Dr. Gil Michael Befman, Chief Economist of Bank Leumi Dudi Reznik, Interest Rate Strategist
| The Bank of Israel’s composite index indicates a recovery in economic activity in March
The composite index for examining the state of the economy rose in March by about 0.19% compared with the previous month, according to data from the Bank of Israel.
This is a high rate of increase compared to the average in the previous three months (December 2021 – February 2022), which amounted to about 0.03%, a figure which indicates an improvement in economic activity.
In this context, we note that the Bank of Israel refers in its announcement that the improvement in the data of the composite index for March occurs against the background of “the end of the fifth wave of morbidity (the” omicron wave “), and the return of economic activity and the labor market to pre-Corona crisis.
He also added that “it seems that so far, the war in Ukraine, which has led to a significant rise in commodity prices, has not led to a significant damage to Israel’s real activity.”
The increase in the composite index in March occurred against the background of increases in the following components: (February), revenue in the services industries (February), inputs for production and the rate of job vacancies in the economy, which indicates increased demand for workers.
On the other hand, the increase in the composite index offset the decreases in the following components: imports of consumer goods and goods.
An examination of the quarterly data of the composite index indicates a 1.1% increase in the first quarter of 2022 (in annual terms). This is a moderate increase in relation to the average quarterly growth rate during 2021, which was about 3.2%, and even lower compared to the fourth quarter of 2021.
In light of this, and in light of the relatively high correlation (approximately 75%) that exists between the quarterly change rate of the composite index and the quarterly change rate of gross domestic product (seasonally adjusted data, from early 2010), it appears that the national accounts data for the first quarter of 2022 This month) are expected to indicate a certain slowdown in pace, relative to the fourth quarter last year.
Looking ahead, we estimate that in a key scenario, gross domestic product is expected to grow by 5.8% in 2022. This is a forecast similar to that of the Bank of Israel (5.5%) and the International Monetary Fund (5.0%), which updated its growth forecast for Israel upwards. Despite the reduction in forecasts for most developed countries.
| The improvement in employment data supports a further rise in interest rates in May
A rate in its standard definition, which includes only the number of unemployed, fell again in March, according to CBS data.
The unemployment rate in the narrow definition fell from a level of 3.9% in January-February to 3.8% in March. This is the lowest unemployment rate since the beginning of 2020, and about 1.7 percentage points lower compared to the peak level of unemployment (recorded since the outbreak of the crisis), which stood at 5.5% in March 2021.
However, it should be noted that despite the continuing decline in unemployment, which indicates an impressive improvement in the domestic labor market, unemployment (by narrow definition) has not yet returned to the eve of the crisis – 3.4% in February 2020. That is, the labor market .
It should be noted that the data presented are monthly data, deducted from seasonal effects (inter alia, from the effect of holiday vacations on employment data).
This is in contrast to the current data published by the CBS (monthly and bi-weekly frequency), which are not seasonally adjusted, and also include unemployment by a broad definition (ie the unemployed, employed persons who have been temporarily absent all week and workers who have stopped working due to dismissal or closure). As of March 2020, most of them, apparently, as a result of the crisis).
We emphasize that the (standard) unemployment data from the two sources are not the same. In this context, it should be noted that the latest current data published indicate a continued decline in unemployment in the narrow definition even in the first half of April.
However, it is still too early to conclude from these partial data for the entire month of April seasonally adjusted, as during the second half of April there is a Passover holiday, which may have an impact on the data.
As for the unemployment rate by broad definition, we note that it stood at 4.4% in the first half of April – which is the lowest rate since the outbreak of the corona crisis – compared to 5.3% in the second half of March.
This decrease is a result of the decrease in the standard unemployment rate, when the extent of excess unemployment created due to the crisis (the difference between unemployment in the broad definition versus the narrow definition) remains at 1.5%, which is about 65.9 thousand “Corona unemployed” – about 13.5 thousand temporarily absent workers ( Mainly workers who were expelled from the IDF), compared to about one million workers at the height of the crisis and about half a million as early as 2021, and about 52.4 the number of workers who were laid off from the labor force since the beginning of the crisis (compared to about 130,000 at the beginning of 2021).
In conclusion, the improvement in employment data continues, which reflects the continued resilience of the Israeli labor market, along with the peak volume of job vacancies in the economy (approximately 150,000 in March).
This is a development that, as it continues, may support increased pressure to increase wages in the economy in the coming months, and acceleration.
We will also note that these data support our further assessment at the forthcoming meeting (23.5) of the Monetary Committee of the Bank of Israel.
| Global Macro: As expected, the Fed raised the interest rate by 50 basis points and announced quantitative easing measures
The Fed’s policy statement emphasized the approach whereby “the Fed is very attentive to the risks of inflation” and was accordingly raised by 50 bps to a range of 0.75-1.00%.
Also, the policy announcement launched the quantitative tightening over a course that will accelerate over the coming months. In terms of the text of the post, it remains almost unchanged compared to the March post.
The Fed expects it to fall back toward the 2% target without causing much damage to the real economy and the labor market, in support of “appropriate tightening in terms of monetary policy.”
The Fed did not give weight to the technical decline in GDP in the first quarter and gave relatively large weight to the increase in U.S. private-sector activity, a figure that mitigates the effects of foreign trade and government activity.
The Fed’s statement notes the high degree of uncertainty surrounding the impact of the war in Ukraine, and there is also an addition to the announcement with a cautionary reference to “the impact of closures related to the re-emergence of the corona in China, which could exacerbate supply chain disruptions”.
The Fed’s statement concludes with a warning that the Fed “closely monitors inflation risks.” However, this statement does not appear to reflect an intention to accelerate the rate of interest rate hikes beyond 50 bp in any of the forthcoming moves with the aim of returning the policy to a neutral position more quickly.
Furthermore, Chairman Powell noted at the press conference that a 75-point increase was not considered in the current policy debate.
Chairman Powell noted that “there is a widespread opinion in the FOMC that further 50-point increases should be on the table in the next two sessions.”
Based on the expectation that inflation will fall significantly later this year, the Fed is expected to continue with 50-point increases in its next two policy meetings, before slowing economic growth and moderating inflation that will lead to a return of 25-point increases in the last three policy meetings of 2022.
This is expected to bring the Fed’s target range to about 2.50% to 2.75% by the end of the current year, and it looks like the interest rate will peak at 3.25-3.50% in the first half of 2023.
The details of the quantitative tightening were as described in the plan outlined in the minutes of the March policy meeting. The reduction in holdings will be through limiting the amount of redeployment of redemptions and this reduction will quickly rise from a ceiling of about $ 30 billion per month in June, meaning that the reinvestment will only be in redemption amounts of over $ 30 billion per month, to $ 60 billion a month three months later. Then.
Thus, the extent of non-investment will increase and thus the extent of the reduction in holdings will increase.
At the same time, the reduction of MBS holdings through the reinvestment limit will rise from $ 17.5 billion in June, meaning that the reinvestment will only be in redemption amounts of over $ 17.5 billion per month, and after three months to $ 35 billion.
However, the volume of MBS that comes to maturity each month rarely exceeds $ 20 billion a month, so the aggregate reduction in the balance sheet will be about $ 80 billion per month and not $ 95 billion as theoretically implied.
There has been no mention of active sales of MBS assets, but given that the Fed wants to return to balance with only government bonds in the long run, this is likely to be a step the Fed will add next year. Given the decline in the deficit, so this move is expected to offset some of the impact of the balance sheet reduction on long-term yields.
| The US labor market returned to pre-crisis levels, the labor force participation rate is still lower than before the crisis
The employment report for April indicated that in the US as reported by employers increased by 428,000, and the rate remained unchanged at 3.6%.
The number of unemployed remained unchanged, at the level of 5.9 million, similar to the level of February 2020 (3.5% unemployment rate and 5.7 million unemployed). The increase in employment was evident in the leisure and hospitality industries, in production and in transportation and storage.
It rose 0.3% in April from $ 31.85 per hour in April. Over the past 12 months, the average wage has increased by 5.5% and thus the annual rate of increase has slowed relative to March.
Although employment according to the employers’ survey was higher than forecast, there were a number of disappointing components in this report and in particular the decline in the labor force participation rate, back to 62.2%, and the employment rate in the population (60%), which remained below values recorded in February 2020.
The decline in participation rates is mainly reflected in middle-aged and older people and at relatively young ages.
The Household Employment Survey, which is a more comprehensive survey and gives more expression to self-employed and freelancers in the survey than in the employers’ survey, indicates a decrease in employment in April and this is reflected in a decrease in the participation rate and a slight increase in unemployment. .
Such disparities occur from time to time, but in April 2022 this is a particularly large gap, which may have a future negative impact on the employment situation in the US.
Also, the broad unemployment index, 6U, which includes desperate workers and gives weight to temporary workers unwillingly, rose in April to 7.0% compared to 6.9% in March.
Overall, if such trends continue in the coming months, it will be a development that the Fed will take into account in a way that may moderate the intensity of interest rate hikes in the coming months.
| The interest rate in the UK rose by 25 basis points to a record high of 13 years. The interest rate announcement was relatively “ionic”
The Monetary Policy Committee (MPC) of the Bank of England (BOE) has announced an increase from 0.75% to a 13-year high of 1.00%.
The announcement said the commission would not make a decision until after August whether to accelerate the balance sheet reduction rate by actively selling government bonds. Given ongoing price pressures, interest rates are expected to continue to rise beyond current market pricing.
The MPC announcement sounded ionic in several ways: first, while it said it would now “consider” whether to shrink its balance sheet through active sales, it said it would not make an actual decision until after the August meeting;
Second, the text regarding the extent of the additional interest rate hike has been softened and the new policy statement is about tightening the policy “to a certain extent”;
Third, the Bank updated its GDP growth forecasts downwards; fourth, although the Commission updated the inflation forecast upwards from 7.0% in March to a peak of just over 10% in the fourth quarter of 2022, instead of 8 % In the second quarter of 2022 earlier, it updated downwards the longer-term inflation forecast.
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The writer is the chief economist of Bank Leumi. The data, information, opinions and forecasts in the review are provided as a service to readers, and do not necessarily reflect the official position of the Bank. They should not be construed as a recommendation or substitute for the reader’s independent discretion, or an offer or invitation to receive offers, or advice to purchase and / or make any investments and / or actions or transactions. Errors may occur in the information and changes may occur. The Bank and / or its subsidiaries and / or companies related to it and / or the controlling shareholders and / or stakeholders in which of them may from time to time have an interest in the information presented in the review, including financial assets presented in it.