| Victor Behar, Director of the Economics Department at Bank Hapoalim, and Hapoalim Economists
| Israel: Economic activity is maintained at a high level mainly thanks to the contribution of the high-tech industry and the construction industry
Exports of services in November-December 2021 were 30% higher than in those previous years. In the construction industry, we are seeing a sharp jump in the number of construction starts to a level of 63,000 in the past year.
Both of these industries are growing at a rapid pace, and they are also generating higher-than-average wage jobs. On the other hand, we see that private consumption has moderated in recent months, probably against the background of price increases, and a negative wealth effect from the financial markets.
Revenue in the industries fell slightly in December and January. This trend of declining revenue may continue in our estimation in the coming months, in light of increased emigration of Israelis abroad, which will lead to a shift in local consumption to imports of services. The narrow rate fell in February to 3.7%, and the employment rate rose to 60.6% In Khalat).
In our opinion, these data represent a return of the economy to the field of full employment. The number of job vacancies in the economy has reached about 150,000 – in light of the low unemployment rate, we estimate that this will be reflected in pressure to increase wages. A more accurate picture of wage trends will be obtained in a few months, with a reduction in the number of remote workers (ESL expenses, travel and overtime for example).
As in most countries in the world, Israel is now facing a shock on the supply side, which is leading to a wave of price increases. It’s hard to talk about a forecast when the price of a barrel of oil moves from side to side sometimes at twenty dollars a week.
Some governments, such as the United Kingdom, France and Sweden, have decided to reduce taxes in order to mitigate the effects of rising energy prices. A move of this kind moderates price increases in the short term and may slightly halt the momentum of rising inflation. On the other hand, it does not reduce the demand for energy, because the price to the consumer does not change.
At a current barrel price of about $ 120, the price of gas at stations will increase in April by about 7% (without a change in excise tax on fuel). In the short term we expect very high price indices: 0.8% in March, 1.0% in April, 0.5% in May.
Prices of flights abroad are expected to rise sharply in the coming price indices, as well as the housing clause, which will be affected by rising house prices, and later this year perhaps also by countries from Russia and Ukraine. .
The Bank of Israel is signaling that increases in Israel will also be faster than expected. Rising real estate prices, a return to full employment and upward surprises in recent consumer price indices reduce the central bank’s degrees of freedom.
The derivatives market now embodies the Bank of Israel’s interest rate at a level of about 1.5% in about a year, an estimate that seems reasonable to us.
Longer-term yields have risen sharply in recent weeks – the yield reached a level of 2.35% this morning, an increase of 1.1 percentage points compared to the beginning of the year.
Yields in Israel are very much in line with those in the world, even though inflationary pressures in Israel are lower. The markets now embody an estimate that interest rates in Israel, over time, will not detach from those in the United States.
We still believe that interest rate increases will be more moderate than in the United States, and that inflation in Israel will also be lower. These factors justify yields in Israel that are slightly lower than those in the United States.
| Global: The war in Ukraine continues to give its signals
Energy prices fluctuate and rise again to about $ 120 per barrel. Inflation has already passed the threshold at which central banks balance the impact of economic activity on the need to curb inflation.
Energy prices are likely to push inflation figures in the US and probably also in Europe to double-digit levels in the coming months.
Keep in mind that real interest rates are still deep in negative territory, and perhaps this is the factor that inhibits the slowdown in activity. On the other hand, it also means that central banks are in an uncomfortable situation, because it is difficult to eradicate inflation with negative interest rates.
The Bank of England raised for the third time in a row. The Fed has delayed and will now have to catch up with the rate at higher doses of 0.5%. The question of where this process will stop is open – yield curves are flat, and Fed members themselves also believe that the interest rate will rise to 2.8%, but in the long run an interest rate of 2.4% is more appropriate.
After a decade of low interest rates, most of which the ten-year real interest rate was zero and did not exceed 1% in the US, it is a bit difficult for us to imagine a return to positive real interest rates. This is perhaps one of the reasons for the flat yield yields in the US. However, if the stagflation scenario does not materialize, it is not inconceivable that we will see the long-term yields continue to climb, embodying even positive real interest rates.
| The rise in the inflation environment and inflation expectations led to a sharp rise in bond yields
It appears that bond markets have internalized last week’s signals from Fed Chairman Powell about the possibility that despite the war in Eastern Europe, the Fed may raise interest rates at upcoming meetings by half a percent instead of a quarter. This, if more powerful measures than the past are required in order to curb the rise in the inflation environment.
In the past week, capital market inflation expectations have risen from 3.48% to 3.73%, and ten-year expectations have risen from 2.86% to 2.98%. These were affected, among other things, by the renewed rise in energy prices. The price of a Brent oil barrel rose again to $ 120, after already falling slightly below $ 100 in the middle of the month.
All of this led to a sharp rise in yields to maturity on government bonds, with the two-year yield rising from 1.94% to 2.28%, and the 10-year yield rising from 2.15% to 2.48%.
| The rise in government yields is a global phenomenon
10-year government bond yields in developed countries have risen by an average of 100 basis points over the past three months.
In Germany, the yield on bonds has risen to 0.59% (compared to 0.25% – three months ago) the highest level since May 2018. In Australia the yield has risen in the last three months from 1.52% to 2.77% and in the US from 1.48% to 2.48%.
The upward trend in US stock indices continued for the second week in a row. Last week, the index rose by 2%, and the VH indices rose by 1.8% and 0.3%, respectively.
The IT and energy industries stood out in particular. Although there are still no signs of calming in the war in Ukraine, fear in the markets seems to have moderated, and this is reflected in a further drop in the 21-point index that dropped to 21 points over the weekend.
In most indices in Europe, weekly declines were recorded. The index was down 0.9%, and the stock indices in Germany and France were down 0.7% and 1.0%, respectively. In the UK, the CPI rose 1.1%.
In Asia, the Japanese index rose by 4.9%, while the main indices in China and India fell by 2.1% and 0.8%, respectively.
In the commodity market, price increases were mainly recorded. The price of a Brent barrel of oil rose by 11% last week to a level of $ 120 and the price in the US rose by 14%.
| USA: Mixed macro data
Orders for products fell 2.2% in February, a much sharper drop than forecast to a 0.6% drop. This is the first drop in this figure in the last five months. Even without vehicles, a decrease of 0.6% was recorded.
The University of Michigan Consumer Confidence Index continued to decline in March, reaching its lowest level since 2009, largely due to consumer concerns about a rise in the inflation environment.
Inflation expectations for the coming year, from the survey, rose from 4.9% to 5.4%, and expectations for the five- to ten-year range remained stable at a high level of 3.0%.
In the positive direction indices still indicate high-level expansion. The IHS Markit Purchasing Managers’ Index for Manufacturing Industries rose in March beyond the forecast, reaching a high level from September 2020.
A similar development took place in the index for industries, and it reached a high level from July 2021. At the same time, the new weekly requirements for dropped at a surprising rate and reached a low level for several decades.
In the housing market, there was a 2% decline in sales in February, following a sharp decline in January, and also in the signing of contracts there was a surprising decline of 4.1% against a forecast of a 1% increase.
| Europe: Decline in the consumer confidence index in the eurozone and the IFO index in Germany
The geographical proximity of Western European countries and the high dependence on Russian gas make them more vulnerable than other countries, such as the United States.
Beyond the uncertainty regarding the development of the war, consumer confidence has also been hurt by the rise in inflation above the annual level of 5%. At the same time, the leading indicator index, the E, has fallen in Germany to its lowest level since 2021.
Towards the end of the week, the US announced that it would supply the EU with an additional 15 billion cubic meters of liquefied natural gas this year, in order to reduce the EU’s dependence on gas from Russia.
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