MARCH 8, 2012

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WEEKLY MARKET OUTLOOK

Moodys Capital Markets Research, Inc. Weekly Market Outlook Contributors:
David W. Munves, CFA 1.212.553.2844 david.munves@moodys.com John Lonski 1.212.553.7144 john.lonski@moodys.com Jerry H. Tempelman, CFA 1.212.553.1434 jerry.tempelman@moodys.com Ben Garber 1.212.553.4732 benjamin.garber@moodys.com Njundu Sanneh 1.212.553.4036 njundu.sanneh@moodys.com Yukyung Choi 1.212.553.0906 yukyung.choi@moodys.com Irina Makarova 1.212.553.4307 irina.makarova@moodys.com Franklin Kim 1.212.553.4419 franklin.kim@moodys.com Ervis Deda 1.212.553.1404 ervis.deda@moodys.com

Looking for Inflation in All the Wrong Places

Credit Markets Review and Outlook by John Lonski
Looking for inflation in all the wrong places.
FULL STORY PAGE 2

Topic of the Week by Jerry H. Tempelman The Week Ahead The Long View

European debt crisis update: Swimming this way and that.

FULL STORY PAGE 8

We preview 10 reports from the US, 27 from the UK/Europe, and 23 from the Asia/Pacific.
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Check our chart here for forecast summaries of key credit market metrics. Full updated stories (If the outlook improves, the funding of acquisitions and shareholder compensation will lend more support to corporate borrowings now ample pace) begin on page 19.

Credit Spreads

Defaults Issuance

Investment Grade: Year-end 2012 spread to narrow by at least 5 bp from its recent 128 bp. High Yield: Recent spread of 615 bp could fall by 110 bp in response to a forthcoming stabilization of global financial markets. US HY default rate: Up slightly, to 2.5% in June 2012 IG: up by 12% in 2012 to $954 billion HY: up by 15% in 2012 to $301 billion

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Moody's Analytics/Europe:
Enam Ahmed 44.0207.772.1668 enam.ahmed@moodys.com

Ratings Round-Up

US positives surge; Europe calm.

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Moody's Analytics/Asia-Pacific:
Fred Gibson 1.612.9270.8146 fred.gibson@moodys.com

Market Data

Credit spreads, CDS movers, issuance.

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Editor
Dana Gordon 1.212.553.0398 dana.gordon@moodys.com

Links to commentaries on: Europe, Regions, WYG, LinkedIn, PNC, banks, sovereigns, issuance, crude awakening, Aetna, HY surge, bank credit spreads, Clearwire, and consumer staples
FULL STORY PAGE 30

Moodys Capital Markets Research recent publications

Click here for Weekly Credit Outlook, our sister publication containing Moodys rating agency analysis of recent news events, summaries of recent rating changes, and summaries of recent research.
Moodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research, Inc is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products. For further detail, please see the last page.

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Credit Markets Review and Outlook

Credit Markets Review and Outlook

By John Lonski, Chief Economist, Moodys Capital Markets Research Group and Ben Garber, Economist, Moodys Capital Markets Research Group

Looking for Inflation in All the Wrong Places

In his recent semi-annual testimony to Congress, Fed chairman Ben Bernanke reiterated that a 2% annual rate of PCE (personal consumption expenditure) price index inflation is consistent over the long run with the Federal Reserves mandate to promote stable prices. The fact that the 2% target is a long-run average rate of inflation implies that the Fed can tolerate temporary deviations from 2% provided that it believes the inflation rate will eventually return to its long-term trend. This may be all well and good. However, a visiting economist from another planet might be struck by how the last two recessions, including the most severe recession since the Great Depression, were byproducts of inflationary bubbles that had absolutely nothing to do with the PCE price index. Too many investors have learned the hard way that one can make a colossal error by focusing too hard on what has been the relatively mild pace of PCE price index inflation. Indeed, there have been times where rampant asset price inflation has been of much greater importance than the moderate rate of consumer price inflation. Perhaps what is needed is a mega-price index that includes the prices of both assets and consumer products. Runaway stock price inflation sparked 2001s recession The recession of 2001 was largely the offshoot of an unsustainable surge by stock prices. Financial markets were setting themselves up for a calamitous fall when the 23% average annualized surge by the market value of common stock of the five-years-ended March 2000 surged past profits accompanying average annual increase of 4%. (Figure 1.)
Figure 1: Gross Overvaluation of Equities Relative to Profits Helped to Trigger the Recession of 2001 Recessions are shaded 17.5 15.5 13.5 11.5 9.5 7.5 5.5 89Q1 Market Value of Common Stock X Profits from Current Production

91Q1

93Q1 95Q1

97Q1 99Q1

01Q1

03Q1 05Q1

07Q1 09Q1

11Q1

Figure 2: Often Disruptive Instability of Equity Prices Differs Radically from the Great Moderation of the PCE Price Index: yy % change of moving 12-month averages Market Value of Common Stock 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0% -35.0% Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 PCE Price Index

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Credit Markets Review and Outlook Moreover, during the five-years-ended Q1-2000, PCE price index inflation averaged a very tolerable 1.8% annually. Cueing policy to the PCE price index risked missing the inflation of an equity price bubble, whose ultimate bursting sank the entire economy. (Figure 2.) Breakneck home price inflation led to an unfinished calamity However, the damage done to the global economy by the stock price inflation of 1995-2000 was nothing compared to the devastation stemming from the US real estate price bubble of 2002-2006. Much different from the PCE price indexs accompanying 2.3% average annual rise, Case-Shillers home price index of 20 metropolitan regions surged higher by 12% annualized, on average, during the five-years-ended June 2006. (Figure 3.)
Figure 3: Despite the Great Moderation of the PCE Price Index, the US Suffered Destructive Bouts of Home Price Inflation and Deflation: indices, Jan-00 = 100 Case Shiller Home Price Index of 20 Metropolitan Regions 200 190 180 170 160 150 140 130 120 110 100 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 PCE Price Index

Rapid home price inflation catapulted the ratio of home price to income up to untenable heights, where the correction of such speculative excess now enters its sixth year. (Figure 4.)
Figure 4: Unprecedented Surge by Home Prices Relative to Income Triggered the Great Recession of 2008-2009 Recessions are shaded Median Price of Existing Homes Sold as % Employment Income per Worker

450% 430% 410% 390% 370% 350% 330% 310% 290% 270%

250% Jan-89 Apr-91 Jul-93 Oct-95 Jan-98 Apr-00 Jul-02 Oct-04 Jan-07 Apr-09 Jul-11

If the recession of 2008-2009 was far more severe and lasting in terms of its pernicious effect on the US economy, then the runaway home price inflation of 2002-2006 was far more damaging than the legendary PCE price index inflation of the 1970s and early 1980s. During that span of persistently rapid consumer price growth, the five-year average annualized rate of PCE price index inflation peaked at the 8.5% of Q3-1981, which was well above its latest 2.1% average. Since 1995, the five-year average annualized rate of PCE price index inflation has risen no higher than the 3.1% of Q3-2008, where that upturn was mostly the byproduct of a surge in oil prices to record highs. Had the Fed tightened monetary policy in response to Q3-2009s 4.2% annual rate of PCE price index inflation, a horrid recession would have been even worse. So much for putting Fed policy on automatic pilot that takes its guidance solely from consumer price inflation. If only because central banks have no way of quickly influencing oil prices, it may not be particularly wise to unflinchingly gear monetary policy to consumer price indices that are very sensitive to energy price fluctuations. (Figure 5.)

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Credit Markets Review and Outlook

Figure 5: PCE Price Index Inflation Has Not Been Among the Major Drivers of Economic Distress for Some Time Recessions are shaded 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% Apr-89 Apr-91Apr-93Apr-95 Apr-97Apr-99 Apr-01Apr-03Apr-05 Apr-07Apr-09 Apr-11
Figure 6: Deflation Fears Severely Weaken Support from Record Home Affordability Note 2005's "Bubbly" Climb by Home Sales amid Plunging Affordability: mov 3-mo avgs Home Affordability Index ( L ) Total Sales of 1 Family Homes: mills of units, annlzd ( R ) 200 190 180 170 160 150 140 130 120 110 100 Jul-89 Jul-91 Jul-93 Jul-95 Jul-97 Jul-99 Jul-01 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0

PCE Price Index Inflation: yy % change

The fact that a deep plunge by home affordability was unable to curb the earlier spending spree on housing underscored the speculative nature of the erstwhile boom in home sales. (Figure 6.) Both homebuyers and mortgage creditors brushed aside the warnings of diminished affordability on the grounds that the inevitability of ever increasing home prices would correct any errors in lending. All too often, both mortgage borrower and lender assumed that even if mortgage servicing became unmanageable, foreclosures would be averted by disposing of affected properties at an attractive price. Early on that assumption proved true. Despite a plunge by affordability that included a jump by the ratio of home prices to income per worker to a record high, the home mortgage delinquency rate sank from Q3-2001s 5.3% to Q1-2005s 4.3%. The latter brought attention to how higher-than-expected prices or wages can facilitate unanticipated declines by loan delinquency rates. Its when prices and incomes lag expectations that debt repayment problems mount. Japan shows that quantitative easing need not lead to ruinous inflation Many now fret over the inflation threat implicit to the rapid growth of the Federal Reserves balance sheet. After averaging a very steady 6.1% of GDP during the 30-years-ended Q2-2008, Fed assets have since climbed up to the 19.2% of Q4-2011. But that fell short of Q4-1947s record high 19.7%. Despite how Fed assets approximated a comparatively steep 17.6% of GDP during the five-years-ended 1951, the US economy remained safely distanced from a calamitous upturn by inflation. PCE price index inflation has remained well contained notwithstanding the very rapid growth of Fed assets. In fact, the 1.7% average annual rate of PCE price index inflation during the first 3.5 years of the now elevated ratio of Fed assets to GDP is less than its 2.9% average annual rate of the 3.5 years immediately prior to the Q3-2008 start to the Feds stepped of purchases of assets. (Figure 7.) In addition, the TIPS contract shows that quantitative easing has yet to lift the expected rate of CPI inflation up to its 2.5% average of 2003-2006. (Figure 8.)

MARCH 8, 2012

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Credit Markets Review and Outlook

Figure 7: PCE Price Index Inflation Remains Well Contained Despite Surge by Federal Reserve Assets Relative to GDP Federal Reserve Assets as % US GDP ( L ) PCE Price Index Inflation: yy % change ( R ) 4.5% 19% 17% 15% 13% 11% 9% 7% 5% 94Q1 96Q1 98Q1 00Q1 02Q1 04Q1 06Q1 08Q1 10Q1 12Q1 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0%

Figure 8: Fed's Buying of Assets Has Done More to Stabilize Inflation Expectations Than to Drive Such Expectations to New Highs Federal Reserve Assets as % US GDP ( L ) Expected Annual Rate of CPI Inflation as derived from Treasury TIPS: % ( R ) 19% 17% 15% 13% 11% 9% 7% 5% 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1 12Q1 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50

Too often we forget that the Fed was not the first central bank to resort to quantitative easing during modern times. During the latter part of the 1990s, the Bank of Japan turned to quantitative easing for the purpose of ending price deflation. Nevertheless, Japanese price deflation has remained in effect since 1997 notwithstanding a jump by Bank of Japan assets from 1994s 10% to nearly 30% of that countrys GDP. (Figure 9.)
Figure 9: Relative to GDP, Fed's Asset Buying Spree Has Yet to Rival That of the Bank of Japan Assets Federal Reserve Assets as % US GDP ( L ) 30% Bank of Japan Assets as % Japan GDP ( R ) 30%

25%

25%

20%

20%

15%

15%

10%

10%

5% 1994 1996 1998 2000 2002 2004 2006 2008 2010

5%

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Credit Markets Review and Outlook

If the US now suffers from impediments to growth that are in many ways scaled-down versions of what ails Japan, then the Feds ongoing efforts to shore up a vulnerable economic recovery may not be setting the stage for a destructive episode of intractable price inflation. (Figure 10.)

Figure 10: Despite a Surge by Bank of Japan Assets vis-a-vis GDP, Japan's Version of the PCE Price Index Has Deflated Since 1997 Bank of Japan Assets as % Japan GDP ( L ) Japan's PCE Price Index ( R ) 101 29% 99 24% 97 95 19% 93 91 89 9% 1994 1996 1998 2000 2002 2004 2006 2008 2010 87

14%

MARCH 8, 2012

CAPITAL MARKETS RESEARCH GROUP / WEEKLY MARKET OUTLOOK / MOODYS.COM

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Creditof the Week Topic Markets Review and Outlook

Topic of the Week

By Jerry H. Tempelman, CFA

European Debt Crisis Update: Swimming This Way and That

Financial markets can at times seem like a Jacques Cousteau movie. One moment a school of blue fish may be swimming from left to right, when all of a sudden they start going from right to left instead and are now yellow. There have been several such changes in sentiment in financial markets recently, triggered in part by developments in the sovereign credit sphere but affecting markets in many risky assets. After a gradual improvement following the latest Greek rescue agreement on February 21, markets in equities, high yield and investment grade corporate bonds, as well as in sovereign debt, corrected this past Tuesday, with the VIX Index of S&P 500 put and call option volatility trading above 20 for the first time in more than two weeks. Sentiment changed again two days later, on better than expected German industrial output and Japanese economic growth.
Figure 1. One-year CDS-implied EDF metric of selected sovereign issuers
TM

Portugal

Ireland

Hungary

Italy

Spain

Belgium

8%

6%

4%

2%

0% Jan10

Jun10

Nov10

Apr11

Sep11

Feb12

Market-based probabilities of default of sovereign debt issued by the so-called GIIPs nations remain elevated relative to their recent lows (Figure 1). CDS-implied EDFTM (Expected Default Frequency) credit measures of Portugal, in particular, have increased significantly in recent days: its one-year metric jumped from 3.62% on Feb. 24 to 4.72% on March 7; its cumulative 5-year metric rose from 17.6% to 21.1% over the same period. While the recent liquidity injections by the European Central Bank have had a positive effect on yields of Italian and Spanish government debt, this has not been the case for Portugal (Figures 2, 3, 4). Market participants apparently believe that while Italy and Spain may be having liquidity issues, Portugal may potentially have solvency issues, and at some point be in need of a second round of financial assistance. Portugal has been able to issue short-term debt, but nothing with a maturity of more than one year. Under the terms of its existing rescue agreement, the country is supposed to access the capital markets again in 2013. Portugals current bond yields suggest that this objective is somewhat of a reach. Market participants are also increasingly worried that if and when a second rescue plan for Portugal is arranged, it will be similar in structure to the recent Greek rescue agreement. That is, financial losses will be imposed on private-sector creditors as a condition for additional financial aid, in spite of what policymakers may have wished about Greece being a unique situation.

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Credit Markets Review and Outlook Topic of the Week

Figure 2. Generic government bond yields of Italy
% 8 7 6 5 4 3 2 1 0 -1 Jan10 2-yr (lhs) 10-yr (lhs) Difference (rhs) 3.2 2.8 2.4 2.0 1.6 1.2 0.8 0.4 0.0 -0.4 Jun10 Nov10 Apr11 Sep11 Feb12

Figure 3. Generic government bond yields of Spain

% 7 6 5 4 3 2 1 0 Jan10 2-yr (lhs) 10-yr (lhs) Difference (rhs) 3.2 2.8 2.4 2.0 1.6 1.2 0.8 0.4 0.0 Jun10 Nov10 Apr11 Sep11 Feb12

Figure 4. Generic government bond yields of Portugal

% 21 18 15 12 -2 9 6 3 0 Jan10 -4 -6 -8 Jun10 Nov10 Apr11 Sep11 Feb12 2-yr (lhs) 10-yr (lhs) Difference (rhs) 4 2 0

Update on the Greek drama Greece appeared to be making progress this past week on its debt-exchange. On Monday, 12 members of the Institution of International Finance announced they would participate in the exchange; on Wednesday that numbers was expanded to 32 institutions, which in aggregate own 84 billion of Greek debt, or 40.8% of Greeces 206 billion of debt owned by private institutions. On Thursday, a Greek government official
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Credit Markets Review and Outlook Topic of the Week stated that more than 75% of all Greek debt held in private hands had been tendered into the exchange. The country also indicated it would not have any money available to repay debt issued under English law a move designed to get holders of those particular debt tranches to participate in the exchange even though they could not be forced to do so with collective-action clauses retroactively attached to bonds issued under Greek law. The International Swaps and Derivatives Association did not update its March 7 determination that no credit event had occurred with respect to the Greek debt restructuring; such a credit event would trigger payment on CDS contracts written on Greek government debt. ISDAs determination came in response to two very specific questions. The first was whether Greek government debt held by private investors had become economically subordinate to bonds previously held by the European Central Bank and national central banks that had been exchanged for new debt not subject to the restructuring. The second question was whether there had been an agreement between Greece and holders of private Greek debt that constitutes a credit event. Thus, ISDAs determination did not answer, for example, whether the imposition of collective-action clauses, in combination with the Greek debt restructuring itself, constitutes a credit event. Indeed, ISDA pointed out that its decision does not exclude the possibility that a determination of a credit event may yet be made in response to additional questions. Many observers believe that the invocation by Greece of a collective-action clause will be deemed a credit event by ISDA. Moodys Investors Service recently downgraded Greeces local- and foreign-currency bond ratings from Ca to C, the lowest notch on the Moodys rating scale. Moodys stated that the distressed-debt exchange constitutes a default because (i.) the exchange imposes losses on existing investors, and (ii.) an outright default would have been likely in the absence of the debt exchange.

MARCH 8, 2012

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The Week Ahead

The Week Ahead

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

FRIDAY, MARCH 9

Employment Report February Time: 8:30 am Forecast: 210,000 nonfarm payrolls, 8.3% unemployment rate The February jobs report is expected to bring payroll growth in excess of 200,000 for three straight months, a feat that has only been produced once before in the current recovery. Jobless claims are holding at their lowest levels in four years, which points to sustained strength in hiring. Yet at 58.5%, the current share of the working aged population who are employed trails the pre-recession level by over 4%, which means substantial progress is still needed to repair the unemployment problem. Trade Balance January Time: 8:30 am Forecast: -$49.0 billion Rising oil prices may lead the January trade deficit to its widest level in seven months. Oil aside, trends in imports are still consistent with robust demand for US goods. Capital goods imports, which are key components in the US production process, expanded 12% annualized last quarter, greatly improving on the third quarters weak 2% pace.
TUESDAY, MARCH 13

Retail Sales February Time: 8:30 am Forecast: 1.0% overall, 0.7% ex auto February is projected to bring the fastest retail sales growth in five months, led by explosive gains in auto sales. Vehicle sales reached the four year high of 15.1 million annualized units last month, which may lead this quarters GDP result to beat forecasts. Additionally, Februarys 6.7% yearly same store retail gain is the ten month high, which shows broader consumer sector strength beyond autos. Business Inventories January Time: 10:00 am Forecast: 0.6% Inventories are in line to build positive momentum in January after greatly contributing to growth last quarter. The 1.9% boost to GDP in Q4 was the seven quarter high, showing greater business sector confidence following the mid-year lull in activity. Though inventories may currently fall short of the $54 billion increase to last quarters real growth, the solid trends in retail sales may ultimately make inventories a long-term positive for the economy. FOMC Rate Decision Time: 2:15 pm Forecast: 0-0.25% Fed Funds target The second FOMC meeting of the year will likely leave the Federal Reserve in a holding pattern, as improved hiring contrasts with policymakers cautious outlook. Pressure on the Fed to tighten may mount if recent income gains continue to allow inflation to exceed the 2% yearly growth target. Yet given the high level of unemployment, reversal of Fed easing may only develop if inflation runs hot beyond the recent gains from higher fuel costs.
10 MARCH 8, 2012 MOODYS CAPITAL MARKETS RESEARCH, INC. / WEEKLY MARKET OUTLOOK / MOODYS.COM

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The Week Ahead

WEDNESDAY, MARCH 14

Import Price Index February Time: 8:30 am Forecast: 0.5% Higher commodity costs may lead the Import Price Index to rise for the second straight month in February. Yet early March figures show softer price trends. Oil has dropped $5 a barrel from this years high as Europes slump and lower expectations for Chinese growth are moderating one source of inflation concerns.
THURSDAY, MARCH 15

Producer Price Index February Time: 8:30 am Forecast: 0.4% overall, 0.1% core Februarys Producer Price Index is in line to expand at the fastest rate in five months as commodity prices shot higher. Higher raw materials costs have fed through to other productsthe 3.0% yearly rise of the core finished goods PPI is the multi-year high. Near-term declines in oil and other commodities may ultimately slow this trend.
FRIDAY, MARCH 16

Consumer Price Index February Time: 8:30 am Forecast: 0.4% overall, 0.2% core The Consumer Price Index may expand at the fastest rate in ten months in February, with gasoline prices leading the way. Though the 2.9% yearly change of the CPI in January breeds discomfort, this value has fallen from last years high of 3.9%. If the gas-powered gains fade out in the months ahead, inflation risks may once again appear to be tilted to the downside. Industrial Production & Capacity Utilization February Time: 9:15 am Forecast: 0.5% industrial production, 78.9% capacity utilization Industrial production is forecast to expand in February as indicated by surveys of business activity. New export orders in the ISM Manufacturing Index reached the ten month high last month, as external demand still gives a lift to US production. The steep fall in January durable goods orders was influenced by the expiration of business tax credits, which implies that the longer-term positive demand trends remain intact. University of Michigan Consumer Confidence March Preliminary Time: 9:55 am Forecast: 75.2 Confidence in the March Michigan survey may hold onto Februarys one year high thanks to the brighter employment picture. Gasoline prices will weigh on confidence and will ultimately steal much of the funds from the payroll tax cut. Yet strong auto sales show the consumer is gaining resiliency to negative economic shocks.

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The Week Ahead

EUROPE
By the European staff of Moodys Analytics Release times are Greenwich Mean Time

Focus: Uncertainty over Greece grows All eyes are on Greece, which is facing increasing obstacles in fighting its sovereign debt crisis. A major threat is that the harsh austerity measures introduced to secure another tranche of support from the EU and International Monetary Fund will further eviscerate the countrys economy. Moreover, it is still uncertain that even if Greece manages to adhere to the new rescue scheme, the countrys debt levels will become sustainable and reduced to 120% of GDP by 2020, as the assumptions of the plan could prove to be too optimistic. The growing uncertainty regarding possible Greek default is not doing any good to the already-shaken economy of the euro zone. The region has probably entered recession; GDP contracted in the last quarter of 2011 by 0.3% q/q and will most likely fall further in the first three months of this year. Moreover, the February composite Purchasing Managers' Index fell again below the no-change level of 50 and points to a further slowdown in business activity. The euro zone industrial production data coming out next week will show a continued slowdown in the region's manufacturing sector, which we expect to shrink 0.1% y/y. Also, Italian GDP data will confirm that the regions third largest economy entered recession at the end of 2011, with its output contracting for a second consecutive quarter. Moreover, the ZEW Indicator of Economic Sentiment, after a short-lived rebound in February, will most likely return to more negative territory, indicating a weaker outlook. At the same time, because of high energy prices, the euro zone's inflation is expected to have remained elevated at the beginning of this year and jumped to 2.7% y/y in February.
FRIDAY, MARCH 9

Germany Consumer Price Index February Time: 7:00 a.m. GMT Forecast: 2% y/y German inflation remains relatively contained. The national CPI fell 0.4% m/m but rose 2.1% y/y in January, while the EU-harmonized measure of consumer prices increased 2.3% y/y. The European Central Bank has kept rates at 1% because of the deteriorating euro zone outlook, but the price level has not been affected. We expect only a modest rise in consumer prices, as the German economy slides into recession because of the euro zone debt crisis. France Industrial Production January Time: 7:45 a.m. GMT Forecast: 0.2% m/m French industrial production likely rose slightly in January after a large fall the previous month. However, demand for French products likely remained under pressure from fiscal tightening at home and in key European trading partners. The purchasing managers' index for manufacturing, a leading indicator of production, was in the territory associated with contraction in January for the sixth month. Germany Foreign Trade January Time: 8:05 a.m. GMT Forecast: 13 billion The German trade surplus fell to 13.9 billion in December from a revised 14.9 billion a month earlier. We expect the sovereign debt crisis to affect Germany further this year. Slowing exports will drag on the balance in the coming months as key trade partners in the euro zone and the UK face recession. The German economy contracted 0.2% q/q in the last quarter of 2011, and we expect it to grow a modest 0.3% for 2012 as a whole.
12 MARCH 8, 2012 MOODYS CAPITAL MARKETS RESEARCH, INC. / WEEKLY MARKET OUTLOOK / MOODYS.COM

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The Week Ahead

Spain Retail Sales January Time: 8:05 a.m. GMT Forecast: -7% y/y Spanish real retail sales fell 6.2% in year-ago terms in December, following a 7.3% drop in the previous month. Retail sales will be weak in the coming months. The Spanish economy slipped into a recession in the fourth quarter of 2011 and will likely contract for most of this year. This will put upward pressure on already elevated unemployment. Wage growth will also be muted. Household wealth is being further eroded by the downward correction in property prices. Italy Industrial Production January Time: 9:00 a.m. GMT Forecast: 0.3% m/m Moody's Analytics expects Italian production to weaken in coming months as fiscal tightening, falling exports and tight credit weigh on demand. Further deterioration is consistent with Italys manufacturing purchasing managers' index, which remained in contractionary territory for sixth month in January. The rise in the PMI to 46.8 from 44.3 in December reflects mainly slower contraction in new orders. United Kingdom Producer Price Index February Time: 9:30 a.m. GMT Forecast: 4.3% y/y UK producer price pressures have eased in recent months. The output price measure rose 4.1% y/y in January, down from a 4.8% increase the previous month. In month-ago terms, prices rose 0.5%. Meanwhile, the input price measure also rose 0.5% m/m. In annual terms, input prices gained 7% y/y, down from 8.9% previously. A renewed uptick would not be surprising in February given the sharp rise in the price of Brent crude, which averaged around 120 per barrel during the month, up from around 110 in January. United Kingdom Industrial Production January Time: 9:30 a.m. GMT Forecast: 0.3% m/m UK industrial production rebounded in December, driven by manufacturing. Output rose 0.6% m/m, reversing the 0.6% contraction reported in November. In annual terms, output shrank 3.3%, adding to the 3.6% contraction reported previously. With the purchasing managers' index back in expansionary territory in January, continued production gains may also be reported during the month. Nonetheless, the outlook for UK manufacturing in 2012 is downbeat, with domestic and foreign demand expected to weaken as the UK and key euroland trade partners fall back into recession. United Kingdom Foreign Trade January Time: 9:30 a.m. GMT Forecast: -8.1 billion The UK foreign trade deficit narrowed notably in the final month of 2011 driven primarily by a strong fall in imports. The deficit came in at 7.1 billion, following a revised 8.9 billion deficit in November. The firmly in deficit will persist through 2012. Although the UK economys slide into recession will help cool demand for imports, weaker exports will drag on the balance as euroland trading partners also experience recession.
MONDAY, MARCH 12

Germany House Price Index February Time: 10:05 a.m. GMT Forecast: 5.6% German house prices declined in January, even though they increased in year-to-year terms. Prices for new homes fell 0.5% m/m but rose 6.2% y/y, following a 7.1% y/y increase in December. Germany is already affected by the sovereign debt crisis, and we expect weaker economic growth in the near future. In addition, constrained household finances are weighing on demand, helping to reduce prices further. Italy GDP Fourth Quarter 2011 Time: 11:00 a.m. GMT Forecast: -0.7%
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The Week Ahead

Italys economy slipped back into recession at the end of 2011, according to preliminary estimates. Output dropped 0.7% q/q in the fourth quarter, following a 0.2% decline in the previous stanza. Fiscal tightening, rising unemployment, tightening credit conditions, and deteriorating exports will weigh on demand in the coming months. We expect the economy to contract 1% this year but to increase 0.7% in 2013. Risks to the outlook are weighted to the downside, as the government will be forced to announce additional fiscal austerity plans to improve its fiscal stance. OECD Composite Leading Indicators January Time: 12:25 p.m. GMT Forecast: 100.6 The OECD composite leading indicators inched higher to 100.4 in the final month of 2011 from 100.2 a month earlier. We expect further improvements in the coming months on the back of the good start to 2012 by the U.S. Nevertheless, many key individual country measures are showing below-trend growth. Problems in the euro zone will remain a key risk to the global economy in 2012. World Moody's Analytics Survey of Business Confidence 3/9/2012 Time: 3:00 p.m. GMT In the previous survey, global businesses remained guarded, consistent with where sentiment has been since the end of last year. Confidence has recovered from the hit it took last summer during the flare-up of the European debt crisis and the political spectacle in the U.S. over raising the Treasury debt ceiling, but it remained subdued. Businesses considered current economic conditions to be very good, but they were much less upbeat when responding to specific questions regarding hiring and investment. The recent surge in oil prices has yet to affect pricing pressures. The confidence survey results have been consistent with a global economy that is expanding at the low end of its potential.
TUESDAY, MARCH 13

Russian Federation Foreign Trade January Time: 5:00 a.m. GMT Forecast: US$21.7 billion Russias merchandise trade balance reported a surplus of US$20.4 billion in December, up from a revised $17.01 billion in the previous month. Exports growth slowed with weakening global demand, while import growth also slowed in a year-ago terms. Exports growth will continue to slow in the coming months, putting downward pressure on the trade balance. Meanwhile, slower import growth later this year amid a weaker domestic environment will prevent a sharp fall in the balance. France Consumer Price Index February Time: 7:30 a.m. GMT Forecast: 2.7% Frances EU-harmonized annual inflation rate is expected to have increased in February because of stronger cost-push pressures. The price of Brent crude oil surged during the month after Iran halted exports to a number of European countries. The oil price remained above its level in the same month last year, and the gap widened compared with January, putting upward pressure on annual energy prices. However, pressures driven by domestic demand likely weakened, as Moodys Analytics expects that the French economy went into a mild recession at the start of this year. Spain Consumer Price Index February Time: 9:05 a.m. GMT Forecast: 1.9% Spanish consumer prices rose 2% y/y in January, down from a rise of 2.4% y/y in December. On a monthago basis, they contracted 1.1% in January after increasing 0.1% in the previous month. Tensions over the European debt crisis and an economy in recession will help dampen inflation pressures in the coming months. Core inflation increased 1.3% y/y in January, down from a 1.5% increase in the previous month. United Kingdom Foreign Trade January Time: 9:30 a.m. GMT Forecast: -8.1 billion
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The Week Ahead

The U.K. foreign trade deficit narrowed notably in the final month of 2011, driven primarily by a strong fall in imports. The deficit came in at 7.1 billion, following a revised 8.9 billion deficit in November. The deficit will persist through 2012. Although the U.K. economys slide into recession will help cool demand for imports, weaker exports will drag on the balance as euroland trading partners also experience recession. Italy Consumer Price Index February Time: 10:05 a.m. GMT Forecast: 3.4% According to preliminary estimates, the EU-harmonized consumer price growth in Italy remained at 3.4% y/y in February. With the Italian economy in recession, inflation pressure should ease in the coming months. On a year-ago basis, GDP contracted 0.5% in the fourth quarter after growing 0.2% in the previous stanza. We expect the economy will contract further in the first half of this year. However, should crude oil prices remain elevated, price growth will start to accelerate later this year. Euro Zone, Germany ZEW Indicator of Economic Sentiment March Time: 11:00 a.m. GMT Forecast: -18.5 Investor confidence improved sharply in February. The euro zone ZEW indicator of economic sentiment index increased to -8.1 from -32.5 a month earlier, while the measure for Germany rose to 5.4 from -21.6. Nevertheless, the outlook is weak as a number of euro area countries are in a recession already, and industrial production, industrial orders and retail sales point to a slowdown in the German economy.
WEDNESDAY, MARCH 14

United Kingdom Employment Situation February Time: 10:30 a.m. GMT Forecast: 8.5% unemployed The headline ILO-harmonized unemployment index for the U.K. held at 8.4% in the three months to December. The national claimant count jobless rate, which is a month ahead of the ILO data, was unchanged at 5% in January. Nevertheless, the labor market is deteriorating, and unemployment is expected to head higher as the U.K. slips back into a mild recession. Euro Zone Consumer Price Index February Time: 11:00 a.m. GMT Forecast: 2.7% The euro zones consumer price growth accelerated to 2.7% in February from 2.6% in the previous month, according to Eurostat's preliminary estimate. The euro zone's slip back into recession, combined with the sovereign debt crisis, could dampen inflation pressures in the coming months. However, should crude oil prices remain elevated, price growth will start to accelerate later this year, increasing the risk of workers seeking higher wages as compensation. Euro Zone Industrial Production January Time: 11:00 a.m. GMT Forecast: -0.1% Euro zone industrial production contracted 1.1% in December from the previous month, when it remained unchanged. In annual terms, output contracted 2% in December, following 0.1% growth in the previous month. Industrial production will remain weak through 2012. The January and February purchasing managers' indexes for euro zone manufacturing held in contraction territory.
THURSDAY, MARCH 15

Russian Federation Government Finance January Time: 5:00 a.m. GMT Forecast: RUB500 billion

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In 2011, the consolidated budget of Russia's federal, regional and local governments, as well as those of the state social funds, posted a surplus of RUB848.8 billion. High oil prices have been extremely beneficial for Russia, allowing a budget surplus in 2011, and part of oil- and gas-related revenues was used to rebuild the reserve fund. Nevertheless, Russias vulnerability to oil-price shocks increased further because of the weaker global economic outlook and because the oil price needed to balance the budget has risen.
FRIDAY, MARCH 16

Italy Foreign Trade January Time: 10:05 a.m. GMT Forecast: -2.5 billion Italy's merchandise trade balance shifted back into surplus in December. Rising exports, mainly to nonEuropean countries, and weakening imports were the main drivers. The country reported a not seasonally adjusted surplus of 1.4 billion, following a 1.6 billion shortfall in November. The trade balance, however, will deteriorate in the coming months as major fiscal consolidation throughout the euro zone dampens foreign demand for Italian products. Euro Zone External Trade January Time: 11:00 a.m. GMT Forecast: -16.2 billion The euro zones not seasonally adjusted trade balance is expected to have deteriorated in January from December and relative to the same month last year. Major fiscal tightening throughout the euro zone and uncertainty about officials' ability to resolve the sovereign debt crisis likely weighed on exports because the majority of external trade is intraregional. Such a weakening of exports would have put downward pressure on the trade balance. In addition, the trade balance is typically in deficit in January because of seasonal factors. Italy Balance of Payments January Time: 11:00 a.m. GMT Forecast: -4.5 billion Italys current account balance reversed in December. The country reported a not seasonally adjusted surplus of 400 million, following a 3.4 billion shortfall in November. However, the current account balance will remain under pressure in the coming months as major fiscal consolidation throughout the euro zone weighs on exports, while falling imports due to weakening domestic demand should improve the trade balance somewhat. Russian Federation Industrial Production February Time: 2:00 p.m. GMT Forecast: 3.5% Annual growth in Russia's industrial production regained momentum in January. Factories, mines and utilities increased output by 3.8% y/y, following a 2.5% increase in December. While production accelerated in manufacturing, output growth slowed in mining and quarrying and fell further in energy, gas and water supply in year-ago terms. External weakness remains an important downside risk, but still-robust domestic demand will keep supporting industry in the opening months of this year. Russian Federation Producer Price Index February Time: 2:05 p.m. GMT Forecast: 8.1% Russian producer prices fell 0.2% m/m and rose 8.4% y/y in January, after falling 0.1% m/m and rising 14.3% y/y in December. Prices in manufacturing and utilities led producer price declines in January, while prices in mining and quarrying rose. Producer prices are expected to continue their downward trend in the coming months, while businesses' ability to push through costs to consumers will be limited.

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The Week Ahead

By Katrina Ell and the Asia-Pacific staff of Moodys Analytics Release times are Greenwich Mean Time

ASIA-PACIFIC

Industrial production will likely be hampered by the soft landing across the region. Production in India and the Philippines is expected to remain weak, while Malaysia and Japan should show some signs of improvement. Elsewhere, the remaining bits of Chinese data out this week will likely reveal an improvement in domestic conditions. Elsewhere, we expect the flurry of Singaporean data to show a moderate recovery from Lunar New Year seasonal affects. However, the city-state will face significant headwinds from the softness in global electronic and tech demand.
FRIDAY, MARCH 9

Australia Foreign Trade January Time: 12:30 a.m. GMT Forecast: A$1.9 bil Exports received a boost from slightly higher commodity prices in January, after declining since the third quarter. Coupled with customs data showing imports eased over the month, the trade balance likely widened in January. For the foreseeable future, the import bill will be lifted by capital goods; domestic production is insufficient to meet the needs of the resources boom, and imports are filling the gap. China Consumer Price Index February Time: 1:30 a.m. GMT Forecast: 3.7% Chinese consumer prices likely rose 3.7% y/y in February, a deceleration from Januarys 4.5%. Lunar New Year festivities in January led food prices higher, causing a spike in the headline rate. With inflation likely to trend downward, policy initiatives will encourage growth. China Producer Price Index February Time: 1:30 a.m. GMT Forecast: 0.1% Producer prices were likely flat in February, after rising 0.7% y/y in January. Sustained easing in global commodity prices has driven producer-price disinflation since mid-2011. We expect this to persist through the first half, flowing through to consumer prices. China Fixed Asset Investment February Time: 5:30 a.m. GMT Forecast: 19% January and February data, combined to remove Lunar New Year distortion, should show fixed-asset investment decelerated early in 2012, from 23.8% in the year to December. Fixed-asset investment has been gradually slowing since mid-2011 thanks to tighter policy. With inflation an easing concern, the government has shifted to a pro-growth stance, which will support fixed-asset investment in the coming months. China Industrial Production February Time: 5:30 a.m. GMT Forecast: 12.5% January and February data, combined to offset Lunar New Year distortions, should show industrial production mildly decelerated early in 2012, from 12.8% y/y in December. Subsidies on a number of consumer goods in 2011 lifted the retail sector and flowed through to higher production. With their

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expiration, we expect softening in the opening months of 2012. Easier monetary conditions will support industrial production growth in coming months and support a soft landing in the economy. China Retail Sales February Time: 5:30 a.m. GMT Forecast: 17.3% January and February data, combined to offset Lunar New Year distortions, will show retail spending cooled after a rebate for white goods expired. Retail spending held up well through tighter monetary settings in the second half of 2011. Now that the government has shifted to a pro-growth stance, retail sales will continue around their trend pace of 17% y/y.
MONDAY, MARCH 12

China Monetary Aggregates February Time: 11:00 p.m. GMT Forecast: 13.5% Monetary aggregates should show some sign of a turning point in February in line with the reserve ratio cut, the passing of the Lunar New Year, and window guidance to banks to lend more to local governments. Money supply growth will likely have accelerated to above 13% while new lending should have matched or exceeded January's CNY738 billion. China Trade February Time: 11:00 p.m. GMT Forecast: -US$8 billion China's trade balance likely fell into deficit in February, although seasonal distortions increase uncertainty. In January the surplus jumped because of a drop in imports, helped by the Lunar New Year. We expect this reversed in February as conditions in the mainland suggest relatively healthy demand for commodities and other imports. Japan Machinery Orders January Time: 12:50 a.m. GMT Forecast: 6% Machinery orders likely rose 6% in January, reversing most of Decembers 7.1% decline. Capital investment plans are rising as the reconstruction effort gains momentum. Moreover, small-business sentiment is turning up, and producers forecast a pickup in manufacturing output, suggesting the economy is growing again. Malaysia Industrial Production January Time: 5:01 a.m. GMT Forecast: 4.1% Malaysias industrial production is set to start 2012 strongly. On a year-ago basis, production likely expanded 4.1%, but this is partially because of low base effects. Production in the export-led economy faces stiff headwinds from weak Western demand and the soft landing across the region. Yet, negating part of this has been the resilience at home, driven by strong household and investment activity. Japan Consumer Confidence February Time: 6:00 a.m. GMT Forecast: 40 Japanese consumer confidence likely nudged higher in February, marking a third straight gain. Confidence is receiving support from recent job and income gains. Stable financial markets, aggressive monetary easing, and a declining yen are all buoying the economic outlook. India Industrial Production January Time: 6:30 a.m. GMT Forecast: 2.1% Indias industrial sector cooled sharply through the second half of 2011 as weak domestic demand and a deteriorating global backdrop weighed on production. Output is barely rising on a year-ago basis and this is likely to persist through the first half of 2012. The uptick in January exports gives some upside risk to the
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January production figure. OECD Composite Leading Indicators January Time: 12:25 p.m. GMT Forecast: 100.6 The OECD composite leading indicators nudged higher to 100.4 in the final month of 2011 from 100.2 a month earlier. We expect further improvements in the coming months on the back of the good start to 2012 by the U.S. Nevertheless, many key individual country measures are continuing to show below-trend growth. Problems in the euro zone will remain a key risk to the global economy in 2012. World Moody's Analytics Survey of Business Confidence 3/9/2012 Time: 3:00 p.m. GMT In the previous survey global businesses remained guarded, consistent with where sentiment has been since the end of last year. Confidence has recovered from the hit it took last summer during the flare-up of the European debt crisis and the political spectacle in the U.S. over raising the Treasury debt ceiling, but it remained subdued. Businesses considered current economic conditions to be very good, but they were much less upbeat when responding to specific questions regarding hiring and investment. Pricing pressures have yet to be impacted by the recent surge in oil prices. The confidence survey results have been consistent with a global economy that is expanding at the low end of its potential.
TUESDAY, MARCH 13

Japan Industry Activity Indexes January Time: 12:50 a.m. GMT Forecast: 0.8% After growing a strong 1.4% in December, Japanese services activity likely rose a milder, albeit still-solid 0.8% in January. Jobs and incomes rose in January, supporting wholesale and retail trade. Recovery in supply chains following Thailands floods is driving improvement in the auto and electrical industries. Australia Housing Finance January Time: 1:30 a.m. GMT Forecast: -0.2% Australian housing finance likely retreated in January, after rising 2.3% m/m in December. We expect firsttime homebuyers in New South Wales moved property purchases forward before the stamp duty exemption for properties priced up to A$600,000 ended on 31 December. Elsewhere, weak auction clearance results and subdued consumer confidence suggest caution in the opening months of 2012. We expect looser monetary settings coupled with soft house price growth will gradually encourage potential homebuyers back into the market in 2012. Philippines Industrial Production January Time: 3:30 a.m. GMT Forecast: -9.1% Electronics production in January was affected by Lunar New Year celebrations, as China is a key market. Food manufacturing improved as the recovery from earlier weather damage continues. Japan Monetary Policy March Time: 6:00 a.m. GMT Forecast: 0.05% The Bank of Japan expanded its quantitative easing program by 10 trillion to 65 trillion in February and named an inflation goal of 1% to fight deflation and support the countrys recovery. The moves are working; the yen has declined sharply against the U.S. dollar and euro in recent weeks, supporting business confidence and export competitiveness. The target interest rate remains locked at 0% to 0.1%.
WEDNESDAY, MARCH 14

South Korea Employment February

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Time: 12:00 a.m. GMT Forecast: 3.5% Unemployed Labor demand in Korea remained favorable through the second half of 2011 and into January, even as global demand and local production slowed. There may be some labor hoarding as firms expect the current lull in global demand to pass fairly soon. However, the period from January to March often has a spike in labor market entrants as school leavers and university graduates (who finished their studies in November) enter the labor force. This can lead to unpredictable spikes in the unemployment rate during these months, so don't worry too much if unemployment jumps to 4%. India Wholesale Price Index February Time: 7:30 a.m. GMT Forecast: 6.5% Inflation has turned in India, with the closely watched wholesale price index easing sharply through the fourth quarter and into January. This is likely to continue as demand remains weak, while food price inflation has turned, helped by year-ago base effects and decent rainfalls. The recent runup in global oil prices is unlikely to have much of a domestic impact where prices are still controlled.
THURSDAY, MARCH 15

Singapore Employment 2012Q1 Time: 3:00 a.m. GMT Forecast: 2.1% Unemployed Singapore's labor market remains healthy and has defied expectations of a softening for some time. Some increase in the unemployment rate from historically low rates is still expected for the fourth quarter given lacklustre industrial production in the period. A dimmer regional outlook likely also slowed hiring in touristrelated services. Singapore Retail Sales January Time: 6:00 a.m. GMT Forecast: 3.5% Seasonal factors such as the Lunar New Year will make January's reading less useful, but some trends can still be discerned. Domestic demand in the city remains relatively healthy, abstracting away from government policy-distorted motor vehicle sales, and retail spending should continue growing at a sustainable pace in the first half of 2012.
FRIDAY, MARCH 16

Singapore Foreign Trade February Time: 1:30 a.m. GMT Forecast: 12% Nonoil domestic exports for Singapore fell more than expected in January but likely rebounded in February as the Lunar New Year ended. That said, electronics exports remain weak because of supply chain problems from Thailand and general weak global demand, and will drag on overall exports in the first half of the year.

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The Long View

The Long View The US: If the outlook improves, the funding of acquisitions and shareholder compensation will lend more support to corporate borrowings now ample pace
By John Lonski and Ben Garber, Moodys Capital Markets Research Group March 9, 2012
CREDIT SPREADS

As measured by Moody's long-term average corporate bond yield, the recent investment grade corporate bond yield spread of 128 bp eclipsed its 122 bp mean of the two previous economic recoveries. Cash flow growth amid corporate borrowing restraint, as well as an accommodative monetary policy, is likely to narrow this spread by at least 5 bp by year-end 2012. The recent high-yield bond spread of 615 bp is much wider than what otherwise might be inferred from February 2012's US high-yield default rate of 2.3% and its projected rise to 3.1% by September-October 2012. A continued narrowing by the high-yield bond spread requires more confident outlooks for revenue growth and sufficient access to financial capital in the event of an adverse systemic shock. Owing to the financial systems importance to accessibility to reasonably priced liquidity, the high yield bond spread is more likely to return to its 435 bp average of May 2011 if the investment grade bank bond yield spread narrows substantially from its recent 246 bp. For example, February-May 2011s 449 bp average for the high yield bond spread was joined by a 168 bp average for the US investment-grade financial company bond spread.
DEFAULTS

Moody's forecasts that the US trailing 12-month high-yield default rate will rise from Decembers 2011s most recent bottom of 1.8% and Februarys 2.3% to 3.1% by September-October 2012. Profits growth and corporate borrowing restraint should limit defaults for now.
US CORPORATE BOND ISSUANCE

After sinking by 27% annually in 2010, US-dollar denominated investment grade corporate bond issuance grew by 6% in 2011, while the annual increase by the sum of high yield bond offerings plus new bank loan programs slowed from 2010s 106% surge to 2011s 5% rise. However, the latter owed much to a 25% increase by high yield bank loan programs. The amount of dollar-denominated high yield corporate bond issuance plunged by 15% annually during 2011.

For all of 2012, IG bond issuance may increase by 12% to $954 billion, while high-yield bond issuance could grow by 15% to $301 billion. The forecasts implicitly assume the avoidance of extremely turbulent financial markets. In terms of year to year percent changes, dollar-denominated issuance of investment-grade bonds is expected to rise by 2% for a second straight quarter in Q1-2012, while the decline by total high yield borrowings (bonds plus newly-rated bank loan programs) narrows from Q4-2011s -40% to Q1-2012s 22%. The year-over-year percent increases by corporate bond issuance through the first 10 weeks of 2012 were 26.8% for USD-denominated investment-grade, 1.9% for USD-denominated high-yield, 6.3% for eurodenominated investment-grade, and 332.8% for euro-denominated high-yield. Refinancings of both bonds and leveraged loans should be the primary drivers of bond issuance in 2012. A growing number of bond issues and newly-rated bank loan programs will fund acquisitions and shareholder compensation, but only after financial markets stabilize sufficiently. Companies will resort to acquisitions and divestitures in order to better cope with the USs slow growing economy.
US ECONOMIC OUTLOOK

In response to a further climb by business sales, jobs growth should continue, albeit sometimes at a subpar pace. The Federal Reserves efforts to contain long term borrowing costs will help to contain downside economic risks. Also, any slowing of economic activity is likely to prompt a remedial drop by Treasury bond yields. In view of how persistently high unemployment will soften wages, low inflation should help to rein in
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The Long View Treasury bond yields. If Europes difficulties intensify or the price of crude oil skyrockets to a new record high, the 10-year Treasury yield could sag to 1.5%. Energy costs and Europes sovereign debt issues constitute the biggest threats to the adequacy of economic growth going forward. The potential loss of economic activity to spending cuts and tax hikes by financially-stressed state and local governments also deserves consideration.

EUROPE

By Enam Ahmed and the European staff of Moodys Analytics March 9, 2012

GDP in the single-currency area currency contracted by 0.3% in the final months of 2011 from the previous stanza when it rose by 0.1%. This is the first decline in value added since the second quarter of 2009. Softening domestic demand and deteriorating external conditions were behind the contraction. The weak growth figures are likely to be extended through the first half of 2012. The euro zone has already probably slipped back into a technical recession on the heightened tensions over the European debt crisis and slowing global demand. With the outlook weak, the European Central Bank cut its key policy rate in November and December and extended more credit facilities to the banking sector. We expect the ECB to hold its key policy rate at 1% through 2012. The UK economy contracted by 0.2% q/q in the fourth quarter of 2011, after growing by 0.5% in the opening stanza. Output has effectively remained unchanged since the third quarter of 2010, which points to an underlying weakness in the recovery. There is a high risk the economy will contract again in the current quarter. Fiscal consolidation at home will weigh further on domestic demand; while weakness in key trading partners will dampen exports. Around half of all UK exports go to the euro zone, where governments are implementing harsh austerity measures. The Bank of England continues to hold its key policy rate steady at the record low of 0.5% on concerns about the UK economic recovery. The central bank expanded its asset purchase program target by a further 50 billion in February following a 75 billion increase in October on fears over the outlook. This takes the central banks asset purchase target now stands at 325 billion.

By the Sydney office of Moodys Analytics March 9, 2012

ASIA PACIFIC

The brighter tone from this years purchasing managers surveys suggests the global economic recovery is slowly gaining momentum. Global manufacturing is turning up in 2012 after slowing in late 2011. According to Japanese manufacturers, which account for about 12% of global factory output, these gains should extend through March. From there onwards, recent aggressive monetary easing from the worlds central banks will give a leg up to global demand, cementing a stronger second-half performance. Stability in financial markets foreshadows improvement in consumer and business confidence, which is key to a self-sustaining global expansion. Tempering optimism is Europes debt crisis; any flare-up and all bets are off. Nevertheless, incoming data suggest the U.S. recovery is improving, the euro zone is stabilising, and AsiaPacific economies are proving resilient. Manufacturing surveys point to a pickup in global GDP growth. The recent data suggest Asian exports are poised to pick up, which will boost GDP growth as the year progresses. The book-to-bill ratio, a proxy for global semiconductor demand, is nearing its neutral rate of 1, indicating Asias tech manufacturers should post solid production gains ahead. The rise in U.S. manufacturing orders, which tend to lead the Asian export cycle by about six months, corroborates this view. As this grows clearer, expect the regions monetary bias to shift from easing to neutral.

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Ratings Round-Up

Ratings Round-Up
By Njundu Sanneh

US Positives Surge; Europe Calm

A surge in the number of US upgrades this week brought their proportion to 58%, the highest in the past six months and the first time above 50% since early January. The eleven upgrades included energy companies Concho Resources Inc., Continental Resources Inc., and Exelon Corporation. The 58% follows on last weeks 44%, which was also a significant gain on the 30% vicinity for many weeks prior to that. In Europe rating change activity was fairly quiet with only six companies affected. The downgrade of the Government of Greece may mean an increase in the number of rating changes next week..

FIGURE 1 Rating Changes - US Corporate & Financial Institutions: Favorable as % of Total Actions

By Count of Actions
1.0 0.8 0.6 0.4 0.2 0.0 Sep00
Source: Moody's

By Amount of Debt Affected

1.0 0.8 0.6 0.4 0.2 0.0 Jan12

Feb02

Jul03

Dec04

May06

Oct07

Mar09

Aug10

* Trailing 3-month average

FIGURE 2 Rating Key

BCF CFR CP FSR IFS IR JrSub LGD LTCF LTD LTIR Bank Credit Facility Rating Corporate Family Rating Commercial Paper Rating Bank Financial Strength Rating Insurance Financial Strength Rating Issuer Rating Junior Subordinated Rating Loss Given Default Rating Long-Term Corporate Family Rating Long-Term Deposit Rating Long-Term Issuer Rating MM MTN Notes PDR PS SGLR SLTD SrSec SrUnsec SrSub STD Money-Market MTN Program Rating Notes Probability of Default Rating Preferred Stock Rating Speculative-Grade Liquidity Rating Short- and Long-Term Deposit Rating Senior Secured Rating Senior Unsecured Rating Senior Subordinated Short-Term Deposit Rating

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FIGURE 3 Rating Changes: Corporate & Financial Institutions - US

Old New Old New Old New Old STD STD LTD LTD FSR FSR LGD Rating Rating Rating Rating B1 Ba1 B3 B3 Ba2 Ba3 Baa1 B1 Ba3 B2 B1 Ba3 B2 A1 Caa2 Ba1 Ba3 Ba2 Caa1 Caa1 LGD-4 LGD-3 Ba1 Ba1 A3 Ba3 B1 B3 Ba3 Ba1 B1 A2 B3 Baa3 LGD-2 LGD-3 LGD-3 LGD-2

Date 2/29/12 2/29/12 2/29/12 3/1/12 3/1/12 3/1/12 3/1/12 3/1/12 3/2/12 3/2/12 3/5/12 3/5/12 3/5/12 3/5/12 3/5/12 3/5/12 3/5/12 3/5/12 3/6/12

Company ALTRA HOLDINGS, INC. AMEREN CORPORATION NEW ENTERPRISE STONE & LIME CO., INC. BAKER & TAYLOR ACQUISITIONS CORP. CLEAR CHANNEL COMMUNICATIONS, INC. MEDICAL PROPERTIES TRUST, INC. NORANDA ALUMINUM HOLDING CORPORATION POLYMER HOLDINGS LLC EXELON CORPORATION TUBE CITY IMS CORP. AFFIRMATIVE INSURANCE HOLDINGS, INC. CASELLA WASTE SYSTEMS, INC. CONCHO RESOURCES INC. CONTINENTAL RESOURCES, INC. PINNACLE ENTERTAINMENT, INC. PINNACLE ENTERTAINMENT, INC. PNC FINANCIAL SERVICES GROUP, INC. RESTAURANT HOLDING COMPANY, LLC LIFE TECHNOLOGIES CORPORATION

Sector Industrial Utility Industrial Industrial Industrial Financial Industrial Industrial Industrial Industrial Financial Industrial Industrial Industrial Industrial Industrial Financial Industrial Industrial

Rating SrSec/LTCFR/PDR SrUnsec/BCF Srunsec/LTCFR/PDR SrSec/LTCFR/PDR LGD SrUnsec/LTCFR LGD SrUnsec/SrSec/LGD SrUnsec/LTIR SrSec/LTCFR/PDR/BCF SrSec/LTCFR/ISFR/BCF SrSec/LTCFR/PDR/SrSub SrUnsec/LTCFR/PDF LTCFR/PDF LTCFR/PDR LGD LTD LTCFR/PDR/SGL SrUnsec

Amount Up/ ($ Million) Down 210 825 250 165 2,500 450 250 6,088 300 400 1,500 1,800 350 450 218 2,300 U D D D U U D U U U D D U U U D D U U

New IG/SG LGD SG SG SG SG SG SG SG SG IG SG SG SG SG SG SG SG IG SG SG

LGD-3 LGD-4

Source: Moody's

FIGURE 4 Rating Changes: Corporate & Financial Institutions EUROPE

Date 2/29/12 3/1/12 2/29/12 3/1/12 2/29/12 3/1/12

Company AKTIA P.L.C. PEUGEOT S.A. DFS DEUTSCHE FLUGSICHERUNG GMBH WESTLB AG ELAN CORPORATION, PLC SAVINGS BANK OF UKRAINE

Sector Financial Industrial Industrial Financial Industrial Financial

Rating SrUnsec/SLTD/BCF/MTN SrUnsec/LTCFR/ST/NTN SrUnsec/MTN BFSR/JrSub/PS SrUnsec/LTCFR/PDR SrUnsec/LTD

Amount Up/ ($ Million) Down 26 5,843 70 749 625 149 D D D D U D

Old New Old New Old New STD STD LTD LTD FSR FSR Rating Rating Rating Rating A1 Baa3 Aaa B3 B2 A2 A3 Ba1 Aa3 Ca B1 A3 P-1 P-3 P-2 NP C C-

Country FINLAND FRANCE GERMANY GERMANY IRELAND UKRAINE

IG/SG IG IG IG SG SG IG

Source: Moody's

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Market Data

Market Data Spreads

Figure 1: 5-Year Median Spreads-Global Data (High Grade) Aa2 Spread (bp) 800 A2 Baa2 Spread (bp) 800

600

600

400

400

200

200

0 2003
Source: Moody's

0 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 2: 5-Year Median Spreads-Global Data (High Yield) Ba2

Spread (bp)

B2

Caa-C
Spread (bp)

2,000 1,600 1,200 800 400 0 2003

Source: Moody's

2,000 1,600 1,200 800 400 0 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Market Data

CDS Movers
Figure 3. CDS Movers - US (February 29, 2012 March 7, 2012) CDS Implied Rating Rises Issuer Range Resources Corporation Embarq Corporation Cellco Partnership Valassis Communications, Inc. Citigroup Inc. Merrill Lynch & Co., Inc. Procter & Gamble Company (The) Kraft Foods Inc. International Lease Finance Corporation Merck & Co., Inc. CDS Implied Rating Declines Issuer Edison Mission Energy K. Hovnanian Enterprises, Inc. Bon-Ton Stores Inc., (The) Radian Group Inc. Wells Fargo Bank, N.A. American Express Credit Corporation DIRECTV Holdings LLC Bear Stearns Companies LLC. (The) News America Incorporated UnitedHealth Group Incorporated CDS Spread Increases Issuer Edison Mission Energy Hovnanian Enterprises, Inc. K. Hovnanian Enterprises, Inc. Bon-Ton Stores Inc., (The) Radian Group Inc. MGIC Investment Corporation MBIA Inc. Energy Future Holdings Corp. Caesars Entertainment Operating Company, Inc. Freescale Semiconductor, Inc. CDS Spread Decreases Issuer YRC Worldwide Inc. Range Resources Corporation Valassis Communications, Inc. Residential Capital, LLC Embarq Corporation Travelport LLC Cleveland Electric Illuminating Company (The) Thomas & Betts Corporation Computer Sciences Corporation Joy Global Inc. Source: Moody's, MarkIt CDS Implied Ratings Mar. 7 Feb. 29 Baa3 Ba3 Baa2 Ba1 Aa2 A1 Ba3 B2 Baa3 Ba1 Ba1 Ba2 Aa2 Aa3 Aa2 Aa3 Ba3 B1 A1 A2 CDS Implied Ratings Mar. 7 Feb. 29 C Caa2 C Caa3 Ca Caa2 Ca Caa2 Baa1 A3 Baa2 Baa1 Baa3 Baa2 Baa2 Baa1 A3 A2 Baa1 A3 Senior Ratings Ba3 Baa3 A2 Ba3 A3 Baa1 Aa3 Baa2 B1 A1

Senior Ratings Caa1 Caa3 Caa2 Caa1 Aa3 A2 Baa2 Aa3 Baa1 A3 CDS Spreads Feb. 29 1,778 2,088 1,958 1,728 1,592 1,291 723 2,357 1,515 704 CDS Spreads Feb. 29 3,161 426 536 5,327 215 2,842 179 99 348 301

Senior Ratings Caa1 Caa3 Caa3 Caa2 Caa1 Caa2 B2 Caa3 Ca Caa1

Mar. 7 2,413 2,620 2,472 2,012 1,870 1,446 865 2,493 1,630 799

Spread Diff 635 531 514 284 279 154 142 136 116 95

Senior Ratings Ca Ba3 Ba3 Ca Baa3 Caa2 Baa3 Baa2 Baa1 Baa2

Mar. 7 2,552 201 448 5,255 154 2,785 152 72 322 276

Spread Diff -610 -225 -88 -72 -61 -57 -27 -27 -26 -25

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Market Data
Figure 4. CDS Movers - Europe (February 29, 2012 March 7, 2012) CDS Implied Rating Rises Issuer Italy, Government of Natixis Reseau Ferre de France Eksportfinans ASA Kommunalbanken AS Bremer Landesbank Kreditanstalt Oldenburg GZ Hypo Alpe-Adria-Bank International AG TDC A/S Yorkshire Building Society BAWAG P.S.K. CDS Implied Rating Declines Issuer Spain, Government of Rabobank Nederland BPCE Portugal, Government of Banco Bilbao Vizcaya Argentaria, S.A. Instituto de Credito Oficial Landwirtschaftliche Rentenbank Deutsche Bank AG Alpha Bank AE EFG Eurobank Ergasias S.A. CDS Spread Increases Issuer Greece, Government of National Bank of Greece S.A. Piraeus Bank S.A. EFG Eurobank Ergasias S.A. Alpha Bank AE Norske Skogindustrier ASA Spain, Government of Peugeot S.A. Banque PSA Finance Wind Acquisition Finance S.A. CDS Spread Decreases Issuer ConvaTec Healthcare E S.A. DEPFA Bank plc Barry Callebaut Services N.V. Banco BPI S.A. M-real Oyj Campania, Region of Abruzzo, Region of Caixa Geral de Depositos, S.A. Smurfit Kappa Acquisitions Lazio, Region of Source: Moody's, MarkIt CDS Implied Ratings Mar. 7 Feb. 29 Ba1 Ba2 Baa3 Ba1 Baa3 Ba1 B1 B2 Aa1 Aa2 Ba1 Ba2 Baa3 Ba1 A3 Baa1 Baa3 Ba1 Ba1 Ba2 CDS Implied Ratings Mar. 7 Feb. 29 Ba3 Ba1 Baa2 Baa1 Ba1 Baa3 Caa2 Caa1 Ba2 Ba1 Ba3 Ba2 Baa2 Baa1 Baa3 Baa2 C Ca C Ca Senior Ratings A3 Aa3 Aaa Ba1 Aaa A2 A1 Baa2 Baa2 Baa2

Senior Ratings A3 Aaa Aa3 Ba3 Aa3 A3 Aaa Aa3 Caa2 Caa2 CDS Spreads Feb. 29 11,593 2,216 2,188 2,179 2,238 1,467 270 401 391 944 CDS Spreads Feb. 29 1,120 506 529 998 762 471 442 890 392 422

Senior Ratings C Caa2 Caa2 Caa2 Caa2 Caa1 A3 Ba1 Baa1 B3

Mar. 7 22,065 2,698 2,627 2,477 2,479 1,646 399 483 463 1,013

Spread Diff 10,472 482 438 299 241 179 129 82 72 69

Senior Ratings Caa1 Baa3 Baa3 Ba2 B3 Baa2 Baa1 Ba2 B1 Baa2

Mar. 7 1,059 445 474 953 729 445 416 868 372 406

Spread Diff -62 -61 -55 -45 -33 -26 -26 -22 -20 -17

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Market Data

Issuance
FIGURE 5: Market Cumulative Issuance - Corporate & Financial Institutions: USD Denominated
Issuance ($B) Issuance ($B)

2009

2010

2011

2012

1,400 1,200 1,000 800 600 400 200 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Moody's / Dealogic

1,400 1,200 1,000 800 600 400 200 0

FIGURE 6: Market Cumulative Issuance - Corporate & Financial Institutions: EURO Denominated

Issuance ($B)

2009

2010

2011

2012

Issuance ($B)

1,400 1,200 1,000 800 600 400 200 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Moody's / Dealogic

1,400 1,200 1,000 800 600 400 200 0

FIGURE 7: Issuance: Corporate & Financial Institutions

Weekly Year-to-Date

Investment-Grade Amount $B 41.964 241.215

USD Denominated High-Yield Amount $B 11.015 72.192 Euro Denominated High-Yield Amount $B 2.364 12.549

Total* Amount $B 53.989 321.861

Weekly Year-to-Date

Investment-Grade Amount $B 15.517 240.547

Total* Amount $B 17.881 257.790

* Difference represents issuance with pending ratings. Source: Moody's/ Dealogic

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Moodys Capital Markets Research recent publications

8 Mar 2012 European Financial Institutions: Why Liquidity Is Unlikely to Spur the Asset Growth Desired by Policy Makers 8 Mar 2012 Regions Financial Corp.: Market Signals Improve in Expectation of TARP Repayment 7Mar 2012 WYG Plc 7Mar 2012 LinkedIn Corp. 6 Mar 2012 PNC Financial Services Group, Inc.-Despite Solid Credit Status, Implied Ratings Decline 5 Mar 2012 Banks' Credit Spreads More Subject to Secular Pressures than Cyclical Lift 2 Mar 2012 Issuance Rises in February on Near Record High Yield Volume 1 Mar 2012 Markets May Suffer a Crude Awakening 1 Mar 2012 Aetna Inc.: Market-Implied Ratings Still Strong 29 Feb 2012 Plunging Interest Rates Fuel US High Yield Surge 27 Feb 2012 Bank Credit Spreads Are Unlikely to Return to Pre-Crisis Level 27 Feb 2012 Case Study: Clearwire's EDF Metric Highlights Elevated Credit Risk 27 Feb 2012 CDS Market Warns of Underperformance in Consumer Staples' Bonds

Also available at: www.moodys.com/cmrg

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