In the country
A significant increase in real estate transactions, probably in response to expectations of an increase in purchase tax (which did materialize), contributed to another strong month in tax revenues. The deficit as a percentage of GDP fell to 4.6 percent and we will rise next month Of Israel and further strengthening of the shekel.
In November, the Bank of Israel accelerated foreign exchange purchases but this did not prevent the appreciation of the shekel from continuing. .
The appreciation of the shekel reduces imported inflation and will allow the Bank of Israel to remain patient. Tomorrow (Wednesday) the November price index will be published, which we believe will remain unchanged. The sharp rise in the price of fuel will be offset by a fall in the prices of holiday and fruit-vegetables.
In the world
Inflation in the US has risen to an expected 40-year high. In our estimation, the central bank will update tomorrow (Wednesday) upwards the interest rate forecast to 2 interest rate hikes next year. At the same time, the bank And how to deal with the uncertainty arising from the omicron variant.
On Thursday the central banks in the eurozone and the UK will leave interest rates unchanged, but the former will announce the termination of the emergency purchases program next year.
The Chinese renminbi (yuan) has continued to strengthen over the past week as well. The strength of China’s exports of goods along with the halting of outbound tourism contributed to the strengthening of the currency this year. The appreciation has contributed to the fact that inflation in China is lower compared to other countries in the world. In the future, however, we see fewer factors supporting the continued strengthening of the currency: the slowdown in China’s economy and the opposing monetary policy of China’s central bank, which is expanding (slowly), compared to its US counterpart, which is expected to shrink.
Also in November, the state’s tax revenues were high and stood at about NIS 36 billion, so that in total (almost) the annual revenues this year are about 18 percent higher than in 2019 (before the corona). Contributing to this were the improvement in economic activity, the acceleration in the high-tech industry and the rises in the stock markets. In the last two months there has also been a sharp increase in real estate taxation in light of a significant increase in the number of transactions, probably in response to the expectation of an increase in the purchase tax (which has actually materialized). At the same time, government spending rose at a more moderate pace so that the deficit as a percentage of GDP fell to 4.6 percent. We estimate that the deficit will rise next month (December expenses are high), but will continue the downward trend at the beginning of next year, which supports Israel’s credit rating and the continued strengthening of the shekel. In our opinion, the completion of the Bank of Israel’s bond purchases this month will not affect yields in light of the continued decline in the government deficit.
The asymmetry in Bank of Israel purchases will increase volatility in the foreign exchange market
The Bank of Israel’s foreign exchange purchases increased to $ 4 billion in November, the highest level in the last six months.
We still expect the shekel to continue appreciating in the medium term, but in our estimation volatility will increase due to the reduction of the very broad monetary policy in the US and the asymmetry in Bank of Israel purchases / sales that occurs in light of rapid appreciation but not in response to rapid depreciation. Stay patient and do not raise interest rates.
Tomorrow (Wednesday) the consumer price index for November will be published, which in our estimation is expected to remain unchanged, with the sharp rise in the price of fuel offset by a fall in holiday prices and a fall in fruit and vegetable prices. It should be noted that there is uncertainty about the magnitude of the impact of taxation on one-time tools on actual prices.
Household optimism fell sharply in November, according to the CBS Consumer Confidence Index.
High inflation will move the central bank
These data will lead us in our estimation to the central bank tomorrow (Wednesday) updating upwards the interest rate forecast for 2 interest rate hikes next year. At the same time, with a high probability the bank will announce that it plans to accelerate the reduction of the acquisition plan, the big question is whether and how it will address the uncertainty arising from the Omicron variant.
Central Bank Week
The focus this week will be on the US Federal Reserve, but it is important to remember that the other major central banks in the world will also publish decisions this week (before leaving for the long Christmas break). The increase in morbidity, but in our estimation will announce the termination of the emergency purchase program in the first quarter of 2022. An hour earlier the Bank of England will leave us with an unchanged interest rate, despite high inflation and signals of rising interest rates already in the previous announcement. Raising interest rates for next year On Friday we will hear the central bank’s interest rate decision in Japan. We expect the bank to announce that the emergency purchase plan will end as planned in the first quarter of 2022. In Hungary) and the depreciation of the local currency. On the other hand, the Central Bank of Switzerland will leave the interest rate unchanged in the negative territory in light of the strength of the local currency and relatively low inflation (1.5% inflation).
Currency too strong
Despite the reduction in the reserve ratio of the Chinese central bank, the yuan continued to strengthen in the past week as well. The strength of China’s exports of goods (reached another peak in November) along with the disappearance of outbound tourism contributed to the strengthening of the currency this year, in addition to which in recent weeks there has also been an increase in foreign investment. The strength of the currency has contributed to the fact that inflation in China is lower compared to other countries in the world (similar to Israel) and stands at 2.3 percent in November, below the central bank target of 3 percent. However, in the future, we see fewer factors supporting the continued strengthening of the currency in them: the slowdown in China’s economy and the opposing monetary policy of the Chinese central bank, which is expanding (slowly), compared to its US counterpart, which is expected to shrink.
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