| Ofer Klein, Head of the Economics and Research Division at Harel Insurance and Finance
| In Israel: Inflation is rising and putting pressure on the government
The swing in energy prices continues, when in the last month the direction was almost only up. As a result, the price of regulated gasoline will rise by 9 percent tonight and we are updating the forecast accordingly to 0.3 percent.
Even at a price that is about 20% -25% of the cost of electricity production, there is a jump, which brings an increase in the price of electricity in the summer.
At the same time, the government’s surplus in tax revenues and the low deficit so far will allow it, in our estimation, to facilitate a rise in prices, especially in light of public pressure.
| Inflation is rising but forward expectations are falling
Despite the actual rise in inflation, inflation expectations in Israel and the rest of the world have fallen sharply in the past two weeks. The expectation of a faster rise in interest rates in Israel and a slowdown in global growth next year contributed to this.
| World: Feel the rise in yields
The US Federal Reserve is committed to raising it by half a percentage point in the next 2 decisions, according to the summaries of the discussions from the last decision.
However, in the last two weeks the markets have been pricing that the pace will moderate in light of fears of a significant slowdown in growth alongside expectations of a further decline in inflation.
Surveys of companies and households indicate positive but moderate growth in the second quarter, and prices fell to 4.9 percent in April.
The sharp rise in yields and interest rates on mortgages continues to cool the residential housing market, which is noticeable in Canada, New Zealand and of course in the US.
After mortgage lending, sales rates slowed significantly as well. In the United States, it fell sharply, for the second month in a row, to 590,000 (at an annual rate), the lowest level since the peak of closures in April 2020.
| Get out of zero and strengthen the euro
Anyone who has recently tried to renew a passport or book a plane ticket feels the intense demand for tourism and recreation. A similar picture exists in Europe in the last 3 months in light of the removal of corona restrictions.
Thus, despite the war in Eastern Europe the corporate sentiment in the eurozone was positive, and in May stood at 54.9 points, a decrease compared to the previous two months but still in positive territory.
At the same time, inflation continues to rise, so according to the initial estimate, it reached 7.9 percent in May (on an annual basis).
The positive growth alongside high inflation, which unlike the US will still rise in light of the high weight of energy in European indices, will lead the central bank to raise another year.
This week the Governor of the Central Bank stated that in its estimation the interest rate will become positive by the end of the third quarter. Therefore, we expect that in the forthcoming interest rate decision (June 9), the Bank will announce the termination of the purchase plan in July, along with a high chance of a corresponding increase in interest rates.
In our opinion, this supports a continued rise in yields in Europe and the strengthening of the euro, especially against the dollar, which we believe already embodies a reasonable interest rate hike.
| China: Slows down and eases
GDP in China continued to shrink in May as well, but at a more moderate pace. This is according to the official purchasing managers’ indices, which have still recorded a contraction but are more moderate in light of some relief in the May restrictions.
We still anticipate continued austerity and expansionary policies of the government in the coming months.
The author is the head of the Economics and Research Division at Harel Insurance and Finance. The author (s) and / or members of the Harel Group and / or interested parties in them and / or the controlling shareholders of the Group, may hold and / or trade, for themselves and / or for others, the securities and financial assets specified in this review. This review should not be construed as investment marketing or a substitute for investment marketing, which takes into account the personal and special needs of each investor. What is stated in this review reflects the opinion of the author at the time of publication, and this may change at any time and without further notice. The Company will not be liable, in any form, for any damage and / or loss caused, if any, as a result of relying on this review, nor does it warrant that relying on the information contained therein may yield profits.