Meitav Investment House Chief Economist Alex Zbzhansky in a weekly macro review of the local economy. The growth rate of credit card purchases at fixed prices continued to moderate In accordance with the existing trend in the other indicators for private consumption in the economy. At the same time, the rate is still relatively high and in our estimation points more to a return to “normality” than to economic difficulties or consumer concerns. A slowdown in the growth rate of the export of high-tech services was recorded. The growth rate of total exports of services also moderated. However, this is still a high rate.
The volumes of all types of credit in the economy continued to grow at the highest rate since 2007. The growth rate of consumer credit and mortgages (the amount of credit) even accelerated (data up to May). At the same time, the rate of growth in the number of mortgage loans continues to decrease in June, signaling a cooling in the real estate market.
The correlation between the local and American bond markets has recently been at a very high level. In general, the relationship should be supported by a similar policy of the central banks in both countries. However, it is not certain that the policy will indeed be similar. As a principle, the Bank of Israel manages a policy based on local considerations. The main factor that should connect the policy of the Bank of Israel to the FED is the exchange rate of the shekel in relation to the dollar. However, in recent years, the shekel has stopped responding to the interest rate differences between Israel and the US. The correlation between the 10-year yield gap between the US and Israel and the exchange rate of the shekel went from positive to negative. As we have shown many times in reviews, the exchange rate of the shekel depends mainly on the direction of the American stock market due to the hedging activity of the institutions.
This situation allows the Bank of Israel to conduct a more independent monetary policy. In this regard, the recent decline in bond yields in Israel, which was mainly a result of the decline in American yields, is not so compatible with the local circumstances. The local economy looks better than the American one. Inflation is expected to begin to decrease in the coming months in the United States, but in Israel it is expected to still be in the upward direction.
In our estimation, the move in the markets “copied” to Israel from the US moved the risk of inflation and interest rates in Israel from extremes upwards to extremes downwards: inflation expectations fell sharply and in the medium and long term even below the levels at the end of 2021. Only then did the consensus forecast and the Bank of Israel’s forecast for inflation in 2022 stand below to 2% compared to the inflation forecasts of about 5% and even more that exist today.
The shekel bond yields for 5 decreased to a level of approximately 2.2%, which is only 0.25% higher than the current yield of the floating rate bond and 0.35% above the MCM. In our estimation, the yields in the middle of the curve (including the attached) do not give Sufficient compensation for the existing risks.