The number of people infected with corona has risen sharply and is expected to continue to rise. We estimate that we will see a significant slowdown in the consumption of services in the coming months, mainly due to the fear of crowds.
The shekel strengthened again last week against the background of price increases in world stock markets that affected institutional foreign exchange sales.
Towards very high price indices in relation to seasonality. The inflation forecast for 2022 is 2%.
The many reports in the media about price increases have also affected inflation expectations, which have risen in the past week – expectations for the various ranges are now at a level of about 2.6%.
The Bank of Israel’s interest rate will remain unchanged tomorrow, but in our opinion the accompanying announcement will be hawkish in relation to its predecessors.
The number of people infected in Corona recorded a sharp rise to a level of more than five thousand a day. It is estimated that the numbers will be much higher in the coming days. No restrictions on activities have been added, but the fear of crowding does its thing, and more employees are choosing to work remotely. We estimate that we will see a significant slowdown in the consumption of services in the coming months, mainly due to the fear of crowds. The revenue index in the retail chains fell by 0.7% in November, seasonally adjusted, a figure that may indicate a relative weakness in sales during the “sale” season.
Exports of high-tech services continue to break records – the months of September-October were particularly high with exports of $ 3.8 billion per month – an increase of about 20% compared to the corresponding months in 2020. The sharp increase in exports of services maintains a current account surplus , And more than offsets the effects of price increases on world commodities. The shekel strengthened again last week also against the background of price increases in world stock markets that affected institutional foreign exchange sales.
Towards very high price indices in relation to seasonality Consumer price indices in the first months of the year are usually very low, or negative in the case of January, but this year it is expected to be different: a number of food producers have announced an intention to raise prices, the tax on sugary drinks has come into force, electricity prices are expected to rise in February. – 4.9%, and we expect further price increases in the prices of various services, in which the wage component is high. There are also factors that moderate inflation, such as appreciation, an expected reduction in Bezeq’s communications prices, and a reduction in purchase tax for single-family apartments. We leave the inflation forecast at 2% for the coming year.
The many reports in the media about price increases have also affected inflation expectations, which have risen in the past week – expectations for the various ranges are now at a level of about 2.6% (the curve of expectations is flat at this level).
The Bank of Israel’s interest rate will remain unchanged tomorrow, but in our opinion the accompanying announcement will be hawkish in relation to its predecessors. Labor market data have become tight, the rate of actual employment (excluding temporary absence from work) close to pre-Corona level. We estimate that the Central Bank’s updated estimates will include a reduction in the growth forecast for 2022 as well as an increase in at least one interest rate.
Many countries have returned to imposing restrictions on activity, but there are also those who have decided to allow the New Year celebrations and broadcast as much “business as usual”. The increase in morbidity in the world does not stop the market’s expectation of interest rate increases in the coming year for the time being either. Bond markets are now expecting three US rate hikes this year and another two in 2023, and in the eurozone expectations are that in three years the zero interest rate will come to an end.
The year 2021 ended with double-digit returns in the major US and European stock indices. The S & P500 rose 27% year-on-year, with gains at NASDAQ and Dow Jones reaching 21% and 19%, respectively. The sectors leading the gains were energy, real estate and technology. The sharp rises in stock indices reflected, among other things, the rapid recovery of economic activity, including in the labor market, the continuation of the expansionary macro policy, and the high profitability of the business companies. In Europe, the Eurostox 50 and 600 indices rose by about 21% on average in local currency, and the French stock index led with a 29% rise. Asian stock indices performance was uneven. On the one hand, the stock indices in Taiwan and India rose by about 24%, but on the other hand the stock index in Hong Kong fell by 14% and the CSI300 index in China fell by 5%. In the past year, the rise in commodity prices has also been noticeable. The general commodity index (CRY Index) rose by about 39%, among other things due to the effect of the rise in the price of oil (Brent type) by 50%.
USA: The number of job seekers continues to fall. For now, the effects of the spread of omicrons are not noticeable in the labor market, and the (continuous) weekly demands for unemployment benefits have fallen above and beyond the forecast and reached the low level since the corona outbreak in 2020. The Case Schiller index of house prices in the twenty largest cities in the US rose by 0.9% in October, completing an annual increase of 18.4%, a slight slowdown from the annual rate in the previous two months. .
US: Rising inflation expectations and yields. The slope of the yield curve remains unchanged, with the gap between the yield for ten years and the yield for two years remaining at the very low level of 78 basis points. The yield to maturity on ten-year US government bonds rose slightly this week to 1.51%, and the two-year yield rose to 0.73%. The capital market now expects 3 interest rate hikes during 2022 and another two interest rate hikes in 2023. Inflation expectations derived from the two-year bond market rose from 3.1% to 3.22%, and five-year inflation expectations rose from 2.76% to 2.91%.
Eurozone: Parliamentary houses in Spain and Italy have approved countries’ budgets for 2022. These budgets include funds from the EU Rehabilitation Program. As for Corona infections, these have reached record levels at Christmas in France, Italy, Spain and many other countries. Many countries have tightened restrictions on gatherings ahead of the New Year’s celebrations. In Portugal, workers are asked to work from home throughout the week, and in France a similar decision was made regarding three working days a week.
China: A year of economic and regulatory turmoil ended with a 5% drop in the main stock index. The Purchasing Managers’ Index of total output remained unchanged in December at 52.2 points. Manufacturing firms’ profits rose in November at a lower annual rate than in October, due to the slowdown in the real estate industry and a weakening in demand for private consumption. New restrictions on direct investment abroad have also been set by Chinese businesses.