2023-10-29 10:48:20
Mixed Financial Reports and Fears of Interest Rate Hike Cloud Markets
By Yonatan Katz and Leader Capital Markets economists
Last week, the markets were clouded by mixed financial reports and fears of another interest rate hike by the Federal Reserve. Despite these concerns, all of the data in the US showed positive signs, including a sharp increase in GDP in the third quarter at 4.9%, a significant increase in private consumption in September at 0.7%, sales of new homes rising by 12%, and orders for durable goods increasing by 4.7%. The purchasing managers’ index (PMI) in October also indicated a moderate expansion compared to stagnation in September.
Moving to Israel, the Bank of Israel presented a relatively optimistic macro forecast of 2.3% growth this year and 2.8% growth next year. However, an updated forecast by Leader Capital Markets economists suggests a more significant moderation in activity in 2024, with growth projected at only 1.7%. They also predict a budget deficit of 5.2% and an unemployment rate of 4.4% by the end of 2024. The forecast takes into account several significant assumptions, including a prolonged war of attrition, which will hinder the recovery of economic activity and damage consumer confidence. The economists also note that the global backdrop is less supportive of a recovery in the local economy, and fiscal support for businesses and households is expected to be limited.
In terms of consumption in Israel, there has been a moderate recovery after a sharp decline in credit card purchases during the early days of the war. As of October 15, there has been a gradual increase in purchases for industrial products, medical services, restaurants, and leisure activities. However, overall consumption levels remain relatively low compared to the beginning of September, particularly in education and leisure services, restaurants, tourism, and industrial products. The economists expect the recovery to be slow as long as the conflict continues.
Looking at the global economy, Europe is experiencing a contraction, with the PMI indices indicating a decline in both industry and service sectors. The indices for October showed a contraction in industry with an index of 43.1 points, similar to September, and a contraction in the service industries with an index of 47.8, down from 48.7 in September. It appears that Europe has entered a recession in the second half of 2023, with a sharp drop in new orders and a continued decrease in employment.
On the other hand, economic activity in the US is stabilizing and slightly expanding. The PMI indices point to expansion, though at a slow pace. The combined index rose to 51.0 from 50.2, with the industry index at 51.1 and the services index at 50.9. The service industries are benefiting from an increase in real wages and a tight labor market, while input prices in the service industries are moderating. Other economic data in the US also showed positive signs, including strong GDP growth, an increase in private consumption, and improvements in the job market.
The implications of these trends suggest that there is an increased likelihood of another interest rate hike by the Federal Reserve at the beginning of 2024 and the maintenance of high interest rates for most of the year. The bond market has already seen rising yields, and it is anticipated that yields will not decrease in the near future.
In Israel, the bond market has also experienced rising yields, likely influenced by a “hawkish” tone from the Bank of Israel, an increase in the volume of issuances by the Ministry of Finance, and a negative rating outlook by S&P. The yield on the 4.7-year bond reached 4.28% at the end of trading on Thursday. According to simulations of the Bank of Israel’s interest rate forecast, investing in the Shahar 928 bond could provide an average return higher than the Bank of Israel’s interest rate of 4.15% throughout the life of the bond, assuming a conservative interest rate reduction by the central bank.
In conclusion, the markets were weighed down by mixed financial reports and concerns about another interest rate hike. The US showed positive economic indicators, while Europe experienced a contraction. The Bank of Israel presented an optimistic forecast, but Leader Capital Markets economists have a more cautious outlook. Consumption in Israel is slowly recovering, and the bond market is facing rising yields. Overall, the global economic outlook remains uncertain, and the decisions of central banks will play a crucial role in shaping the future.
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