CAPITAL MARKETS RESEARCH NOVEMBER 30, 2017 2018 Outlooks for Defaults and Profits Imply WEEKLY Ample Liquidity MARKET OUTLOOK Credit Markets Review and Outlook by John Lonski Moody’sAnalytics Research 2018 Outlooks for Defaults and Profits Imply Ample Liquidity. Weekly Market Outlook Contributors: John Lonski » FULL STORY PAGE 2 1.212.553.7144 The Week Ahead [email protected] Njundu Sanneh We preview economic reports and forecasts from the US, UK/Europe, and Asia/Pacific regions. 1.212.553.4036 » FULL STORY PAGE 5 [email protected] Franklin Kim The Long View 1.212.553.4419 Check our chart here for Credit Investment Grade: Year-end 2017 spread to exceed its recent [email protected] forecast summaries of key Spreads 108 bp. High Yield: After recent spread of 373 bp, it may Yuki Choi 1.212.553.0906 credit market metrics. Full approximate 380 bp by year-end 2017. [email protected] updated stories, “Since 1995, Defaults US HY default rate: Compared to October 2017’s 3.2%, US$-IG bond issuance fell Moody's Default and Ratings Analytics team forecasts that Moody's Analytics/Europe: annually in only two of the the US' trailing 12-month high-yield default rate will average Tomas Holinka 15 years overlapping mature 2.2% during 2018’s third quarter. +420 ( 221) 666-384 Issuance In 2016, US$-IG bond issuance grew by 5.6% to a record economic upturns,” begin on [email protected] $1.412 trillion, while US$-priced high-yield bond issuance fell Barbara Teixeira Araujo page 18. by -3.5% to $341 billion. For 2017, US$-denominated IG + BM4aor2bo0ad r(ya2.'2Ts4e A)ix n1e0air6lay-At4ir3ca8su/ j [email protected]: m ibtrneroicclnlroiedorad niss ,$e sw u4bha3yni5 l2ec b e7Ui .l0mSli%$oan-y pt. orrii sc$ee4 db3 yh3 i g7b.hi3l-l%iyoine tl,od o abr onnneedawr ilzsyes eunqaitunhac oel tfm o$ a12.y05 1144’ s Katrina Ell » FULL STORY PAGE 18 +61 (2) 9270-8144 [email protected] Ratings Round-Up by Njundu Sanneh Faraz Syed Busy Two Weeks in US. +61 (2) 9270-8146 [email protected] » FULL STORY PAGE 23 Market Data Credit spreads, CDS movers, issuance. Editor » FULL STORY PAGE 25 Dana Gordon Moody’s Capital Markets Research recent publications 1.212.553.0398 [email protected] Links to commentaries on: Saudi Arabia, defaults, credit/stocks, China, yields/prices, debt/growth, Spain, upside surprise, bulls, less fear, Fed & BoJ, inflation, market triggers, hurricanes, data in sync, Harvey, inflation, yields, Korea, jobless rate, spreads, Saudi Arabia. » FULL STORY PAGE 29 Click here for Moody’s Credit Outlook, our sister publication containing Moody’s rating agency analysis of recent news events, summaries of recent rating changes, and summaries of recent research. Moody’s Analytics markets and distributes all Moody’s Capital Markets Research, Inc. materials. Moody’s Capital Markets Research, Inc is a subsidiary of Moody’s Corporation. Moody’s 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, Moody’s Capital Markets Research, Inc. 2018 Outlooks for Defaults and Profits Imply Ample Liquidity Sometimes analysts cry wolf and nothing worse than a barking Chihuahua appears. And so it was with the Great Junk Bond Scare of November 9 through 17. Liquidity effectively shrugged off the high-yield bond market’s sell-off of mid-November. When credit is in real trouble, high-yield funding quickly dries up. which simply didn’t happen during the high-yield market’s latest correction. Despite how the composite speculative-grade bond yield and accompanying high-yield bond spread jumped up from their November 1 through November 8 averages of 5.62% and 359 bp, respectively, to November 9 through November 17 averages of 5.97% and 389 bp, the latter span was still home to 45 new high-yield bond issues that raised $22.8 billion of funds. Never underestimate the power of strongly held expectations of a declining trend for the high yield default rate. High-yield spread goes from being too thin to too wide A reliable explanatory model of the high-yield bond spread now suggests that the spread could narrow further after dropping to a recent 374 bp. As derived from November-to-date readings for the average high-yield EDF metric, the VIX index, and the lagged moving three-month average of the Chicago Fed’s national activity index, an explanatory regression model now puts the high-yield bond spread’s midpoint at 342 bp, which was the thinnest estimated midpoint since the 326 bp of June 2014. By contrast, when the averages of the three-months-ended October 2017 showed the explanatory model’s expected midpoint of 414 bp leading the actual high-yield spread of 376 bp by +38 bp, the actual spread begins to approach its expected value by late October. (Figure 1.) Figure 1: According to an Explanatory Model, the High-Yield Bond Spread Has Gone from Being Too Thin from August Through Early November to Recently Being Too Wide in bp High-Yield Bond Spread as Explained by NAI/EDF/VIX Model US High-Yield Bond Spread: actual 630 630 605 605 580 580 555 555 530 530 505 505 480 480 455 455 430 430 405 405 380 380 355 355 330 330 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Improving trend for profits assumes companies will control labor costs Recent data on corporate bond issuance and new bank loan programs from speculative-grade borrowers reflect ample liquidity. For US$-denominated borrowing activity, the annual increases expected for Q4- 2017 are 24% for investment-grade corporate bonds, 26% for high-yield bonds, and 9% for new bank loan programs from speculative-grade issuers. The projected continuation of profits growth through 2018 bodes well for systemic liquidity and complements expectations of a lower default rate into the final quarter of 2018. The Bureau of Economic Analysis’ (BEA) estimate of Q3-2017’s pretax profits from current production, or pretax operating profits, rose by 5.4% from Q3-2016, wherein a 2.9% yearly increase by corporate gross- 2 NOVEMBER 30, 2017 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH Credit Markets Review and Outlook value-added (an estimate of revenues net of materials costs) outran the accompanying 2.3% rise by employment costs. The still uninspiring growth of net revenues will compel many businesses to rein in labor costs regardless of a tighter labor market. In all likelihood, employee remuneration will be more closely tied to a worker’s individual and potential performance. Because younger workers tend to have more upside potential than their older colleagues, wage increases are likely to be greater for younger employees. Such a bias may have important implications for the overall pace of household expenditures given how workers aged at least 55 years now constitute a record 23% of employment as measured by the Labor Department’s household survey. Faster debt growth probably spurred Q3-2017’s jump by net interest expense Third-quarter 2017’s nonfinancial-corporate pretax operating profits grew by 4.5% year-over-year. Though Q3-2017’s 3.3% yearly increase by nonfinancial-corporate gross-value-added (GVA) was faster than the 2.9% increase of total corporate GVA, nonfinancial corporations had to contend with the faster growth rates of 2.5% for employee compensation and 6.3% for net interest expense. The latter was the fastest annual rate of growth for net interest expense since the 7.3% of Q2-2015. More importantly, the faster growth of net interest expense vis-a-vis pretax profits favors steeper financial leverage. Though nonfinancial-corporate net interest expense has edged up from Q2-2017’s 24.9% to Q3-2017’s 25.1% of pretax operating profits (in terms of moving yearlong observations), Moody’s Default Research Group expects the US high-yield default rate to fall from a Q3-2017 average of 3.5% to 2.1% by Q3-2018. Only if this measure of leverage is amplified by a now unexpected contraction of profits might the default rate projection be revised significantly higher. (Figure 2.) Figure 2: High-Yield Default Rate Is Expected to Ease Despite a Mild Rise by Ratio of Net Interest Expense to Pretax Operating Profits Estimated Net Interest Expense as % of Profits from Current Production: nonfinancial corporations ( L ) High-Yield Default Rate: % ( R ) 66% 14.5% 61% 13.5% 12.5% 56% 11.5% 51% 10.5% 9.5% 46% 8.5% 41% 7.5% 36% 6.5% 5.5% 31% 4.5% 26% 3.5% 2.5% 21% 1.5% 16% 0.5% 84Q4 87Q4 90Q4 93Q4 96Q4 99Q4 02Q4 05Q4 08Q4 11Q4 14Q4 17Q4 In all likelihood, the acceleration by net interest expense was mostly the offshoot of faster growth by nonfinancial-corporate debt. Note how nonfinancial-corporate debt growth probably sped up despite the slower growth of bank-held commercial and industrial (C&I) loans. Slower growth by C&I loans does not imply likewise for corporate debt It may be a mistake to infer too much about business borrowing from the behavior of bank-held C&I loans. Unlike the deceleration by the yearly increase for the overall outstandings of bank-held C&I loans from Q2-2016’s 10.1% to Q2-2017’s 2.3%, the annual increase for the short-term debt obligations of nonfinancial corporations accelerated from Q2-2016’s 1.3% to Q2-2017’s 7.8%. The latter occurred despite a pronounced slowing by outstanding loans from depository institutions owed by nonfinancial corporations from Q2-2016’s 8.7% yearly advance to Q2-2017’s 2.6% rise. The latter was outweighed by a radical shift in the yearly percent change for the sum of outstanding nonfinancial-corporate loans from nonbanks and commercial paper — after shrinking by -3.8% in Q2-2016, nonbank short-term debt was up by +11.8% in Q2-2017. Ultimately, leverage increased as Q2-2017’s 5.6% yearly increase by total nonfinancial-corporate debt outran the accompanying annual increase of 4.7% for internal funds. 3 NOVEMBER 30, 2017 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH Credit Markets Review and Outlook Returning to 2017’s third quarter, the yearly change in corporate borrowing costs differed across debt instruments. Unlike the increases posted by 3-month LIBOR from Q3-2106’s 0.79% to Q3-2017’s 1.31% and Barclays Capital’s investment-grade corporate bond yield from 2.80% to 3.11%, a composite speculative-grade bond yield sank from Q3-2016’s 6.40% to Q3-2017’s 5.49% and Moody’s long-term Baa industrial company bond yield dipped from 4.40% to 4.39%. As derived from a sample of quarter-long observations that begins in 1984, the yearly percent change of nonfinancial-corporate net interest expense shows the strongest correlation of 0.63 with the yearly percent change of nonfinancial-corporate debt. The yearly percent change of net interest expense then showed similar correlations of between 0.25 and 0.35 with the yearly percentage point changes of the speculative-grade bond yield (0.35), Barclays Capital’s investment-grade bond yield (0.29) and Moody’s long-term Baa industrial company bond yield (0.26). Net interest expense shows unexpectedly low correlation with LIBOR Finally, the correlation between the yearly percent change of net interest expense and the yearly percent change of three-month LIBOR was a surprisingly low 0.19. Because many floating rate business loans are tied to LIBOR, one would think that LIBOR would produce a stronger correlation with net interest expense compared to fixed-rate bond yields. In summary, profits growth will keep the “wolf” at bay In conclusion, forecasts of faster growth for both pre- and after-tax profits in 2018 underpin a benign outlook for defaults. The deeper than -7.5% annual contractions by yearlong operating profits that preceded each appearance of a greater than 10% default rate should be avoided in 2018. Note also that the immediate effect of a pronounced shrinkage of profits is to widen yield spreads exactly when a growing number of companies are compelled to bridge cash shortfalls via stepped up borrowing. Thus, the inability to quickly pare corporate net borrowing will impede needed reductions in net interest expense. For now, cries of “wolf” will lack credibility unless accompanied by a deep and extended contraction of profits. . 4 NOVEMBER 30, 2017 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH The Week Ahead The Week Ahead – US, Europe, Asia-Pacific THE US From Moody’s Analytics - Economy.com and the Moody’s Capital Markets Research Group (Updates are made on Mondays.) Summary, December 4: The focus for the upcoming week will be on the November employment report and tax legislation developments. We look for nonfarm employment to have risen 215,000 between October and November, better than the 163,000 average gain over the prior six months. The recent hurricanes have caused some big swings in monthly job growth but we expect a solid gain in employment in November. The unemployment rate likely fell from 4.1% to 4% in November. We expect average hourly earnings rose 0.3%. The House and Senate will go into conference to hammer out the differences between their tax bills and this will garner a ton of attention from financial markets. Aside from employment, the economic data will offer little distraction. It will be the same with the Fed, which goes into its blackout period ahead of its December meeting. We expect nonfarm productivity growth to have been revised up in the third quarter to 3.3% at an annualized rate, compared with the 3% in the advance estimate. This would be consistent with the already released upward revision to third quarter output. Productivity growth has improved recently but the trend remains very weak and a quick turnaround is unlikely. Productivity growth normally slows as expansions age, and the boost to productivity from a tight labor market is not a sure thing. Fiscal policy’s failure to do more to boost productivity growth could ultimately be the biggest policy mistake this expansion. Turning back to the incoming data, we look for the nominal trade deficit to widened in October. Trade is off to a poor start this quarter and it will likely be a drag on GDP growth for the first time this year. October factory orders likely dropped 0.5% and this coupled with the revisions to core capital goods orders could have implications for our estimate of fourth quarter GDP growth. The ISM nonmanufacturing index likely dropped in November because of a decline in supplier deliveries, payback for the hurricane-related disruptions to the supply chain which boosted supplier deliveries (implying slower deliveries) over the past couple of months. THURSDAY, NOVEMBER 30 Jobless claims (week ended November 25; 8:30 a.m. EST) Forecast: 238,000 We expect initial claims for unemployment insurance benefits to have slipped by 1,000 to 238,000 in the week ending November 25, which includes the Thanksgiving holiday. New filings are normally volatile around holidays, and there is more uncertainty than usual in the forecast. Recently there appears to be no identifiable pattern in new filings during Thanksgiving week, but seasonal adjustment issues can cause wild swings in initial claims. This would be the second consecutive weekly decline, and the four-week moving average would rise from 239,750 to 242,000. Personal income and spending (October; 8:30 a.m. EST) Forecast: 0.3% (personal income) Forecast: 0.2% (nominal spending); Forecast: 0.2% (PCE deflator) Nominal personal income is forecast to have risen 0.3% in October following a 0.4% gain in September and 0.1% increase in August. Nominal wage and salary income is expected to provide a modest boost to total personal income growth in October. The labor income for all private workers rose 0.1% in October. However, the labor income proxy for production workers rose 0.5%. The model that uses the average of the total private and production worker labor income proxy does the 5 NOVEMBER 30, 2017 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH The Week Ahead best in forecasting nominal wage growth. The model expects a 0.35% gain in nominal wages in October. We look for a trend-like income in nonwage income in October. We look for nominal spending to have risen 0.2% in October. Already-released data on retail sales suggest that goods excluding auto and gasoline rose 0.4%. Nominal spending on motor vehicles likely fell 1%. Since 2000, nominal spending on motor vehicles follows changes in unit sales more closely than retail sales. Unit sales were down 2.6% in October. Lower gasoline prices likely weighed on nominal spending at gasoline stations. Services spending likely rose 0.3% in October, supported by a gain in utility consumption. We look for the core PCE deflator to have risen 0.2% (0.16% unrounded) from September to October. This would leave the core PCE deflator up 1.4% on a year-ago basis, compared with the 1.3% gain in September. FRIDAY, DECEMBER 1 ISM manufacturing survey (November; 10:00 a.m. EST) Forecast: 58.9 The ISM manufacturing index is forecast to have inched higher in November, rising from 58.7 to 58.9. Supplier deliveries will limit the increase in the ISM index in November. We anticipate further declines in supplier deliveries as the impact of the hurricanes fades. We look for improvement in most of the other components. New orders likely edged higher and remained above 60 for the sixth consecutive month. The forecast assumes a modest gain in the employment and production indexes. We will revisit this forecast for the ISM index next week following the Chicago PMI and regional Fed manufacturing surveys. Vehicle sales (November; 4:00 p.m. EST) Forecast: 17.8 million annualized units Vehicle sales were likely solid in November, supported by replacement demand following the recent hurricanes. We look for vehicle sales to have reached 17.8 million annualized units in November, compared with the 18.08 million in October and 18.57 million in September. Through November, vehicle sales will have averaged 17.94 million annualized units per month this quarter, compared with the 17.16 million average in the third quarter. MONDAY, DECEMBER 4 Business confidence (week ended December 1; 10:00 a.m. EST) Forecast: N/A Global businesses are upbeat. Sentiment remains strong across much of the globe, consistent with an economy that is expanding above its potential. The most encouraging aspect of the survey is that the percentage of respondents that are upbeat about economic conditions going into next year remains sturdy. Despite the strength of confidence readings, they have softened in recent weeks and are as low as they have been since just before last year’s U.S. presidential election. Sentiment has turned lower across much of the globe, but particularly in the U.S. The softer readings are evident with regard to sales, pricing, hiring and even investment. Businesses are increasingly fixated on regulatory and legal issues, as about one-half of businesses say these issues are their largest concern. An additional one-fifth of businesses say finding qualified labor is their biggest problem. Concern with the strength of their sales and taxes has significantly receded. The four-week moving average in our business confidence index increased from 32.2 to 34.8 in the week ended November 24. TUESDAY, DECEMBER 5 6 NOVEMBER 30, 2017 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH The Week Ahead International trade (October; 8:30 a.m. EST) Forecast: -$47.6 billion We look for the nominal trade deficit to have widened from $43.5 billion in September to $47.6 billion in October. The advance goods deficit widened from a revised $64.1 billion in September to $68.3 billion in October. Nominal goods exports dropped 1%, while imports gained 1.5%. We anticipate that this will be visible in the upcoming October trade data. The forecast assumes that the services surplus increases from $21.9 billion in September to $22 billion in October. Prior to the October trade data, our high-frequency GDP model has net exports subtracting roughly 0.4 of a percentage point from fourth quarter GDP growth. This would be the first time that trade subtracted from growth this year and the first since the final three months of 2016. ISM nonmanufacturing survey (November; 10:00 a.m. EST) Forecast: 58.8 The nonmanufacturing segment of the economy likely cooled some in November but there is no reason for concern. The ISM nonmanufacturing index is forecast to have dropped from 60.1 in October to 58.8 in November. The index will remain above that seen for the bulk of this year. The bulk of the decline in November will be attributed to a drop in the supplier deliveries, which was boosted over the past couple of months because of hurricane-related disruptions. We expect the supplier deliveries index to fall in November, implying a faster pace of deliveries. Many regional services surveys we track signaled improvement between October and November but this will likely only limit the size of the decline in November. Hurricane effects aside, the nonmanufacturing segment of the economy is doing well, but some challenges are ahead. There are some signs of supply constraints, including for labor. There is no evidence of a shortage, but nonmanufacturers are finding it more difficult to find workers. There are solutions, including increasing workers’ pay, improving training, and hiring workers who would have not been considered in the past. The pool of available workers has diminished, but it's not empty. WEDNESDAY, DECEMBER 6 ADP National Employment Report (November; 8:15 a.m. EST) Forecast: N/A Private payrolls increased by a net 235,000 in October, according to the ADP National Employment Report. This was one of the largest gains this year and is a clear indication that the job market remains strong, despite damage caused by Hurricanes Harvey and Irma. The composition of job creation across company showed small firms, which have advanced little since the spring, added a hearty 79,000 jobs on net. Midsize companies expanded their payrolls by 66,000 positions, a weaker showing than the average of 81,000 jobs in the preceding 12 months. Large companies netted 90,000 positions over the prior month. The ADP underestimated the BLS estimate of the change in private employment by 17,000 in November. The average absolute difference between the ADP and BLS estimates growth in private employment over the past six months is 64,000. Productivity and costs (2017Q3-second estimate; 8:30 a.m. EST) Forecast: 3.3% at an annualized rate (productivity) Forecast: -0.8% at an annualized rate (unit labor costs) We expect nonfarm productivity growth to have been revised up in the third quarter to 3.3% at an annualized rate, compared with the 3% in the advance estimate. This would be consistent with the already released upward revision to third quarter output. Productivity growth has improved recently but the trend remains very weak and a quick turnaround is unlikely. Productivity growth normally slows as expansions age, and the boost to productivity from a tight labor market is not a sure thing. Unit labor costs will likely be revised lower in the third quarter. Compensation in the third quarter was revised lower, therefore we expect unit labor costs to have fallen 0.8% at an annualized rate, compared with the 0.3% gain in the advance estimate. Also based on the new compensation data, second quarter unit labor costs are expected to be revised lower, showing a small decline. 7 NOVEMBER 30, 2017 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH The Week Ahead THURSDAY, DECEMBER 7 Jobless claims (week ended December 2; 8:30 a.m. EST) Forecast: 240,000 We expect initial claims for unemployment insurance benefits to have risen from 238,000 to 240,000 in the week ended December 2, leaving them a touch below of their prior four-week moving average of 242,250. New filings are volatile this time of year because of the holidays and the incoming data is for the week after Thanksgiving. Because of the potential seasonal adjustment issues, it’s difficult to be overly confident in the forecast. Claims will be less useful in assessing the health of the labor market over the next several weeks because of the holidays. EUROPE By the Dismal (Europe) staff in London and Prague (Updates are made on Mondays.) Summary, December 4: Next week will bring October retail sales figures for the euro zone. Following the abysmal country results which were released during the past week, we were forced to revise sharply down our initial forecasts of a slight decline. We are now pencilling in a much harsher 1% m/m contraction, which should more than reverse the 0.7% increase in September. This will bring the yearly rate down to only 1.2%, from 3.6% in September, well below the 2.6% average for the previous 12 months. We caution against reading too much into the October results; we do not believe the upward trend in the euro zone’s consumer spending has at all halted. All leading surveys are extremely upbeat, and both the further tightening of the labour market and the continuing recovery imply a rebound in November. First, we expect that October’s sharp plunge in energy consumption on the back of the higher-than-average temperatures across the bloc will be reversed in November, particularly as we already know that temperatures over the month were actually below their long-run average in most major countries. Similarly, the fall in temperatures is set to have boosted clothing sales in the middle of the quarter after October’s mild weather dented demand for retailers’ new winter collections. Regarding the other subsectors, individual country data suggest that declines were broad-based across all types of stores in October. Unfortunately, we fail to come up with a good reason for this. We caution, though, that these data are volatile and often revised, so we expect either a strong revision or a mean-reversion in November. Accounting for the latter and assuming a stable level in December, we expect retail sales to have increased by 0.3% to 0.4% q/q in the last stanza of the year, another good result following already upbeat numbers for the second and third quarters. Across the Channel, all eyes will be on the release of the U.K.’s industrial production figures for October. We forecast that output remained steady following the unexpected 0.7% m/m jump at the end of the third quarter, but we caution that for once risks are actually tilted to the upside regarding the country’s industrial performance. Despite remaining volatile, confidence surveys broadly suggest that U.K. factories are finally starting to benefit from the lower currency, as new export orders have surged. True, the CBI Industrial Trends Survey showed that the total orders balance plummeted to -2 in October, from 7 in September, but the survey is not seasonally adjusted and the balance has fallen by 6 points on average in every October over the past decades. The PMI, by contrast, increased to 56.3 over the month, from 56 in September, as the new orders index jumped to 57.7. Across sectors, output in the energy sector likely plunged by 3% to 4% because of the unseasonably warm weather, and it is likely that mining and quarrying output remained relatively flat following swings over the previous months. This will be offset by jumps in food and clothing production, though we expect that manufacturing would have performed rather well on average. Away from the economic data and on to politics, Theresa May will dine with European Commission President Jean-Claude Juncker next Monday. Markets are anxious about the meeting since it will be the last before the European Summit on December 15, when the EU’s policymakers should decide whether 8 NOVEMBER 30, 2017 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH The Week Ahead to give the green light to the start of trade negotiations with the U.K. The pound this week was lifted by rumours that the U.K. government was ready to commit to a final divorce bill of around £50 billion. While this is undoubtedly good news, nothing is set in stone, so there are still risks the EU might decide next week that insufficient progress has been made on the other two issues left—the Irish border and citizens’ rights. . THURSDAY, NOVEMBER 30 Germany: Retail Sales (October; 8:00 a.m. GMT) German retail sales likely rose further in October following a recovery in the previous month. Sales are expected to have increased by 0.2% from September, when they grew by 0.5%. In year-ago terms, the growth rate likely slowed to 2.5% from 4.5% previously. The Markit retail PMI fell in October, decreasing to 51.2 from 52.8 in September, pointing to modest improvement in the sector during the month. Meanwhile, the GfK consumer climate indicator for October worsened, falling to 10.8 from 10.9 in September, and retreated further to 10.7 in November. Consumption expenditure supported the country’s expansion during the third quarter and will likely continue to do so in the coming quarters. However, conservative German households will likely not increase their spending significantly in coming months because the outlook remains uncertain and because of accelerating inflation. Spain: GDP (Q3; 8:30 a.m. GMT) Preliminary estimates show GDP grew by 0.8% q/q in the third quarter. The highlight of the report should be private consumption, which was lifted by the tourism high season. Tourist spending added 13% over the year in the three months to September, up from 9.2% recorded over 2016. Leading indicators point to a strong rebound in construction: The composite activity indicator ticked up to 3.5% y/y in the third quarter after declining 0.7% in the previous stanza. Likewise, industry should have contributed to GDP. Seasonally adjusted, industrial production recorded a solid third quarter at 2.5% y/y, accelerating from 2.1% in the second quarter. However, net exports may have been a drag on the otherwise muscular performance, as capital imports stayed elevated. Germany: Unemployment (November; 9:00 a.m. GMT) Germany’s seasonally adjusted unemployment rate likely remained at 5.6% in November, after it fell to this record low in September. German businesses remain confident in the country’s future expansion, increasing their labour force despite the uncertainties and geopolitical tensions, such as the lack of a coalition following parliamentary elections in Germany. The Markit PMI for October showed that new work continued to expand strongly, and the pace of increase was one of the highest over the past 6½ years. However, the unemployment rate is likely bottoming out. Germany experienced a vast inflow of refugees during the second half of 2015, some of whom will be entering the German labour force in coming years. Euro Zone: Preliminary Consumer Price Index (November; 10:00 a.m. GMT) Euro zone annual harmonized inflation likely remained at 1.4% in November compared with October. An improving labour market with rising employment will push wages higher eventually, but as of now core inflation remains far from target. That the euro area’s inflation headline fell to 1.4% in October was expected. But the standout detail from October’s CPI report was a fall in the core rate, which we didn’t see coming. Core inflation fell to 0.9%, from 1.1% in September as both services inflation and nonenergy goods inflation dipped. We expect that subdued core inflation will likely prevail for some time, but the cyclical trend remains up. The latest result will nonetheless mean that the European Central Bank was right in late October to reinforce its dovish bias, and we don’t expect it to tighten monetary conditions much further in 2018. Euro Zone: Unemployment (October; 10:00 a.m. GMT) The euro zone’s unemployment rate likely remained steady at 8.9% in October, its lowest reading since January 2009, after having fallen unexpectedly in September. Both leading and hard data show 9 NOVEMBER 30, 2017 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM CAPITAL MARKETS RESEARCH The Week Ahead that the euro zone’s momentum remained strong at the start of the fourth quarter after an already- impressive performance in the third stanza, which should have given a further lift to the area’s labour market. Accordingly, the Markit composite PMI showed that euro area job creation surged to a decade high, mainly because of a strong inflow of new business. Staffing levels are increasing in all major countries, but particularly in Germany, France, Spain and Ireland. We expect the downward trend in joblessness to continue in quarters to come, on the back of improving economic conditions around the monetary bloc, labour market reforms, and stronger industrial bases in Spain, Ireland and Portugal. FRIDAY, DECEMBER 1 Italy: GDP (Q3; 9:00 a.m. GMT) Italy reported strong economic growth in the third quarter, according to the preliminary data. Italy’s real GDP grew by 0.5%, following a downwardly revised 0.3% gain previously. Although we don’t have the GDP component breakdown, annual growth accelerated to 1.8%, the fastest since the first quarter of 2011. The astonishing performance should continue in the current quarter, as all forward- looking indicators paint a rosy picture. Business sentiment climbed past a 10-year high in October, while the manufacturing PMI rose to a new 6½-year peak of 57.8 from 56.3 in September, signaling a solid rate of improvement in business activity. Stronger than expected GDP data for the third quarter will likely prompt us to revise our annual GDP forecast upward for Italy. MONDAY, DECEMBER 4 No major economic indicators are scheduled for release. TUESDAY, DECEMBER 5 Spain: Industrial Production (October; 8:05 a.m. GMT) Spanish industrial output should have printed at 0.4% in October. Although sentiment in the sector continued to improve after hitting rock bottom in July, we have yet to see a rebound in output. Our forecast is that the energy sector improved but that consumer goods production remained weak after dropping by 0.6% m/m in September. Capital goods should have bounced back only a little, since the Catalonian crisis likely dampened optimism. Confidence among Spanish firms, however, remains firmly above that of their euro area peers as the absorption of lingering slack has been steady. Industrial capacity utilization rose to 80% by the start of the closing quarter, up from 77.6% at the beginning of the year. Euro Zone: Retail Sales (October; 10:00 a.m. GMT) Euro zone retail sales likely plunged by 1% m/m in October, more than reversing the 0.7% rise in September. The already-available preliminary country data for the area’s major economies have been grim: Spending on goods fell by 1.9% m/m in France, by 1.2% in Germany, and by 1.1% in Spain. Figures for Portugal were also dismal, showing that sales declined by 2.3% m/m at the end of the quarter, while they contracted by 0.8% in Greece and remained only steady in Ireland. We are still waiting on data for Italy, the Netherlands, Austria and Belgium; they should come in mixed, but after the disappointments observed for all major countries, we wouldn’t be surprised if they were depressed as well. Across sectors, we expect that the weakness was broad-based. The main drag should have come from energy sales, which are also expected to have plunged on the back of October’s unusually mild temperatures. The above-average weather should also have depressed demand for clothing retailers’ new winter lines, so we are penciling in a contraction in textile sales. Food sales are a wild card, but we expect they retreated as well. Our forecast is in line with the area’s Markit retail PMI, which shows that sales growth across the euro zone pulled back at the beginning of the fourth quarter. 10 NOVEMBER 30, 2017 CAPITAL MARKETS RESEARCH / MARKET OUTLOOK / MOODYS.COM