| By Yonatan Katz and Economist Leader Capital Markets
Fears of a Russian invasion of Ukraine continued to overshadow world stock markets, with the Fed sending a “hawkish” message to markets in the background. In the protocol of the Fed members in the opinion that monetary policy (including a reduction in the Fed balance) should be curbed at a relatively fast pace compared to other cycles in the past.
| Israel: There were no real surprises in the January index
Rose 0.2% slightly more than our 0.1% forecast. Inflation was affected by rising food prices (1.3%) due to the imposition of a tax on soft drinks, and cars (1.3%). Prices of construction inputs (up 0.8% in January) and output prices in manufacturing (1.1%) rose rapidly.
| Stabilization of core inflation
In the last 12 months, (excluding the energy and fruit and vegetable items) it has risen by 2.7%, similar to the previous month. Excluding the effect of government intervention (raising the purchase tax rate on housing investors from 5% to 8%, tax on disposable utensils and tax on soft drinks), core inflation rose by 2.4%, similar to core inflation (2.3%)
| We forecast inflation of 1.9% year ahead
Basic discounts:
- NIS: Although the basic factors continue to support the shekel (current account surplus + net real investments), in the short term will continue to be more sensitive from the markets.
- The acceleration in the rate of increase in rental prices is expected to continue, but at a moderate pace. We assume a 4% increase in rental prices in renewable contracts (2.8% year-on-year January 22). The housing item will contribute 0.9% to inflation a year ahead. In 2023, some moderation is expected due to an increase in the housing stock.
- Although the CBS ‘average wage data indicate an increase in the annual rate of about 3.4% per year (until November), we assume an acceleration to a rate of 4.5% at the end of 2022, against the background of a “tense” labor market.
- We assume a moderate rise in the price of oil to $ 97 a barrel in a year and $ 102 at the end of 2023.
| An increase in the stock of apartments may moderate the rise in prices
Despite the expectation of a continued rise in housing prices in the short term, we estimate that starting in the second half of 2022 there will be a certain moderating trend in the rate of rise in housing prices. It is important to emphasize that this year a significant increase in the number of completed apartments is expected (we expect at least 60,000 units), due to an increase in the number of starts in previous years.
Already now, there is an increase in the number of new apartments available for sale, from 43.8 thousand in January 21 to 47.1 thousand in December 21, which is a change after the trend of a contraction in inventory in 2020.
Some important data will be published this week: First: Number of job vacancies (January) – An important statistic to estimate the degree of tightening in the labor market. Second: Personnel survey (January), but in fact has already been published in the bi-weekly report. A signal is expected for an approaching interest rate hike.
The Bank of Israel will emphasize the rapid expansion of the economy, the impressive improvement in employment, and the rise in the inflation environment (and inflation expectations).
| USA: Do not eulogize the American consumer
In January it rose by 3.8% (expected to be 2.0%) after falling by 2.5%. Online purchases rose 14.5% in January. This is a nominal change, but also after deducting inflation, this is a positive trend.
As is well known, households still enjoy a surplus of corona support, but it is more important to emphasize in the future: the pressure to rise is expected to continue and support further growth in disposable income, especially at low wage levels (in hospitality, commerce, etc.). This means: a continued increase in domestic demand, which is an inflationary factor and a reason for continued pressure to rise in interest rates in 2023 and 2024 as well. In other words: continued pressure for rising long-term yields in the US.
| Zoom In: The Implications of Impressive Growth Data
Data released on Wednesday were certainly very impressive, even in an international comparison. The annual growth rate in the fourth quarter 21 (16.6%) is certainly wonderful but a little misleading, when it comes to a change in quarterly growth to the power of four.
We prefer to look at the cumulative rate of change from the fourth quarter of 2019 (the eve of the corona) to the fourth quarter of 2021. That is, an analysis of the level of activity today versus the level of activity on the eve of the corona. What we see:
- In the last two years, from the fourth quarter to the fourth quarter of 21, the economy has grown by a cumulative 8.9%, beyond the potential rate which is estimated (by the Bank of Israel) at about 4% per year.
- During this period, the standard of living rose by 3.1% (private consumption per capita), despite the sharp decline in the consumption of travel services abroad. Private consumption in the local economy rose by 5.2%.
- Investment in residential construction increased by 10% (mainly in the second half of 2021). Which supports an increase in the stock of apartments and a moderation in the rate of increase in housing prices. Investments in the economy’s (investments excluding residential construction) increased by 8%.
- Both exports of high-tech services (+ 31% +) and industrial exports (17%) increased rapidly. Despite the appreciation trend in the shekel, industrial exports continue to expand at a rapid pace.
Additional and very important data:
- The increase in productivity in the economy continues. The hourly output in the business sector increased by 2.5% in 2021 after an increase of 6.5% in 2020! A 9% increase in two years is considered very fast. Implications: an increase in the potential output of the economy + a moderation in inflationary pressures. Firms are able to “absorb” part of the increase in costs (import prices, wages) without compromising profitability, without rolling over the impact of costs to the consumer.
- The savings rate of households remained high, reaching 22.3% in 2021, down from 26.6% in 2020 and an average level of 18% in 2018-2019. This means that it is clear that part of the increase in the savings rate relative to the corona eve is due to restrictions on consumption (such as travel abroad). Nevertheless, Israel has historically enjoyed a relatively high savings rate, with some savings being directed to financial savings and the bond market.
- General implications of the positive GDP data: Israel’s growth data are certainly impressive and support the raising of the rating horizon, in particular by Moods (from a stable horizon to a positive horizon). Such a positive performance also supports the strengthening of the shekel and the widening of the (negative) yield differentials against the United States.
- Implications for monetary policy: Undoubtedly, GDP data reinforce the assessment that the Israeli economy has recovered well from the corona crisis and does not need such an expansive monetary policy. According to a monthly growth model developed by the Bank of Israel, the economy continued to grow in January at an annual rate of 4.2%. The likelihood of an interest rate hike on April 11 has risen.
PDF Document: Weekly Macro Review by Leader Capital Markets Economists
The authors are economists at Leader Capital Markets. The review is based on information published to the general public by the companies reviewed in it as well as estimates and estimates and other information that Lider & Co. Investment House Ltd. assumes is reliable, without conducting independent tests in relation to the information. However, it is emphasized that Lider & Co. And its editors are responsible for the reliability of the information, its completeness, the accuracy of the data contained therein or any omission, error or other defect in it. To replace independent discretion and obtain professional advice, including an investment advisor whose advice takes into account the data and special needs of each person.