| Victor Behar, director of the economic department at Bank Hapoalim, and Hapoalim economists
| Israel
Decreased in the past week and reached on Friday after the establishment of the representative exchange rate at a level of about NIS 3.54 per dollar – a depreciation of about 4% in one week against the dollar. Part of the devaluation can be attributed to the drop in rates on Wall Street and to a certain strengthening of the dollar globally, but it seems that part of the devaluation also reflects the uncertainty surrounding the reform of the judicial system, the worsening of the security situation and bills that have the potential to affect economic parameters and arrangements.
As you can see, the devaluation in the shekel exchange rate in recent days was sharper than what is explained by the price declines in the stock markets around the world, and we tend to attribute it to these circumstances. It is important to note that this is not a very unusual fluctuation, and we do not recognize an unusual systemic liquidity crisis in the foreign exchange market, as for example the situation in the foreign exchange market with the outbreak of the Corona virus.
| Towards a sharp increase in the budget deficit
The state’s tax revenues decreased in January by a sharp rate of 7.6% compared to January last year. A sharp decrease of 9.9% was recorded in the collection of direct taxes. Part of the decrease is indeed due to a high comparison base of January last year, but it is likely that we will see a similar trend in the following months as well.
We estimate that the decrease in tax revenues, and the increase on the expenditure side in the second half of the year after the budget is approved, will lead to a sharp increase in the budget deficit to the level of 3% of GDP and possibly even more. The increase in the deficit and the cessation of designated bond issuances will lead to a net increase in tradable bond issuances, and pressure to increase yields.
The good fiscal situation was a fundamental factor that affected the country’s capital raising prices, resulting in the country’s yields being lower than the dollar yields of the US Treasury. In light of the expected change in the fiscal environment, as well as the increase in political risks in the short term, we estimate that the long-term shekel yields will gradually close the gap with US yields (the gap now stands at about 20 basis points).
| devaluation of the shekel
Following the devaluation of the shekel exchange rate, the forecast is expected to be significantly updated to a level of approximately 3% for the next 12 months. Inflation expectations also rose in response to the devaluation and stand at around 2.9%. The indices of the coming months are expected to be affected by the increase in housing, food and electricity prices, and in our estimation will be high in relation to the seasonality of these months (we will publish an update after the publication of the January index).
We expect a level of 4.0% next week. In light of the resulting devaluation and the expectation of higher inflation in the short term, we estimate that the interest rate will also rise beyond 4.0% in the future.
The markets moved to embody an interest rate of 4.25% at the end of the year and a decrease to a level of about 3.5% next year. We saw a similar trend in the past week in the US as well, when the market moved to embody an interest rate of around 5% at the end of the year as well.
| global
The central banks of the world are expected to lower the rate of interest rate increases, but the process of raising interest rates has not yet ended, and the interest rate is expected to remain at a relatively high level for a long time. Against the backdrop of rising inflation expectations and statements by members of the Fed, yields in the US rose last week, and stock markets fell after the increases recorded in January.
The declines in the USA were led by an index with a decrease of 2.4%, while at the same time the and indices decreased by 0.2% and 1.1% respectively. In Europe, the index decreased by 1.4%. The index decreased by 2.2%, and the other exchanges were also In negative territory, although at more moderate rates.
In the commodity market, the increases in energy prices stood out this week. The price of a barrel of oil increased by 8.2% to the level of 86.5 dollars, and the price index for all energy commodities increased by 7.7%. The price index of all goods rose by 2.1%.
| USA: An increase in the consumer confidence index is accompanied by an increase in expectations for inflation in the coming year
Towards the end of the week, the first estimate for the University of Michigan index for the month of February was published. The index rose to a record level of the last 13 months. The increase this month was influenced by an increase in the current situation component and despite the slight decrease recorded in the expectations index.
Despite the increase in the index in recent months, it is still lower than its previous level before the corona virus. The expectations of those surveyed regarding the rate of inflation in the coming year rose from 3.9% in January to 4.2% in February, and the expectations for a period between five and ten years remained stable at a high level of 2.9%.
The five-year expected from the capital market rose to a level of 2.51% compared to 2.33% at the end of January this year.
| Fed members are signaling that interest rates will not drop anytime soon, even though inflation is moderating
Last Tuesday, it seemed that the signals from the Fed President’s speech in Washington, which emphasized the existence of a process in the US, were received with positive reactions in the capital market. However, statements by other Fed members later in the week were received more cautiously and offset some of the gains recorded the day before.
| The Fed interest rate – the gaps between the members of the Fed and the capital market narrowed
In the last week there was a considerable increase in the yields of government bonds in the USA. The bond rose from 4.30% to 4.52% and the bond from 3.52% to 3.73%.
The US capital market is now anticipating two to three more interest rate hikes of 0.25% to a level that will reach its peak in July of this year – 5.25-5.5%. Also, expectations in the capital market for a drop in interest rates later in the year have moderated, and it appears from them that by the end of the year the interest rate will drop slightly to 5.0% and will reach a level of approximately 3.75% at the end of 2024, and 3.25% at the end of 2025.
The risks of inflation and recession in the US remain high, but nevertheless inflation is moderating and economic activity and the labor market have so far demonstrated surprising resilience. The next steps of the central banks, similar to the messages coming from the various Fed speakers, are expected to be more moderate, and depend on the data that will be published.
| Eurozone: 2.7% decline in retail sales in December 2022
Against the background of price increases and the erosion of the purchasing power of households, there was a decrease in both the food and beverage items and other items. In the last 12 months, sales decreased by 2.8%.
The Ministry of Finance of Germany now estimates that the slowdown in economic growth during this winter will be moderate compared to early forecasts. Similar to the Fed in the US, various spokespeople for the ECB continued to emphasize this week the need to carry out a number of additional measures in order to create the conditions for a decrease in inflation.
| China: Inflation moderates
In the 12 months ending January 2023 it reached 2.1%. It also recorded a sharp decrease (a decrease of 0.8% in the last 12 months) which mainly reflected a decrease in the prices of goods in the world and in China. Therefore, it seems that the central bank will be able to continue its expansionary policy, which is intended to support the acceleration of economic activity in the country.
The financial markets reacted very positively to the changes in the closure policy, but in the last two weeks there has been an increase in risks and the level of uncertainty as a result of the increased tensions with the US regarding the spy balloon discovered by the Americans. Some estimates are that the US will tighten restrictions on trade and capital movements between the US and China.
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