine and Russia.

Spain Retail Sales January Time: 8:05 a.m. GMT Forecast: 4.3% y/y Spains retail sales jumped 4.7% in year-ago terms in December after gaining 0.5% previously. Sales of both food and nonfood products increased. Spain's economic recovery continues, with household consumption driving the rebound. Accelerating real wages provide support to real disposable income, and consumers also profit from reduced energy prices. Retail sales are increasing despite the risk of deflation and weak outlook for the euro zone. Spain's GDP grew 0.7% in the last quarter of 2014.

Italy Industrial Production January Time: 9:00 a.m. GMT Forecast: 0.3% m/m Italys industrial production likely improved further in January, following 0.4% growth in the previous month. Italys manufacturing got off to a promising start in 2015, with the business confidence indicator rising to 99.1 in February, while the purchasing managers index for manufacturing increased to 51.9, the highest since July 2014. Lower oil prices and improved investor optimism in the euro zone resulting from the European Central Bank's recently announced quantitative easing scheme support the rebound.

The Week Ahead



WEDNESDAY, MARCH 11

United Kingdom Industrial Production January Time: 9:30 a.m. GMT Forecast: 0.1% m/m The U.K. industrial production index likely rose in January. Recent robust growth probably supported domestic demand for manufactured goods. Also, the pound has weakened about 10% against the dollar since mid-2014, which should have boosted the cost competitiveness of British exports in the U.S., one of the U.K.s key trading partners. Yet the demand for exports of industrial goods likely remained under pressure from the weak economic recovery in the euro zone, which contains other key U.K. trading partners. The purchasing managers index for manufacturing fell in January but remained in the territory associated with expansion, suggesting industrial production rose.

Italy GDP 2014Q4 Time: 10:00 a.m. GMT Forecast: 0.0% Italys economy stalled in the three months through December, following a 0.1% q/q contraction in the third quarter. In year-earlier terms, output fell by 0.3% after a 0.4% decrease in the third quarter, according to preliminary estimates. With domestic demand weak, foreign demand likely remained the major driver of growth, supported by the weaker euro. Nevertheless, after three years of contraction, the Italian economy will likely rebound in 2015, with real GDP increasing about 0.4%. Support to Italy's economy will come from accelerating credit growth and falling interest rates together with a less restrictive fiscal policy and strong foreign demand.

OECD Composite Leading Indicators January Time: 11:00 a.m. GMT Forecast: 100.6 The OECD composite leading indicator likely rose slightly in January. Gains in the sub-indicators for the U.S. and Japan probably more than offset a fall in those for Russia. Moodys Analytics expects U.S. real GDP growth to accelerate to 3.6% this year from 2.4% in 2014. Similarly, Japans economic growth is expected to pick up to 1.2% after it barely grew last year. In contrast, Russias economy is forecast to contract 3% in 2015, following growth of only 0.5% last year.

THURSDAY, MARCH 12

Germany Consumer Price Index February Time: 7:00 a.m. GMT Forecast: 0.1% y/y According to preliminary estimates, inflation ticked up marginally in February. The consumer price index rose 0.1% y/y, following a 0.4% drop in the previous month. In month-ago terms, inflation rose 0.9%. Meanwhile, the EU- harmonized measure likely fell 0.1% y/y. Declines in both energy and food prices eased in February, while the increase in prices of services accelerated slightly.

France Consumer Price Index February Time: 7:45 a.m. GMT Forecast: -0.4% y/y Frances annual EU-harmonized consumer price growth likely remained marginally negative in February. We expect the annual prices of fuels dropped again, while the prices of high-value-added imports likely increased. Meanwhile, the euro remained weaker against the dollar. Similarly, domestic demand created no significant pressures as high unemployment and the weak economy dragged on it.

Spain Consumer Price Index February Time: 8:05 a.m. GMT Forecast: -1.1% y/y Spains national consumer price index fell 1.3% y/y in January following a 1% decline in the previous month. The main drag was a noticeable price decline in the communications and transport segments. The

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prices of food, housing, and clothing also decreased as weak demand, subsequent deflation in the euro area, and falling oil prices put downward pressure on the CPI. While this will be partly offset by the weakening euro, deflation will likely persist in 2015. However, retail sales increased in December as consumers increased their spending because of lower prices. Output also grew in the last quarter and Spain is clearly on a recovery path despite declining consumer prices.

United Kingdom Foreign Trade January Time: 9:30 a.m. GMT Forecast: -9.5 billion The U.K. foreign trade deficit likely narrowed in January. Exports probably gained ground because the pound has weakened about 10% against the dollar since mid-2014, which should have boosted the cost competitiveness of British exports in the U.S. Yet exports remained under pressure from the weak economic recovery in the euro zone, which contains key U.K. trading partners. At the same time, solid domestic demand probably supported imports.

Euro Zone Industrial Production January Time: 10:00 a.m. GMT Forecast: 0.3% m/m Euro zone industrial production was unchanged on a monthly basis in December, following a revised 0.1% increase in the previous month. In annual terms, production declined 0.2% after falling 0.8% in November. Manufacturing in the euro zone will remain under pressure in the coming months from the stalling recovery and continued geopolitical tensions. The Markit manufacturing purchasing managers' index remained at 51 in February, but economic performance was uneven across the region. We expect industrial production ticked up in January from the previous month but remained almost flat in year-ago terms.

Germany House Price Index February Time: 10:45 a.m. GMT Forecast: 6% y/y New-home prices rose 6.4% y/y in January, following a 5.2% gain in the previous month. The prices of existing homes and apartments also increased in annual terms. Weak inflation, low interest rates, and low unemployment are keeping demand for houses stronger than in other euro zone countries. A revival in supply could ease price pressures, but the Markit construction PMI dropped to 49.5 in January from 50.5 in the previous month, indicating a marginal drop in activity. We expect house prices continued to increase strongly in February.

FRIDAY, MARCH 13

Italy Consumer Price Index February Time: 9:00 a.m. GMT Forecast: 0.1% y/y Italys harmonized consumer prices rose 0.1% y/y in February, according to the preliminary estimates, following a 0.5% decline a month earlier. Excluding energy, inflation accelerated to 1% in February from 0.7% previously. Low oil prices will persist for some time, as U.S. crude inventories have jumped to their highest levels since 1982. Although oil prices should recover later this year, the price growth will be moderate. This will weigh on consumer inflation. Food prices will also remain low, as Russias import ban on agricultural products may cause an oversupply that curbs inflation. Nevertheless, the weakening euro will likely push up import prices, contributing to higher inflation in the coming months.

Russian Federation Monetary Policy March Time: 9:30 a.m. GMT Forecast: 15% Russia's main monetary policy rate will likely be unchanged, after it was unexpectedly cut to 15% from 17% in January. Russias central bank lowered its main interest rate as concern over a looming recession took precedence over stabilizing the ruble and taming inflation. Worsening tensions in Ukraine are prompting threats of stiffer sanctions as oil heads for its seventh straight monthly decline, forcing the economy of the worlds largest energy exporter to the brink of recession.

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ASIA-PACIFIC By the Asia-Pacific Staff of Moodys Analytics, Sydney Release times are Greenwich Mean Time

China's January-February data will highlight effects of monetary easing China's consolidated January-February data for industrial production, fixed asset investment, and retail spending will give insight into how the November interest rate cut and February bank reserve ratio cut have affected real activity, if at all. Conditions in China overall remain weak, the economy is still growing below its potential, and the government is steadily ramping up stimulus measures.

Elsewhere, the final estimate of Japans fourth quarter GDP is expected to be little changed from the initial estimate, showing that the economy exited recession in the fourth quarter. Australia's labor force data are likely to show modest job gains, while housing finance data will show the effects of the Reserve Bank of Australia's latest easing.

FRIDAY, MARCH 6

Malaysia Foreign Trade January Time: 4:00 a.m. GMT Forecast: MYR8 billion Malaysias monthly trade surplus likely narrowed to MYR8 billion in January from Decembers MYR9.2 billion, but remained higher than January 2014s MYR6.4 billion surplus. Uneven global demand and falling commodity prices are holding back export receipts, while trade flows tend to weaken around the Lunar New Year. Import growth remains firm as stronger investment spending, particularly on rail, lifts demand for intermediate goods.

SUNDAY, MARCH 8 China Foreign Trade February Time: 4:00 p.m. GMT Forecast: -US$20 billion China's trade position deteriorated in January, with exports and imports falling in year-on-year terms. Given the Lunar New Year in February, a meaningful recovery is not expected that month. Lower commodity prices will keep the import bill down and boost the trade balance in the near term.

MONDAY, MARCH 9 Japan GDP 2014Q4 Time: 11:50 p.m. GMT Forecast: 0.6% The final estimate of Japans fourth quarter GDP is expected to be little changed from the initial estimate of 0.6% q/q. The economy exited recession in the fourth quarter thanks to a lift in exports, which is benefiting from the cheaper yen. Business investment remained weak; it needs to fire if Abenomics is to be judged a success.

Taiwan Consumer Price Index February Time: 12:30 a.m. GMT Forecast: -0.6% Taiwan's consumer prices likely dropped 0.6% y/y in February, after falling 0.9% in January. The slump in global oil prices is the main driver of price declines as domestic demand has improved with increased global demand. We have pushed out the beginning of monetary policy normalization until early 2016.

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Taiwan Foreign Trade February Time: 8:00 a.m. GMT Forecast: US$4.5 billion Taiwan's monthly trade surplus likely remained relatively wide in February, after January's US$4.8 billion. Taiwan is a net oil importer and the import bill has substantially moderated on lower oil prices. Exports are on a bumpy upward trend thanks to improved U.S. tech demand, with some offset coming from sustained softness in China and Europe.

TUESDAY, MARCH 10

China Monetary Aggregates February Time: 4:00 p.m. GMT Forecast: 11.2% Money supply growth in China has slowed on account of weaker credit demand and a tougher liquidity situation for banks. However, the November interest rate cut coupled with the February reserve ratio cut would have freed up some funds and encouraged credit growth. The government is steadily fine-tuning its easing measures and has been tacitly allowing banks to ramp up lending. M2 growth around the 11% to 12% range is expected this year.

China Consumer Price Index February Time: 1:30 a.m. GMT Forecast: 1% Disinflation is spreading through China, with the latest reason being lower fuel prices. General overcapacity and weakness in demand are the underlying drivers of the disinflation throughout the economy. A low reading a year earlier is likely to push up the reading for February.

China Producer Price Index February Time: 1:30 a.m. GMT Forecast: -4.2% Producer prices remain in deflation due to the persistent overcapacity in many industrial sectors. The housing slump has led to excess supplies of steel, cement, glass and other goods. The drop in global oil prices is also putting downward pressure on energy costs. The government's easing measures will encourage a rebound later in the year at the earliest.

Philippines Industrial Production January Time: 4:30 a.m. GMT Forecast: 8.1% The Philippines' industrial production likely accelerated to 8.1% y/y in January, from December's 7.5%. Manufacturing is performing well in the Philippines thanks to improved global demand led by the U.S. and buoyant domestic demand, and both markets are expected to improve further in 2015. The Philippines is a net energy importer so manufacturers are benefiting from lower input costs.

WEDNESDAY, MARCH 11

Japan Machinery Orders January Time: 11:50 p.m. GMT Forecast: 2.7% Japan's core machinery orders likely grew 2.7% m/m in January. While the series tends to be volatile, the trend in the past three months suggests upward momentum is set in place. Exports of Japanese motor vehicles have been strong thanks to the depreciation of the yen, and the Japanese auto sector is partly driving the surge in machinery orders in the past few months.

Australia Housing Finance January Time: 12:30 a.m. GMT Forecast: 0.1% Australian owner-occupied housing finance was likely flat in January, after surging 2.7% m/m in December. Housing finance commitments have been rising strongly for the purchase of established dwellings. We

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expect demand for housing finance to tick up a notch or two with the Reserve Bank of Australia's newly adopted monetary easing bias in the near term. Lending rates are well below historical averages and auction clearance rates suggest the heat has returned to the property market, particularly in Australia's largest city, Sydney. If Sydney dwelling prices keep rising, the financial regulator APRA will need to impose further restrictions to cool the worrying trends, including investor participation.

China Fixed Asset Investment February Time: 5:30 a.m. GMT Forecast: 14.2% Investment in fixed assets steadily softened through 2014. For the first two months of 2015, fixed asset investment likely decelerated even more. Slower investment may have prompted the government to cut reserve ratios and interest rates in February. Those easing measures will boost activity later this year, but in the near term the housing slump continues to weigh on investment activity.

China Industrial Production February Time: 5:30 a.m. GMT Forecast: 7.8% Manufacturing activity remained downbeat in early 2015. Exporters have reported falling orders, and the housing slump has crimped demand domestically. Manufacturer sentiment has improved slightly but remains on the weak side, suggesting that producers are yet to see any benefits from the government's easing measures.

China Retail Sales February Time: 5:30 a.m. GMT Forecast: 11.5% Retail spending has been driven by continued high growth in urban and rural incomes. Spending in nominal terms has been tamped down by lower fuel and food prices lately, but sales of big-ticket items, including motor vehicles and electric appliances, continue to grow at double-digit year-on-year rates.

Thailand Monetary Policy March Time: 7:00 a.m. GMT Forecast: 2% The Bank of Thailand is likely to hold its official interest rate at 2% in its monetary policy meeting next week. Headline inflation has continued to slip away from the BoT's target, running at -0.5% y/y. However, the BoT has been reluctant to cut rates when facing disinflation and poor domestic demand, as it believes the current conditions are sufficiently accommodative to support the economy in the medium term. The focus has also been on core inflation as opposed to headline inflation, which is a little surprising given that the BoT started targeting headline inflation this year. By keeping rates on hold, the BoT is also risking Thailand's external competitiveness as the baht remains stubbornly high compared with its Asian counterparts. However, this is only a downside risk to our forecast and the BoT is unlikely to change its tune in next week's meeting.

India Foreign Trade February Time: 6:30 p.m. GMT Forecast: -US$8 billion India's foreign trade deficit has been narrowing on account of a sharply reduced import bill. Lower energy costs are helping the trade balance and should contribute to GDP growth. That said, exports are also falling, on account of Europe's weakness, and so there is a case for stimulatory measures to be enacted. The trade data suggest that India's economy has been growing below potential.

THURSDAY, MARCH 12

New Zealand Monetary Policy March Time: 8:00 p.m. GMT Forecast: 3.50% The Reserve Bank of New Zealand is likely to keep interest rates on hold at 3.5% in its March monetary policy meeting. While disinflation is abundant across New Zealand, the RBNZ is unlikely to decrease the cash rate after increasing the rate by 100 basis points last year. However, the RBNZ did change its tune last meeting, suggesting that a tightening bias has been dropped. The downside risk to our forecast is the

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relatively high kiwi in an environment where regional central banks have reduced rates to join the currency war. However, domestic demand remains firm, with a burgeoning housing sector. We believe that strong economic conditions do not warrant a rate cut, with a move towards tightening commencing in late 2015 or early 2016.

Japan Industry Activity Indexes January Time: 11:50 p.m. GMT Forecast: 0.2% Japan's tertiary activity likely expanded 0.2% m/m in January. The aging population will continue to support service sectors such as healthcare, while the economy is recovering from the recession in the previous quarter. These factors will support tertiary activity. However, some downside risks remain, particularly as latest retail sales numbers have been weak.

Malaysia Industrial Production January Time: 12:00 a.m. GMT Forecast: 6% Malaysian industrial production likely grew 6% y/y in January, slower than Decembers 7.4% rise but still robust overall. Trade flows and production tend to weaken around the Lunar New Year because of fewer working days. Overall, production at a new oil field in Borneo is supporting mine output, while recovery in tech demand is boosting manufacturing and strong local construction is supporting production of metals and building products.

South Korea Monetary Policy March Time: 12:15 a.m. GMT Forecast: 2% The Bank of Korea is expected to hold the policy rate at 2% for the sixth straight month in March. The central bank is reluctant to cut rates for fear of stoking household debt. The BoK is also waiting to see the boost from monetary easing in mid-2014. The bias remains toward further monetary easing amid a low-inflation backdrop.

Australia Employment Situation February Time: 12:30 a.m. GMT Forecast: 6.4% Unemployed Australia's seasonally adjusted unemployment rate likely held at 6.4% in February. We expect a modest 15,000 jobs were added over the month, just enough to keep the unemployment rate steady, after 12,000 jobs were shed in January. Labor demand is soft in Australia, with the non-mining economy slow to pick up the slack from the mining sector moving to its less labor-intensive export phase. The Reserve Bank of Australia's monetary easing bias should further improve employment prospects in large service states such as New South Wales and Victoria.

Japan Consumer Confidence February Time: 5:00 a.m. GMT Forecast: 39.5 Japans seasonally adjusted consumer confidence index likely rose to 39.5 in February from Januarys 39.1. The delay in the consumption tax increase is supporting households' willingness to spend, while the economys exit from recession is boosting employment and income prospects.

India Industrial Production January Time: 12:00 p.m. GMT Forecast: 2% India's industrial output growth has slowed on account of slowing mining activity and weaker export demand. Revised GDP figures show a much higher pace of economic growth in 2014 than previously thought. Industrial production data will be more closely scrutinized as a result, in a bid to reconcile the seeming discrepancies. The IP methodology may be revised to bring it in line with the new GDP series.

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The Long View

The US: For January-February 2015, the issuance of US$-denominated corporate bonds surged higher by 21% for investment grade and by 30% for high yield By John Lonski, Chief Economist, and Ben Garber, Economist, Moodys Capital Markets Research Group, March 5, 2015

CREDIT SPREADS As measured by Moody's long-term average corporate bond yield, the recent investment grade corporate bond yield spread of 132 bp was above its 122-point mean of the two previous economic recoveries. The continued growth of profits and accommodative monetary policies globally may help to narrow this spread.

The recent high-yield bond spread of 447 bp was consistent with a projected rise by the US high-yield default rate from January 2015s 1.9% to 2.4%, on average, during 2015s second half. Owing to the financial systems importance to accessibility to reasonably priced liquidity, the recent investment-grade financial company bond yield spread of 112 bp supports expectations of adequate liquidity in the event of an adverse shock. Nevertheless, the implications for liquidity of regulatory changes merit above-average scrutiny.

DEFAULTS The US' trailing 12-month high-yield default rate was 1.9% in January 2015, which was unchanged from January 2014s 1.9%. The default rate is projected to average 2.4% during 2015s second half.

January 2015 was the 67th month of the current business cycle upturn. For the 67th month of the previous two upturns, the high yield default rate was 1.5% in June 2007 and 1.9% in October 1996. .

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.

The first quarter of 2014 showed yearly setbacks of -28.0% for US$-denominated high-yield bond issuance and -0.6% for US$-denominated investment-grade (IG) corporate bond offerings. Worldwide, offerings of IG corporate bonds grew by 7% annually in Q1-2014, while the broadest measure of high yield bond issuance fell by -15%.

Q2-2014s worldwide corporate bond issuance posted year-over-year advances of 14.9% for IG and 52.5% for high yield, wherein dollar-denominated bond offerings increased by 5.0% for IG and advanced by 31.5% for high yield. Meanwhile, Q2-2014 also showed a -16.0% yearly drop by new high yield bank loan programs.

Q3-2014s worldwide corporate bond issuance revealed year-over-year declines of -10.6% for IG and -0.2% for high-yield that included setbacks for US$-denominated issuance of -15.3% for IG and -0.9% for high-yield.

Q4-2014s worldwide corporate bond issuance showed annual percent changes of a 3.4% increase for IG and a -20.1% plunge for high-yield. At the same time, US$-denominated offerings advanced by 17.4% for IG and sank by -9.2% for high yield.

The worldwide corporate bond issuance of January-February 2015 increased annually by 5% for investment-grade and by 18% for high-yield. For yearlong 2015, worldwide corporate bond offerings are likely to rise by 5% annually for IG and fall by -5% for high yield.

For 2014, euro-denominated corporate bond issuance posted year-over-year gains of 17.7% for investment-grade and 50.5% for high-yield.

The Long View

The Week Ahead



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.

US ECONOMIC OUTLOOK Fed funds will remain close to 0% until policymakers are sufficiently persuaded that deflation risks are waning. 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 2.5% 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 Zach Witton of Moodys Analytics March 5, 2015 The euro zones recovery has lost momentum and the economy should remain weak early this year. Governments and households repaying high debt, weak bank lending, fiscal austerity and tensions between Russia and Ukraine should drag on growth. Also, sanctions targeting Russias financial, military and energy industries should take a toll on the European Unions industrial production. Moodys Analytics expects the economy to grow 1.3% this year, up slightly from 0.9% in 2014.

The European Central Bank will keep monetary policy very loose for an extended period. Growing fears about deflation prompted the ECB to recently announce plans to buy up to 60 billion of assets per month until late 2016, mainly consisting of government bonds. Also, the ECB encouraged banks to take more long-term loans by removing the 10-basis point premium paid over the central bank's main funding operations. Previously, the bank had cut its key policy rate to a record-low 0.05% and started buying covered bonds and asset-back securities. The annual inflation rate fell in February for the third consecutive month.

U.K. real GDP growth should moderate but remain solid. The economy faces pressure from the weak recovery in the euro zone, Britain's key export market, and the relatively strong pound. Moodys Analytics expects the economy to grow about 2.5% in 2015, little changed from an estimated 2.6% last year. Weak inflation should prompt the Bank of England to postpone increasing interest rates until the fourth quarter of this year. The annual inflation rate eased to a record low of 0.3% in January.

ASIA PACIFIC By Alaistair Chan and the Asia-Pacific Staff of Moodys Analytics March 5, 2015 Japan's latest data has been on the weak side. There was a bump in industrial output, which may be Lunar New Year-related. However, this may not be sustainable, because other data show that domestic demand remains weak. Hence, much work remains for Prime Minister Shinzo Abe and the Bank of Japan to reinvigorate the economy.

Industrial production grew 4% in January, and many sectors with a relatively bigger export focus such as passenger cars, mobile phones and home electronics had much higher output from December. Inventories were run down, suggesting that production rose to match higher demand. This increase seems to be related to the Lunar New Year, which was in February this year. But the outlook is not positive, as firms expect production to be flat in February and to decline in March.

Moreover, although January was a stronger month than December, the overall environment is weak: Production was lower than it was a year earlier. On a year-on-year basis, output was 1.3% lower in January. Possibly for this reason, firms shed labor on net last month. Total employment fell by 20,000, and the unemployment rate rose to 3.6%, the highest since September.

The Long View The Long View

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Weakening employment conditions and falling incomes caused households to cut back on spending. Real incomes fell 0.4% m/m in January. Retail sales fell 2% y/y, while household expenditures fell 1.6%. Housing construction has declined from post-tsunami levels, and despite lower real borrowing costs thanks to the Bank of Japan's quantitative easing program, underlying housing demand has not meaningfully improved. In January, housing starts were 13% lower year on year.

Weaker domestic demand has also contributed to reduced inflation. Core consumer prices rose 2.2% y/y, a steady downward trend from the 3.4% peak in July. However, on a positive note, the main reason for slowing inflation is, as in the rest of the developed world, lower energy prices. Given that Japan imports the bulk of its energy, lower energy prices are a direct boost to Japanese household incomes and to the economy in general.

Current wage negotiations could provide workers with a greater share of firms' high corporate profits. Japanese corporates have seen record profits as a result of the lower yen because they have kept their prices in other currencies stable, rather than boost market share. This has not translated into higher wages so far, so there is scope for firms to contribute to a sustainable recovery in Japan by raising base salaries. This could then boost spending and investment and pull Japan out of deflation once and for all.

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The Week Ahead



Ratings Round-Up By Njundu Sanneh

Downgrade of Russia Has Repercussions, Part Two For the second week in a row European financial and corporate sectors feel the effects of the downgrade of the government of Russia. Russian companies directly account for twenty-nine of the forty-six rating changes. Adding seven more rating changes of Russian company subsidiaries in other nations (mostly in Ireland), Russia accounts for 78% of the total weekly rating changes in Europe. All the related rating changes were downgrades, making for a rating change ratio highly skewed to the negative. The many reviews for downgrade owing to the deteriorating operating environment in Russia all ended in downgrades. The difficult operating environment for Russian corporations caused in large part by lower oil prices and sanctions related to the Ukraine crisis is likely to continue

The number of US rating changes bounced back over the past week, but positive changes continue to fall below the 50% mark, with only 43% upgrades. Energy companies loomed large, but all four were downgraded. FIGURE 1 Rating Changes - US Corporate & Financial Institutions: Favorable as % of Total Actions

0.0

0.2

0.4

0.6

0.8

1.0

0.0

0.2

0.4

0.6

0.8

1.0

Apr03 Aug05 Dec07 Apr10 Aug12 Dec14

By Count of Actions By Amount of Debt Affected

* Trailing 3-month average

Source: Moody's FIGURE 2 Rating Key

BCF Bank Credit Facility Rating MM Money-MarketCFR Corporate Family Rating MTN MTN Program RatingCP Commercial Paper Rating Notes NotesFSR Bank Financial Strength Rating PDR Probability of Default RatingIFS Insurance Financial Strength Rating PS Preferred Stock RatingIR Issuer Rating SGLR Speculative-Grade Liquidity Rating

JrSub Junior Subordinated Rating SLTD Short- and Long-Term Deposit RatingLGD Loss Given Default Rating SrSec Senior Secured Rating LTCF Long-Term Corporate Family Rating SrUnsec Senior Unsecured Rating LTD Long-Term Deposit Rating SrSub Senior SubordinatedLTIR Long-Term Issuer Rating STD Short-Term Deposit Rating

Ratings Round-Up

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FIGURE 3 Rating Changes: Corporate & Financial Institutions US

Date Company Sector RatingAmount

($ Million)Up/

Down

Old LTD

Rating

New LTD

RatingIG/SG

2/25/15 21ST CENTURY ONCOLOGY, INC Industrial SrSec/SrSub/LTCFR/PDR 726 U B1 Ba3 SG2/25/15 COMSTOCK RESOURCES, INC. Industrial SrUnsec/SrSec/LTCFR/PDR 700 D B3 Caa1 SG2/25/15 TRANSOCEAN INC. Industrial SrUnsec 9,347 D Baa3 Ba1 SG2/25/15 W/S PACKAGING HOLDINGS, INC. - Industrial SrSec/LTCFR/PDR/BCF D B1 B2 SG2/26/15 ANTERO RESOURCES CORPORATION Industrial SrUnsec/LTCFr/PDR 2,625 U B1 Ba3 SG2/26/15 CDW CORPORATION Industrial SrUnsec/SrSec/LTCFR/PDR/BCF 1,704 U B2 B1 SG2/26/15 CROSSMARK HOLDINGS, INC. Industrial SrSec/LTCFR/PDR/BCF 583 D B1 B2 SG2/27/15 PEABODY ENERGY CORPORATION Industrial SrUnsec/SrSec/Sub/LTCFR/PDR/BCF 5,325 D Ba3 B3 SG3/2/15 E*TRADE FINANCIAL CORP. Financial SrUnsec/Sub/LTIR/PS 1,340 U Ba3 Ba2 SG3/2/15 GRAFTECH INTERNATIONAL LTD. Industrial SrUnsec/LTCFR/PDR 600 D Ba1 Ba2 SG3/2/15 SAMSON RESOURCES CORPORATION - Samson Investment Company Industrial SrUnsec/SrSec/LTCFR/PDR 2,250 D Caa1 Ca SG3/2/15 SL GREEN REALTY CORP. Industrial SrUnsec/SrSec/JrSub/Sub/PS 1,455 U Ba1 Baa3 SG3/3/15 SPROUTS FARMERS MARKET, INC. - Sprouts Farmers Market Holdings, LLC Industrial SrSec/LTCFR/PDR/BCF 320 U Ba3 Ba2 SG3/3/15 TRIPLE POINT GROUP HOLDINGS, INC Industrial SrSec/LTCFR/PDR/BCF 440 D B3 Caa1 SG

Source: Moody's FIGURE 4 Rating Changes: Corporate & Financial Institutions EUROPE

Date Company Sector RatingAmount

($ Million)Up/

Down

Old LTD

Rating

New LTD

Rating

Old STD

Rating

New STD

Rating

Old FSR

New FSR

IG/SG

Country

2/27/15 **PEUGEOT S.A. Industrial SrUnsec/BFSR/SLTD/MTN 3,317 U Ba1 Baa3 NP P-3 D D+ SG FRANCE2/25/15 OAO NOVATEK - Novatek Finance Limited Industrial SrUnsec 2,476 D Baa3 Ba1 IG IRELAND2/25/15 OJSC MMC NORILSK NICKEL - MMC Finance Limited Industrial SrUnsec 1,750 D Baa3 Ba1 IG IRELAND2/25/15 OJSC PHOSAGRO - PhosAgro Bond Funding Limited Industrial SrUnsec 500 D Baa3 Ba1 IG IRELAND2/25/15 OJSC URALKALI - Uralkali Finance Limited Industrial SrUnsec 650 D Baa3 Ba1 IG IRELAND2/25/15 SISTEMA JOINT STOCK FINANCIAL CORPORATION - MTS International Funding Limited Industrial SrUnsec 1,250 D Baa3 Ba1 IG IRELAND2/25/15 GAMENET S.P.A. Industrial SrSec/LTCFR/PDR 224 D B1 B2 SG ITALY2/25/15 **OJSC GAZPROM Industrial SrUnsec/LTIR/MTN D Baa3 Ba1 IG RUSSIA2/27/15 SBM BALEIA AZUL, SII/ S.A.R.L. Industrial SrSec 500 D Ba1 Ba3 SG LUXEMBOURG2/25/15 OAO LUKOIL Industrial SrUnsec/LTCFR/PDR 5,596 D Baa2 Ba1 IG NETHERLANDS3/3/15 **ING GROEP N.V. Financial SrUnsec/SrSub/LTIR/IFSR/PS 3,058 U Baa3 Baa2 P-2 P-1 IG NETHERLANDS

2/26/15 NORSKE SKOG HOLDINGS AS Industrial SrSec 395 D Caa1 Caa2 SG NORWAY2/26/15 NORSKE SKOGINDUSTRIER ASA Industrial PDR 1,129 U Ca Caa2 SG NORWAY2/25/15 ATOMENERGOPROM, JSC Industrial LTIR D Aaa Aa1 IG RUSSIA2/25/15 BANK OTKRITIE FINANCIAL CORPORATION PJSC Financial Sub/BFSR 1,150 D B1 B2 D- E+ SG RUSSIA2/25/15 BANK SAINT-PETERSBURG OJSC Financial SrUnsec/Sub/BFSR/LTD/MTN 201 D Ba3 B1 D- E+ SG RUSSIA2/25/15 CENTER-INVEST BANK Financial SrUnsec/BFSR/LTD 24 D Ba3 B1 D- E+ SG RUSSIA2/25/15 ING GROEP N.V. - ING Bank Eurasia Financial BFSR/SLTD D Baa2 Baa3 P-2 NP D- D IG RUSSIA2/25/15 INTER RAO, JSC Utility LTCFR/PDR D Ba1 Ba2 SG RUSSIA2/25/15 INTESA SANPAOLO SPA - Banca Intesa (Russia) Financial BFSR/LTD D Ba1 Ba2 D- E+ SG RUSSIA2/25/15 NLMK Industrial SrUnsec/LTCFR 1,300 D Baa3 Ba1 IG RUSSIA2/25/15 OAO AK TRANSNEFT Utility LTIR 1,050 D Aaa Aa1 IG RUSSIA2/25/15 OAO AK TRANSNEFT - TransCapitalInvest Limited Utility SrUnsec 1,050 D Baa3 Ba1 IG RUSSIA2/25/15 **OJSC OIL COMPANY ROSNEFT Industrial SrUnsec/MTN 6,400 D Baa3 Ba1 IG RUSSIA2/25/15 PROMSVYAZBANK Financial SrUnsec/Sub/BFSR/LTD/MTN 1,814 D Ba3 B1 D- E+ SG RUSSIA2/25/15 RAIFFEISEN ZENTRALBANK OESTERREICH AG - AO RAIFFEISENBANK Financial SrUnsec/BFSR/LSLTD 324 D Ba1 Ba2 D+ D SG RUSSIA2/25/15 ROSSETI, JSC Utility LTCFR/PDR D Ba1 Ba2 SG RUSSIA2/25/15 RUSHYDRO, JSC Industrial SrUnsec/LTCFR/PDR 324 D Ba1 Ba2 SG RUSSIA2/25/15 RUSSIAN HELICOPTERS JSC Industrial LTCFR/PDR D Ba2 Ba3 SG RUSSIA2/25/15 RUSSIAN RAILWAYS JOINT STOCK COMPANY Industrial SrUnsec 12,972 D Baa3 Ba1 IG RUSSIA2/25/15 **SOCIETE GENERALE Financial SrUnsec/SrSec/BFSR/SLTD/MTN 1,327 D Baa3 Ba1 P-3 NP D D- SG RUSSIA2/25/15 VOZROZHDENIE BANK Financial BFSR/LTD D Ba3 B1 D- E+ SG RUSSIA2/25/15 ZENIT BANK Financial SrUnsec/BFSR/LTD 599 D Ba3 B1 D- E+ SG RUSSIA2/26/15 MOSCOW MORTGAGE AGENCY Financial SrUnsec/LTD 24 D Ba3 Ba2 SG RUSSIA2/26/15 SVYAZINVESTNEFTEKHIM OAO Industrial SrUnsec/LTCFR/PDR 250 D Ba1 Ba2 SG RUSSIA2/27/15 **BANK VTB, JSC Financial SrUnsec/SrSec/BFSR/SLTD/Sub/MTN 4,911 D Baa3 Ba1 P-3 NP D- E+ IG RUSSIA2/27/15 **SBERBANK Financial LTD D Ba1 Ba2 SG RUSSIA2/27/15 VNESHECONOMBANK - SME Bank Financial SrUnsec/LTD 485 D Baa3 Ba1 IG RUSSIA3/2/15 BANK OTKRITIE FINANCIAL CORPORATION PJSC - Khanty-Mansiysk bank Otkritie PJSC Financial Sub/LTD 200 D B2 B3 SG RUSSIA3/2/15 HOME CREDIT & FINANCE BANK Financial SrUnsec/LTD/Sub/MTN 581 D B1 B2 SG RUSSIA3/2/15 NBD BANK Financial LTD D A1 A2 SG RUSSIA3/2/15 TRANSCAPITALBANK JSC BANK Financial LTD D A1 A2 SG RUSSIA

2/26/15 WALSALL HOSPITAL COMPANY PLC Industrial SrSec 248 U A3 A2 IG UNITED KINGDOM3/2/15 BY CHELMER PLC Industrial SrSec 595 U Baa1 A3 IG UNITED KINGDOM3/2/15 HOCHSCHILD MINING PLC Industrial SrUnsec/LTCFR 350 D Ba1 Ba3 SG UNITED KINGDOM

Source: Moody's

** - Parent listed because ratings changed for several subsidiaries even though parent did not experience any rating change

Ratings Round-Up

Market Data



Market Data

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800

0

200

400

600

800

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Spread (bp) Spread (bp) Aa2 A2 Baa2

Source: Moody'sSource: Moody's

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

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2,000

0

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1,200

1,600

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Spread (bp) Spread (bp) Ba2 B2 Caa-C

Source: Moody's

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

Spreads

Market Data



CDS Movers

CDS Implied Rating Rises

Issuer Mar. 4 Feb. 25 Senior RatingsFranklin Resources, Inc. Aa2 A3 A1Freescale Semiconductor, Inc. Baa3 Ba2 Caa1Amgen Inc. Aa2 Aa3 Baa1Capital One Bank (USA), N.A. Aa1 Aa2 A321st Century Fox America, Inc Aaa Aa1 Baa1Altria Group Inc. Aa2 Aa3 Baa1McKesson Corporation Aaa Aa1 Baa2Springleaf Finance Corporation B2 B3 B2CSC Holdings, LLC B1 B2 Ba2Deere & Company A1 A2 A2

CDS Implied Rating DeclinesIssuer Mar. 4 Feb. 25 Senior RatingsMicrosoft Corporation A1 Aa2 AaaOwens-Brockway Glass Container, Inc. B1 Ba2 Ba3Nationwide Mutual Insurance Company B1 Ba2 A2SCANA Corporation Baa1 A2 Baa3First Industrial, L.P. B1 Ba2 Baa3JPMorgan Chase & Co. Baa2 Baa1 A3Wells Fargo & Company A3 A2 A2Goldman Sachs Group, Inc. (The) Baa3 Baa2 Baa1Bank of America Corporation Baa2 Baa1 Baa2JPMorgan Chase Bank, N.A. Baa2 Baa1 Aa3

CDS Spread IncreasesIssuer Senior Ratings Mar. 4 Feb. 25 Spread DiffAK Steel Corporation Caa1 915 854 61Peabody Energy Corporation B3 891 844 47Brixmor LLC Baa3 730 689 41Chesapeake Energy Corporation Ba1 353 318 35Diamond Offshore Drilling, Inc. A3 354 323 31United States Steel Corporation B1 518 492 26MBIA Insurance Corporation B3 1,255 1,237 18Genworth Holdings, Inc. Ba1 380 363 17Penney (J.C.) Corporation, Inc. Caa2 734 718 16Nine West Holdings, Inc. Caa2 1,104 1,088 16

CDS Spread DecreasesIssuer Senior Ratings Mar. 4 Feb. 25 Spread DiffToys 'R' US, Inc. Caa2 1,498 1,611 -114Freescale Semiconductor, Inc. Caa1 96 189 -94MBIA Inc. Ba1 522 573 -51Sears Roebuck Acceptance Corp. Caa2 1,223 1,264 -42AES Corporation, (The) Ba3 235 274 -39Parker Drilling Company B1 643 674 -31McClatchy Company (The) Caa2 905 932 -27Transocean Inc. Ba1 688 713 -25Sears Holdings Corp. Caa2 1,232 1,256 -24K. Hovnanian Enterprises, Inc. Caa1 630 652 -23

Source: Moody's, MarkIt

CDS Spreads

CDS Implied Ratings

CDS Implied Ratings

CDS Spreads

Figure 3. CDS Movers - US (February 25, 2015 March 4, 2015)

Market Data



CDS Implied Rating Rises

Issuer Mar. 4 Feb. 25 Senior RatingsScottish Power Limited A3 Baa2 Baa1Barclays Bank PLC A2 A3 A2Credit Industriel et Commercial A2 A3 Aa3Daimler AG Aa2 Aa3 A3GlaxoSmithKline plc Aa1 Aa2 A2ENI S.p.A. Baa1 Baa2 A3Bayer AG Aa1 Aa2 A3Intelsat Jackson Holdings S.A. B2 B3 B3Swiss Reinsurance Company Ltd Aa3 A1 Aa3Vinci S.A. A3 Baa1 Baa1

CDS Implied Rating DeclinesIssuer Mar. 4 Feb. 25 Senior RatingsRoyal Bank of Scotland Group plc Baa1 A3 Baa2The Royal Bank of Scotland plc Baa1 A3 Baa1SEB A3 A2 A1Banca Monte dei Paschi di Siena S.p.A. Ba3 Ba2 B1Unione di Banche Italiane S.c.p.A. Ba1 Baa3 Baa3Lafarge SA Baa2 Baa1 Ba1EnBW Energie Baden-Wuerttemberg AG A3 A2 A3Legal & General Group Plc Baa1 A3 A3BAE SYSTEMS plc A3 A2 Baa2Banco BPI S.A. Ba3 Ba2 Ba3

CDS Spread IncreasesIssuer Senior Ratings Mar. 4 Feb. 25 Spread DiffNorske Skogindustrier ASA Caa3 2,156 1,979 176Greece, Government of Caa1 1,439 1,341 97Vougeot Bidco p.l.c. B3 272 255 18Wind Acquisition Finance S.A. Caa1 277 262 15CMA CGM S.A. Caa1 607 593 14Lazio, Region of Ba2 141 131 11Unitymedia KabelBW GmbH B3 146 135 11Portugal Telecom International Finance B.V. Ba2 390 381 9Crown European Holdings S.A. Ba2 231 223 8Puglia, Region of Baa2 189 181 7

CDS Spread DecreasesIssuer Senior Ratings Mar. 4 Feb. 25 Spread DiffMatalan Finance plc Caa1 501 560 -59Intelsat Jackson Holdings S.A. B3 272 318 -46VTB Capital S.A. Ba1 775 821 -46National Bank of Greece S.A. Caa2 975 1,009 -34Unilabs Subholding AB Caa2 418 442 -24Weatherford International plc Baa3 324 347 -23Altice Finco S.A. B3 340 363 -22Bank of Ireland Ba1 139 159 -20Allied Irish Banks, p.l.c. Ba3 95 112 -17Scottish Power Limited Baa1 51 67 -15

Source: Moody's, MarkIt

CDS Spreads

CDS Implied Ratings

CDS Implied Ratings

CDS Spreads

Figure 4. CDS Movers - Europe (February 25, 2015 March 4, 2015)

Market Data



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1,800

0

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1,200

1,500

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Issuance ($B) Issuance ($B)2012 2013 2014 2015

Source: Moody's / Dealogic

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

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1,000

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Issuance ($B) Issuance ($B)2012 2013 2014 2015

Source: Moody's / Dealogic

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

Investment-Grade High-Yield Total*Amount Amount Amount

$B $B $BWeekly 52.850 11.725 67.860

Year-to-Date 255.138 70.655 335.990

Investment-Grade High-Yield Total*Amount Amount Amount

$B $B $BWeekly 24.619 3.711 29.578

Year-to-Date 173.071 24.907 206.060* Difference represents issuance with pending ratings.Source: Moody's/ Dealogic

USD Denominated

Euro Denominated

Figure 7. Issuance: Corporate & Financial Institutions

Issuance



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



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