essence
The Omicron variant restored the feeling of fear in the markets, and similar to the first months after the eruption of the corona, it was accompanied by a sharp decline in world energy prices.
After four waves of corona, and in light of high vaccination rates, the ability of the Israeli economy to contain such events has increased, and the public does not change its behavior as in the first waves.
The new variant works to reduce inflation in the short term, mainly through energy and commodity prices, and possibly also through the prices of flights abroad (as long as it is measured). In the medium term inflation is more affected by supply factors,
We are lowering our inflation forecast for the next 12 months to 1.8%, due to falling oil prices.
The inflation environment of the economy is higher than that reflected in the consumer price index, and it is reflected in asset prices, as well as the rapid increase in credit in the economy. These considerations will gain more weight next year, after the Fed begins to raise interest rates. We estimate that the interest rate will not be raised before the last quarter of 2022.
In the short term, the correlation of the exchange rate with world stock prices is high, and it will determine the direction of the exchange rate. In the longer term, we do not see a change in the underlying factors that support a strong shekel.
Israel
The Omicron variant restored the feeling of fear in the markets, and similar to the first months after the eruption of the corona, it was accompanied by a sharp decline in world energy prices. Israel has stopped foreign entry into Israel, but so far there are no restrictions on local activity. After four waves of corona, and in view of high vaccination rates, the economy’s ability to contain such events has increased, and the public does not change its behavior as in the first waves. On the policy side, too, the picture is different: even if there are restrictions on gatherings, it is less likely that we will again see a mass exodus of workers to the IDF, and extensive government assistance programs.
The labor market continued to improve in October, and the number of workers who were in the IDF for corona-related reasons was only about 18,000. The unemployment rate, which includes these workers as unemployed, fell to 5.6%. The labor force participation rate is still slightly lower than before the corona However, this is a cross-border phenomenon that will probably stay with us for a long time.
The new variant works to reduce inflation in the short term, mainly through energy and commodity prices, and possibly also through prices of flights abroad (as long as it is measured). The price of a barrel of oil fell by $ 10 on the last trading day to $ 73, and the price of fuel for December fell by 3.6%. , And the restrictions now imposed by the states, only prolong the damage to the production and supply chains.The government approved the increase of the purchase tax on real estate investors from 5% to 8%. The increase in the tax rate is expected to contribute about 0.1% to the consumer price index for December. This effect is expected to be offset in the future if the government decides to raise the ceiling of the purchase tax exemption for a first apartment.
Short-term inflation expectations have fallen sharply, especially after the publication of the October price index. A similar trend was also observed in the US and was probably affected by a decline in some transport prices. The implied two-year inflation fell from almost 3% in early November to about 2.5% today. We reduce our inflation forecast for the next 12 months to 1.8%, due to a decline. Oil prices.
The world’s central banks are meeting the new variant with a limited toolbox and high inflation. In Israel, the surprise in the consumer price index in October allows the Bank of Israel a significant delay in raising interest rates, a degree of freedom that did not exist in New Zealand or South Korea, which raised interest rates due to high inflation. The decline in inflation expectations also supports a change in interest rates. The inflation environment of the economy is higher than that reflected in the consumer price index, and it is reflected in asset prices, as well as the rapid increase in credit in the economy. These considerations will gain more weight next year, after the Fed begins to raise interest rates. We estimate that the interest rate will not be raised before the last quarter of 2022.
The shekel depreciated by 3.0% against the dollar last week. It is difficult to point the finger at one factor that led to the sharp change in the trend, perhaps it is the price declines in the NADSC index, which worsened on Friday. Proximity to the end of the year sometimes causes low liquidity in the foreign exchange derivatives market, which is reflected in the rise in the dollar interest rate, and this may have had some effect on the exchange rate. In the short term, the We do not see a change in the basic factors that support a strong shekel.
global
Negative atmosphere in the markets last weekend following the emergence of a new strain of corona virus – Omicron. Last Friday, the World Health Organization announced the existence of a new and worrying corona strain originating in South Africa. According to medical experts, this is a strain with a greater infection rate than the Delta strain, and the degree of effectiveness of existing vaccines against the new strain is not yet known. Individual patients at Omicron have so far been found in a number of countries such as England, Belgium, Germany, and Israel. Pfizer, Modern and others have already announced that they are preparing to make possible adjustments to existing vaccines, and / or develop new vaccines, in order to deal with the new strain as well.
Risk off in the markets. The fear of imposing new restrictions and closures that could harm economic activity, along with risks to public health have led to a sharp response in the markets. Most of the declines in stock indices were recorded on Friday, following the announcement by the World Health Organization. The declines in Europe stood out, with the Eurostocks 50 down 4.7% on Friday and the Dax in Germany down 4.2%. In weekly summary, these indices decreased by 6.1% and 5.6%, respectively. In the US, the Nasdaq was down 3.5% last week, the S & P500 and Dow Jones were down 2.2% and 2.0%, respectively. Stock markets also declined in Asia. India shares were down 4.2%, while Hong Kong and Japan were down 3.9% and 3.3% respectively. Oil and commodity prices also fell amid fears of a slowdown in economic growth in the coming months. The price of a Brent oil barrel fell 11.6% on Friday to a level of $ 71.5, and the Commodity Price Index (CRB) also fell 4.5% on Friday. Transportation prices, some of which have jumped by hundreds of percent in the past year, have recently declined and the BALTIC DRY index, which measures changes in the cost of transporting various raw materials, has fallen by 51% since its record high in early October. Similar to other risk-off episodes, investors increased the demand for government bonds and the yield to maturity rate on 10-year US government bonds dropped to 1.48% after mid-week the yield reached 1.67%.
U.S: Before the outbreak of the new strain, mostly positive macro news. In the housing market, data for October indicated an increase in home sales. Sales of existing homes rose by 0.8% in October, compared to expectations of a decline, to an annual level of 6.3 million units, the highest level from January this year. Sales of new apartments also rose in October. U.S. households continued to increase spending and in October they rose by 1.3% while personal income rose by 0.5%. At 33.8%, it fell to 7.3% in October, a level similar to the average in the years before the Corona crisis. The University of Michigan continued to decline in November, and is at its lowest level since 2011. Core inflation as measured by the CORE PCE rose to 4.1% year-on-year in October from 3.7% in September.
Wall Street and the financial world welcomed President Biden’s decision to appoint Jay Powell for another term as head of the Fed. Lyle Brainard, whose name was mentioned as a possible replacement for Powell, was promoted to the position of Powell’s deputy. For the Fed, a continuation of the characteristics of the current policy is expected, including the “tapering” process and a possible increase in the interest rate in 2022. The protocol of the Fed’s latest interest rate decision revealed that some members support accelerating the process of reducing bond purchases, so that the interest rate tool will be available, in case inflation does not moderate. Last Friday with the rise in concerns about the new corona strain.
Eurozone: Towards a slowdown in activity and a decline in business and consumer confidence? Even before the outbreak of the new strain, there has been an increase in the spread of the corona in recent weeks in the eurozone countries, and in Europe in general. The increase in morbidity has led to the imposition of new restrictions on activity, and these have been met with significant public protests in the Netherlands, Belgium, Austria and Italy. The Austrian government decided to vaccinate the entire population and a closure was imposed for several weeks. In Germany, the IFO Institute announced a decline in the business confidence index for the fifth consecutive month, however the first estimate for Purchasing Managers’ indices for the manufacturing and services sectors for November indicated an increase, and they are at a high level of 58.6 points and 56.6 points respectively.
New Prime Minister of Germany. Olaf Schultz, leader of the Social Democratic Party, has managed to form a coalition with the Green Party and the Free Democrats, and he will soon replace Angela Merkel. According to the declarations, the coalition’s goals will be to invest in infrastructure and modernize the economy, accelerate treatment to improve the environment, increase the minimum wage, and provide housing for the weaker sections.
Japan: The wine weakened against the dollar and reached the lowest level in the last three years on Friday – 114 yen per dollar. The weakening of the wine is mainly explained by the large gap between the Fed’s expected policy and the central bank’s policy in Japan. The first estimate for the Purchasing Managers’ Index of total output in November rose to 52.5 points, the highest level in the last 37 months. Even before the advent of the new strain, and similar to European countries, there was an increase in the spread of the corona, and it is not yet clear how decision makers will act regarding the imposition of restrictions or closures.
China: The central bank left the prime interest rate unchanged, similar to the previous 18 months. However, monetary policy has focused on other expansionary measures, such as easing mortgage credit and reducing banks’ liquidity rates. In the real estate market, other companies have announced debt arrangements with their bondholders in light of the difficulties in meeting their debts, including the possibility of insolvency.
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