| Victor Behar, Director of the Economics Department at Bank Hapoalim, and Hapoalim Economists
Weekly Review Summary:
Although there is no policy of closures or restrictions in Israel, there has been a sharp decline in private consumption, which began in part even when morbidity levels were relatively low.
Similar to previous waves, it is expected that we will see some compensation in consumption after the omicron wave is over, but in our estimation the rebound in consumption will be moderate relative to the previous waves.
The annual inflation rate is expected to reach 3% in February and perhaps even slightly more. We believe that we will then begin to see a gradual decline in the level of annual inflation, but this is expected to remain above 2%.
The basic forces are still operating at a strong shekel, and we estimate that once the stock markets stabilize, the appreciation trend will return.
Rapid interest rate hikes in the United States will allow the Bank of Israel to raise interest rates in the second half of the year, without fear of the effects of interest rates on the exchange rate.
| Israel
The daily verified number is expected, by most estimates, to drop significantly this week, and it is possible that the fifth wave of the corona is starting to fade. We are seeing a sharp decline in private consumption, although there is no policy of closures or restrictions, and some of the decline began even when morbidity levels were relatively low.
In November-December, credit card sales fell by a cumulative 4.2%, and in particular spending on services fell by 11%. In January the decline is expected to be much sharper. Similar to previous waves, it is expected that we will see some compensation in consumption after the omicron wave is over, but in our estimation the rebound in consumption will be moderate relative to the previous waves.
The “wealth effect” was, in our estimation, among the factors that increased consumption between the waves of morbidity in 2021, and in light of the price declines in the markets at the beginning of the year, the atmosphere is now different. Rising prices in the economy over the past year will also moderate the rise in consumption.
The rate decreased in December to 4.1% compared to 4.6% in the previous month. The labor market has been closing the gaps created during the Corona period in recent months.
If one examines the unemployment rates by age, it can be seen (graph below) that high unemployment rates, relative to the pre-Corona period, characterize the relatively older age group in the labor market – population over age 55, and the younger age group making its first steps in the labor market 25-29 . In the older age group we may see an increase in early retirement, a process we are seeing happening now in the US for example.
| High price indices in the coming months
The price of a barrel came close to $ 90 per barrel, and the price of fuel rose by 5.3% in February. The price of electricity is also expected to rise by 4.9% in February, and a number of food producers have announced price increases in February and March.
The annual rate is expected to reach 3% in February, and perhaps even slightly more. We believe that we will then begin to see a gradual decline in the level of annual inflation, but this is expected to remain above 2%.
As the corona becomes less significant in economic conduct, we are likely to see changes in the factors influencing inflation. Transportation prices will begin to fall and there seems to be a moderation in the prices of items such as furniture and household equipment, and in the prices of cars.
On the other hand, we estimate that we will see an increase in the prices of services where the wage component is high, an increase in the prices of rents and the prices of flights. These are expected to leave inflation at a slightly higher level of 2% in 2022.
The shekel depreciated against the dollar last week by 1.8%.
Most of the depreciation was due to the foreign exchange purchases of institutional investors, who had to buy foreign currency as part of adjusting their foreign exchange exposure to falling world stock prices. Directness will probably decrease. The Bank of Israel will be able to reduce foreign exchange purchases, and perhaps even stop them. The basic forces are still operating at a strong shekel, and we estimate that once the stock markets stabilize, the appreciation trend will return.
Rapid interest rate hikes in the US will allow the Bank of Israel to raise interest rates in the second half of the year, without fear of the interest rate effects on the exchange rate. The Bank of Israel still has a high room for maneuver Macro-stability, and is expected to be much slower than the Fed’s interest rate hikes, so the interest rate differential between the dollar and the shekel is expected to widen.
| global
Amid investors’ fears of rapid Fed rate hikes and growing tensions over the possibility of Russian forces invading Ukrainian territory, there were declines in world stock indices over the past week, but these were replaced by price rises on Friday. In the weekly summary, the V indices rose by 1.3% and 0.8%, respectively, and the index remained unchanged. Since the beginning of the year, these three indices have fallen by 4.4%, 7%, and 12%, respectively.
European and Asian stock indices fell last week. Indices and decreased by 2.2% and 1.6%, and since the beginning of the year have lost their value 3.8% and 5% respectively. Weekly declines were particularly pronounced in Asia. The stock index in China fell 4%, and the indices in Korea, India, Japan, and Hong Kong fell by between 3% and 6%.
As an expression of the increase in volatility, the index rose during the week to 32 points, the highest level from May 2020, however, this index fell to 28 points towards the end of the week. The tensions between Russia and Ukraine, along with the threat of sanctions on Russia by Western countries, were in fact the main factor leading to a rise in crude oil prices, which rose by about 15% since the beginning of the month to $ 90 a barrel.
| Powell presented a “hawkish” position and markets began to price rapid increases in interest rates
The Federal Reserve’s announcement last week was neutral in itself, but in the following year Fed Chairman Powell presented a clear hawkish position. Powell stressed the improvement in the labor market (3.9% unemployment), and less the recent indicators pointing to a slowdown, or declines in the markets.
As for Powell, he estimates that it is beginning to be horizontal, and is supported by pressures from the labor market. Powell further implies that interest rate hikes will begin in March, and that these will be at a rapid pace, unlike in 2015 for example, this in light of the various circumstances. Regarding the reduction of the balance sheet – the rate of reduction will be discussed in the next decision, and after the interest rate rises once. The possibility of actively selling bonds was not ruled out. Even if the Fed does not sell bonds, non-repurchase of redeemed bonds will reduce the balance sheet by more than $ 1 trillion a year.
The markets are now embodying five interest rate hikes in the coming year, and they are even raising the possibility of interest rate hikes at half a percent rate compared to a quarter of the common ones so far.
The bond market responded quickly to the announcement, and during trading on Wednesday the yield to maturity reached a rate of almost 1.9%. However, at the end of the trading week the yield dropped to 1.77%.
| The American curve flattened
The yield for three years, for example, is only about 40 basis points lower than the exchange rate for years. This means that the markets embody a scenario in which the process of raising interest rates may be rapid at the beginning, but it will not last long.
A flat curve is usually also an indication of expectations of a weakening of the economy.
| US: High growth in the fourth quarter of 2021 is not expected to continue in the coming quarters
According to the first estimate for the fourth quarter of 2021, the US economy grew at an annual rate of 6.9%, above the earlier forecasts of 5.5%. The growth rate of GDP in 2021 reached 5.7%, the highest rate since 1984. In the last quarter, private consumption increased by 3.3%, investments in non-residential construction increased by 2%, investments in residential construction decreased by 0.8% and public consumption decreased by 2.9 %.
The increase in inventories contributed almost five percentage points to growth, and excluding the increase in inventory growth stood at only 1.9%. The indicators for December-January indicate a significant slowdown in growth in the United States, partly against the background of the spread of the Omicron strain.
The Purchasing Managers’ Index of total output fell in January to 50.8 points from a level of 57 points in December. The index fell in January to 67.2 points, lower than forecast, and lower than in 2011. The PCE index data for December were not surprising but remained relatively high. The PCE index rose in the 12 months ended December 2021 by 5.8%, and the core component recorded an annual increase of 4.9%.
| The International Monetary Fund has reduced growth forecasts for 2022
The IMF’s global growth forecast has been reduced from 4.9% to 4.4%. The growth forecast was reduced mainly in the US and China. Growth forecasts in the US fell from 5.2% to 4.0%, and the growth forecast in China fell from 5.6% to 4.8%.
The eurozone growth forecast has been reduced from 4.3% to 3.9%. The inflation forecast in developed countries rose from 2.3% in 2022 to 3.9%.
| Eurozone: slowdown in economic growth
Of total output dropped in January to 52.4 points. This, from a level of 53.3 in December. Most of the decline occurred in the services industries, to a level of 51.2 points, and especially those that are particularly sensitive to the restrictions imposed in order to deal with the spread of the Omicron strain.
In contrast, the Purchasing Managers’ Indices indices have risen to a high level in the last five months, in part, following some easing of supply chain disruptions. It is possible that the easing of restrictions on activity in a number of countries in the bloc will contribute to a further acceleration of industrial activity and the recovery of activity in the services industries.
China: Stocks down 4.5% this Week And from the beginning of the year shed its value 7%. This index decreased by about 20% from the peak set in February 2021.
The atmosphere in the Chinese capital market is relatively tense against the background of frequent changes in regulation and the sharp slowdown in the real estate industry. In the past week, a number of large and leading companies have issued profit warnings for the rest of the year.
In the PDF document: The full weekly review of working-class economists
The authors of the review are Bank Hapoalim economists. The review is based on data and information that were visible to the public. The data and information used to prepare it were assumed to be correct, without Bank Hapoalim Ltd. conducting independent tests in relation to the data and information. This review does not verify or confirm their correctness. This review is for informational purposes only, and does not purport to be a full analysis of all facts and all circumstances surrounding it. The information on which the review is based and opinions may change from time to time, without any further notice or publication. Of any investor. This article should not be construed as investment advice or a substitute for investment advice that takes into account the data, needs and special investment goals of each person, and should not be acted upon unless Independent opinion.