| By Yonatan Katz and Economists Leader Capital Markets
In the past week, the war in Ukraine has continued to cloud the markets, despite growing hopes for a ceasefire. Prices approached $ 140 a barrel but calmed down when the UAE announced it would increase output.
The price doubled when Russia threatened to halt its exports (9% of the world market). U.S. inflation figures were high, (but matched early expectations) and supported rising yields.
The ECB surprised when it said it might end its bond buying program sooner than expected.
| The labor market is tightening
In the latest decision, it was stated that there are 65,000 new employed persons left until the employment rate of 2019 (the eve of the corona). Since then, 45,000 have been added in the first half of February (despite the problematic nature of bi-weekly data).
This means that wage pressures are expected to increase when the number of vacancies is much higher: around 146,000 (January), especially in 2023 due to expectations of wage agreements in the public sector.
We assume wage growth at a rate of close to 5% starting in 2023 (and 4.5% in 2022).
Some important data will be published this week: Sunday: Foreign Trade Data (February). Second: Number of sales of new apartments and available inventory for sale (January). Tuesday: Number of job vacancies (February), for the month of February.
We expect a 0.5% index in the effect of price increases in food, fruit and vegetables, cars, electricity (3.4%) and petrol (5% increase in price). On the other hand, seasonal reductions in clothing prices (end-of-season prices) are expected.
| Overseas Macro: US: Continued Inflation Acceleration
In February it rose by 0.8% and 7.9% a year ago (from 7.5%), according to earlier estimates. Core inflation rose by 0.5% (6.4% on an annualized basis), accelerating from 6.0% a month ago. What rose in the February index?
- Housing prices (the main item weighing in at 32.8%) rose by 0.5% and by 4.7% a year ago. The acceleration was expected against the background of the sharp rise in purchase prices according to Case-Shiller (with a high correlation to the change in rental prices), and the end of the period of the possibility of not paying rent in the corona crisis (moratorium).
- Household food prices rose 1.4% and 8.6% a year ago.
- Apparel prices rose 0.7% and 6.6% a year ago.
- Flight prices rose 5.2% and 12.7% a year ago, amid a decline in the omicron. In Israel, a similar and perhaps even sharper acceleration trend is expected.
- Prices of new vehicles rose by 0.3% (12.4% a year ago) and prices of used vehicles fell by 0.2% (41.2% a year ago).
- Accommodation outside the home rose by 2.2% and 25.1% a year ago.
The prices of services in the index rose by 0.53% (the sharpest increase since 1992!) And the prices of goods (excluding energy) rose by only 0.44%, moderating from 1% in January.
The shift to service-oriented inflation is due to an increase in demand against the background of rising wages in the economy. A sharp rise in rental prices illustrates this. In contrast, commodity prices (which were mainly affected by supply problems) are now moderating.
Demand inflation is expected to worry Fed members more, as this is a trend that could last for many months.
Important macro data to be published in the Third World: China: Industrial Production, Retail Trade and Investment (February), USA: Output Price Index (February), Wednesday: Retail Trade (February), Fed: 0.25% increase expected and balance sheet reduction plan presented It will probably start in the next few months.
| Zoom In: Will wage erosion in the US curb consumption?
Until a few days ago, long-term yields in the US dropped with the outbreak of the war in Ukraine from 2% to 1.7%.
Beyond flight to safety, many believe the path of raising interest rates is likely to be more moderate due to the erosion of public purchasing power and moderation or even a decline in private consumption. As is well known, private consumption is the main locomotive for economic activity in the United States (about 65% of GDP), and an erosion in the purchasing power of households is expected to greatly moderate the activity of American households.
Even before the crisis in Ukraine the leading indicators indicated a moderation in activity in the coming months:
There is an opposite opinion which claims that an acceleration in inflation will lead to an acceleration in wages. This approach is based on three factors:
- The fact that the U.S. labor market is very “tense”: the number of job vacancies (11.4 million), a rate that reflects full employment (3.8% in February).
- Households are still sitting on a mountain of cash due to the very generous fiscal policy in the Corona period. Cash surplus stands at $ 2.5 trillion and consumer credit repayments are low.
- The main wage pressures are among workers with low wage levels, in the hospitality and leisure industries (14% year-on-year increase), trade (7.7%) and transportation (11.1%). This is a population with a high marginal propensity to consume.
Inflation expectations have already risen significantly even before the crisis in Ukraine, so households are likely to demand wage increases to compensate for the rise in inflation, given the shortage of workers and a very low unemployment rate. Inflation expectations among households rose in March to 5.9% from 5.4% (one year ahead).
The question of the rate of future economic activity (and especially private consumption) is critical in order to predict the level of interest rates in two to three years.
Many anticipate that entering a U.S. recession (or significant moderation) will make it difficult for the Fed to raise interest rates significantly, but as we have shown, there is an opposite view that supports much more restrained monetary policy.
So in our estimation, long-term yields in the US are expected to continue to rise towards 2.5% by the end of the year.
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.