Rising real estate prices and declining unemployment support a 0.5% rise in interest rates

| Alex Zabrzynski, Chief Economist of Meitav Dash

| Israel: High business expectations for activity and rising prices

According to the Business Trend Survey, the companies’ activity continues to grow. Net scales on the state of companies in March are positive, similar to the previous month.

• The companies’ expectations for activity in the next three months have peaked since the beginning of the survey.
• The survey indicates a significant strengthening in companies’ expectations of price increases. Business expectations have reached a high level since the survey began. The percentage of companies that expect their selling prices to rise or rise sharply relative to the season rose to a peak in the retail and industrial trade industry and came close to a peak in the services industry.
• The survey continues to point to a severe shortage of staff shortages. With the exception of the construction industry, in other industries the severity of the shortage of workers is close to its peak.
• The shortage of raw materials, machinery and equipment also continues to be severe, especially in the manufacturing and construction industries.

| The labor market continues to heat up

• According to labor market data, in the first half of March the rate dropped to the lowest ever level of 3.2%. As noted above, the Business Trends Survey indicates a continued shortage of workers.
• The number of jobs in the economy continued to grow in January, despite the outbreak of the omicron. Total jobs have not yet returned to the trend line.
• The average wage in the economy continues to grow above the trend. In light of the decline in unemployment to the lowest levels ever, a rise in wages is expected to accelerate. Wages rose especially in industries with high wage levels. Apparently, most of the unemployed are vying for low-wage jobs.
• Total wages in the economy, which affects all demand, have already risen above the trend and continue to grow rapidly.

| The data support an increase in interest rates to 0.5%

Almost all recent data and developments support the Bank of Israel’s rapid rise in interest rates:

• Of March again surprised when annual inflation rose to 3.5%. The rate of inflation in the last four months (seasonally adjusted) in annual terms has already risen to about 5%.
• Inflation expectations embedded in the bond market have risen recently by about 1% in the short term and by 0.5% in the long term. Expectations exceed the upper limit of the inflation target up to terms of about 5-6 years.
• The risks of inflation increased significantly with the outbreak of the war in Ukraine and the exacerbation of the plague in China.
• Rising real estate prices continue to accelerate.
• The survey of business trends indicated relatively high expectations for economic activity in the economy and high expectations of businesses for price increases.
• Labor market data for the first half of March reflect a sharp drop in unemployment to the lowest levels ever.
• Expectations of rising interest rates have risen sharply. The makam market and the curve of interest ratesIRS Emphasizes an increase in interest rates to about 1.6% in a year.
• The world’s central banks have become much more “hawkish” in their steps and intentions.

Bottom line: Recent developments and data support an increase in interest rates to 0.5% in the Bank of Israel’s decision this week.

| There is no update in the inflation forecast

We did not change the annual inflation forecast despite the fuel that is expected to reduce about 0.2% of inflation. However, the increase in intentions to increase prices in the business trend assessment survey was extremely significant.

The results of the survey have a good predictive ability regarding near-price indices. Therefore, we have updated upwards the forecasts for the coming months so that in the end the annual forecast has not changed and still stands at 3.5%.

| world: The Chinese economy is on a dead end

China’s indices fell sharply in March, especially in the services sector. 13.6% of China’s population is currently under closure in areas producing about 22% of GDP, according to a report inCNN. The Chinese method of eradicating the disease causes severe damage to the activity of the economy, but it seems to have almost no chance of succeeding in the existing circumstances.

Removal of the restrictions will result in a severe outbreak of the plague in a population that has not developed immunity against it, but it is doubtful that continued closures can also eradicate it. The Chinese economy is becoming a serious source of risk to the global economy. Companies exposed to the Chinese economy are likely to suffer significant damage to business activity in the coming months.

In many Asian countries, there was a decline in the indices of purchasing managers in the industry in March, possibly due to the slowdown in China.

| God-ECB Expected to change direction this week

The German bond yield has been positive for the first time since 2014, signaling that interest rates in Europe are on the rise. USA to Germany.

The very “hawkish” statements of the governorsECB The recent senior executives leave almost no doubt that theECB About to change direction this week.

| U.S. economic data reflects a warming economy

US economic data continues to support monetary tightening:

• Claims have dropped to the historically low level and provide further evidence of warming in the labor market.
• Growth has peaked in the past year, both in credit card loans and bank loans.

| How will the reduction of the balance sheet affectFED About the different channels?

The words of the governors of theFED And the publication of the last interest rate meeting continued to push yields upward. From the protocol we learned that theFED Plans to reach a balance sheet reduction rate of about $ 95 billion a month (60 billion in government bonds and 35 in mortgage-backed bonds).

This is a double rate compared to the reduction in the balance that was in the years 2017-19 and is also expected to start almost immediately with the start of an increase compared to the wait of about 3 years the previous time. What are the implications of the planned move?

• According to the contracts, the interest rateFED Is expected to reach a level of about 2.9% in another year (an increase of about 2.5%). This is the highest annual increase since 1995. If we add to this also a reducing effect of a decrease in the balance sheet,FEDIt is a monetary tightening that is expected to be perhaps the sharpest since the early 1980s.

• God-FED It is not expected to lead to a sharp increase in the net supply of government bonds because at the same time a decrease in government financing needs is expected, in contrast to the reduction in the balance sheet that took place in 2017-2019 and led to an increase in bond supply.
• At the same time, the supply of bonds in the next two years will be at levels that were never before the outbreak of the plague.

• One of the main goals of reducing the balance sheet is to cause an increase in long-term yields. In the last two weeks we have already seen that the increase in yields occurs while increasing the steepness of the curve, which has returned to being positive (2Y/10Y).

From an attempt to reduce the balanceFED In the years 2017-2019 it is not possible to clearly learn about its impact on long-term returns. Indeed, with the start of the move at the end of 2017 to October 2018, the yield increased by almost 1% (from 2.3% to 3.2%). However, this happened in parallel with the rise in interest rates.

Once the rise in interest rates stopped at the end of 2018, yields began to decline and reached a level of about 1.5% by mid-2019, despite the continued narrowing of the balance sheet.

• Reducing the balanceFED In 2017-2019 occurred against the background of a weakening in the performance of the stock market. The stock market rose during this period by an average of 0.4% per month, compared with an average monthly return of about 1.6% during the periods of expansion of the balance sheet.
• At the same time, 2018, the main year in which the balance sheet shrank, was a concentration of events that hit the stock market (exacerbation of the trade war, regulatory pressure on major technology companies, mitigation of tax reform, shutdown of the US administration, damage to the German car industry, etc.).
• The purpose of theFED Cause a tightening of financial conditions in the American economy that should eventually lead to a decline in inflation, according to the historical context. The tightening of financial conditions should be reflected in the rise in yields and spreads, the strengthening of the dollar and declines in the stock market.

Bottom line: It is not clear to what extent the reduction in theFED Alone affects the performance of different channels, but its combination with the other forces may have a restraining effect on the performance of different channels.

| Sectoral performance in the stock market clearly predicts a slowdown in economic activity

Examining the relationship between the relative performance of the various sector and sub-sector stocks versus the changes (about two months behind) in the leading US Indicators Index between 2002 and 202, shows that there are sectors with very high ability to predict future acceleration or slowdown in economic activity.

Some sectors are achieving excess performance in the run-up to a slowdown in the growth rate of the leading indicators, while in the run-up to the acceleration in activity they are actually weakening. Other sectors – exactly the opposite.

The sectors that generally excel in the run-up to the slowdown have shown significant excess performance since the beginning of March, which clearly indicates that the stock market is expecting an impending slowdown in the US economy.

| Who is the best at falls?

In light of the increase in risk in the equity channel, we examined which sectors performed the best in relation to the general index S&P 500 During periods of sharp falls in the stock market of more than 15% between 1990-2019 (there were 9 such episodes).

It turns out that the current consumption sector stocks in all episodes achieved a significant excess return over the overall index. Apart from them, the infrastructure sector, health services and communications beat the overall index in 8 out of 9 cases.

The technology, financial, industrial and cyclical consumption sectors were in most cases inferior.

Bottom line: We recommend medium-low exposure to the stock channel. As part of increasing portfolio defensiveness, it is possible to increase exposure to sectors that have proven themselves during periods of declining markets in the past.

PDF Document: Weekly Macro and Markets Full Review of Best Lapel

The writer is the chief economist of Meitav Dash Investment House. This analysis is intended for the purpose of providing information only, and in no way should it be considered an opinion, offer, recommendation or advice / marketing for the purchase and / or holding and / or sale of securities and / or the financial assets described therein. The information contained in this review does not purport to contain all the information necessary for a potential investor and does not purport to constitute a complete analysis of all the facts and details appearing therein. This review is not a substitute for investment advice / marketing that takes into account the data and special needs of each person. Meitav Dash Brokerage, and its sister companies and other companies in the Meitav Dash Investments Ltd. group and / or stakeholders for any of the companies listed above and their clients, may have an interest in the securities and / or financial assets included in this review.