Israel
The effects of the war in Ukraine on the Israeli economy are limited in relation to most countries in the world, with the exception of perhaps the oil exporters who are now sweeping profits. The stability of natural gas prices gives a great advantage to Israeli industrial companies over those in Europe and the United States. The harm to consumers in Israel, as painful as it is, is not on the same scale as what is happening in the world, partly due to our favorable weather. The rise in the prices of agricultural commodities mainly affects emerging markets, where the weight of food in the consumer basket is high. Quite a few Israeli companies may increase profits in the new situation: security companies and companies in the field of chemicals, for example.
Oil and commodity prices have continued to soar over the past week, and forecasts for key financial parameters now depend on how long this crisis continues. In a scenario where oil prices remain at their current level – $ 118 a barrel, as are the prices of other commodities, we are expected to see a wave of price increases in the economy. For example, in April the price of fuel will increase by about 7%, which alone will contribute about 0.2% to the price index this month. Subsequently, further increases will be recorded, mainly in transportation prices (flights, public transportation) as well as food prices. In this scenario, in April the annual inflation in Israel will exceed 4%, and it will gradually decrease until the end of the year. In another scenario, where the war ends relatively quickly and oil and commodity prices fall (about $ 90 a barrel), there will still be high price indices in the coming months, but inflation will moderate to about 3% later this year. The length of time that high commodity prices will prevail will affect inflation in the coming year: some prices in Israel, such as flight prices, taxi travel and food products, are gradually updated, and chances are that these prices will not fall even when commodity prices fall in a year. The bond market now embodies high inflation – an average of 3.8% for the next two years, 3.2% for five years and 2.6% for ten years.
The number of employee jobs in the economy continues to rise rapidly – about 86,000 jobs were added in December-January. Looking back two years, the average wage rises at an annual rate of about 4%, this level does not pose a risk to inflation. Although inflation is the result of an exogenous supply market, the Bank of Israel will not be able to resist it. Inflation is a self-feeding process, and under conditions of full employment, the chances of that happening are high. Central banks feel that they are “behind the curve” in adjusting monetary policy, and this was also hinted at in Powell’s testimony, in which he estimated that in order for the economy to continue to expand and create jobs, price stability is required first. That is, the negative consequences of the war in Ukraine on economic activity, are not expected at this stage to slow down interest rate increases. We estimate that we will therefore see the first interest rate hike in Israel as early as April, and the next hike after it is expected to be relatively close. The continued rise in interest rates from this point depends very much on the development of commodity prices and the transmission to inflation.
Why the ten-year bond yield in Israel has become higher than in the US? The war has raised inflation expectations on the one hand, but it is also raising the risk of an economic slowdown. In the United States, ten-year yields declined last week to 1.73%. In Israel, on the other hand, yields rose to 1.9%. Inflationary pressures in Israel are lower than in the United States, and the effect of rising energy prices on inflation is relatively moderate in Israel. We estimate that the explanation is more due to the behavior of yields in the US – that is The decline in US yields is a result of investors’ perception of US bonds as a safe haven, at a time when market risks are high, often in isolation from basic economic data, or from expectations of future monetary policy. On the other hand, the rise in yields in Israel probably reflects a tighter policy over time in light of the rise in inflation.
global
The war in Ukraine has been going on for more than ten days, and its end is not currently in sight on the horizon. At the same time, Western countries have tightened sanctions on Russia. Against the background of all this, the sharp rise in commodity prices, and especially in oil and natural gas prices, continued, and declines were recorded in most of the world stock indices. The sharp declines in stock indices were particularly pronounced in the eurozone. The stock indices in Germany, France and the Eurostock 50 have fallen by about 10% in the last week. In the US, the Dow Jones and the S & P500 were down 1.3% and the Nasdaq was down 2.8%. The VIX rose from 28 points earlier in the week to 32 at the end. In Asia, major stock indices fell by an average of 2.5%, with the exception of the South Korean stock exchange, which rose 1.4% in the last week. The rise in commodity prices continued even more than this week. The price of a barrel of Brent oil rose 21% to $ 118 a barrel, completing a 52% increase since the beginning of the year. Natural gas and coal prices have also risen sharply. The price of agricultural commodities also continued to rise, especially the price of wheat, which rose by 60% in the past week. Economies in Western Europe, more vulnerable to the consequences of the Russian invasion of Ukraine, are expected to slow down in economic activity in the first quarter of the year, and this has already been reflected in the sharp decline in their stock indices. Accordingly, the euro has depreciated by about 3% against the dollar in the last week.
The aggravation of Western countries’ sanctions on Russia is evident. Among the measures taken were the decision of the European Union, the United Kingdom and the United States to exclude some of the banks in Russia from the SWIFT system. In addition, MSCI announced the removal of Russian securities from its indices, and the United States imposed restrictions on imports from Russia. Some steps are being taken against oligarchs with close ties to the Russian president. There are currently no direct sanctions on energy exports from Russia, although there has already been a decline in Russian exports. The energy. The markets were also affected by Putin’s decision to declare a high alert of the country’s nuclear arsenal and the Russian attack on a nuclear power plant in Ukraine also contributed to an increase in volatility towards the end of the week. Despite the rise in interest rates by the Central Bank of Russia, from 9.5% to 20%, the depreciation of the ruble and the suffocation of liquidity in the country continued.
The Fed interest rate is expected to rise next week. Fed Chairman Jerome Powell said in his congressional testimony that there was no change in the intention to raise interest rates at the next March 16 meeting and his speech indicated that interest rate hikes would continue, even in an environment of fighting, to moderate high inflation. Powell noted in his speech that: We know that the best thing we can do to support a strong labor market is to promote expansion over time, and this is only possible in an environment of price stability. “The capital market predicts that next week interest rates will rise by a quarter of a percent, He noted that the effects of the war in Ukraine on the US economy are still unclear, and that future decisions will be affected by these developments, in addition to other economic developments. In the past week, there have been increases in inflation expectations from the capital market for all ranges. Five-year inflation expectations have risen from 3.1% to 3.26%. The ten-year US government fell from 1.97% to 1.73%. The corresponding yield in Germany Decreased from 0.23% to minus 0.07%.
U.S. labor market data for February support the Federal Reserve’s decision to raise interest rates. In February, 678,000 new jobs were added to the American economy, far exceeding expectations of an increase of about 420,000 jobs, and the data for the previous two months were also updated upwards by 92,000 jobs. The unemployment rate fell to 3.8% from a level of 4.0% and the participation rate rose slightly to 62.3%. Despite the expectation of a further increase in wages, the hourly wage remained unchanged relative to January, and the annual rate slowed to 5.1% from 5.5% in January. Data from the ISM index continue to indicate an expansion in activity and for now there is no noticeable effect of the fighting in Ukraine on economic activity. The index for industrial activity rose to 58.6 points and the index for the services sector fell to 56.5 points, but its level is still high.
Eurozone: The inflation rate continues to rise, mainly due to rising energy prices. The inflation rate in the last 12 months has risen to 5.8% from 5.1% in January, mainly due to the rise in energy and food prices. Core inflation has also accelerated and has risen to 2.7% in the last 12 months. The manufacturing price index rose 0.9% in February and completed a 30.6% rise in the last 12 months. In most economic indicators the impact of the war in Ukraine is still not apparent. The unemployment rate fell to 6.8% in January, the purchasing managers’ index for the manufacturing sector fell slightly to 58.2 points and the index for the services sector rose to 55.2 points. Retail sales did rise in January, after a sharp decline in December, but at a lower-than-expected rate of only 0.2%.
The economic effects of the Russia-Ukraine war will exacerbate the policy dilemmas of the Central Bank of the bloc, theECB. On the one hand, an acceleration in inflation, against the background of a continued rise in energy and commodity prices. On the other hand, economic activity that is likely to be harmed as a result of the various disruptions created as a result of the war, including the effects of the sanctions. Many companies have announced their intention to freeze and even sever ties with the business partnership from Russia. These include large business entities in the aviation, energy, finance, industry, logistics, technology, and other industries. We assume that the ECB will prefer to wait and examine the economic effects of the fighting.
Russia: The stock market has been closed all week following the disconnection of some local banks from the system SWIFT. In addition, Western countries have imposed sanctions on the Ministry of Finance, the Central Bank and the State Wealth Fund, and in practice some of the assets of these institutions have been frozen abroad.