| Alex Zabrzynski, Chief Economist of Meitav Dash
| Israel: The risk of rising inflation in the economy continues to rise
We raise the inflation forecast for the next 12 months to 3.2%. Main reasons for updating:
- The Bloomberg Commodity Price Index has risen by about 16 percent in the past month, the highest increase since 1974. Many commodities have risen by tens of percent since the beginning of the year. The price of the electricity tariff, which stands at about 20%, has risen by about 160%.
- It is really not certain that prices will soon return to pre-war levels in Ukraine. Russia is likely to remain under sanctions or some of them. It should be noted that no sanction imposed on it since 2014 has been lifted. The United States is even considering stopping purchases of oil and fuel oil from it. The supply of goods from Ukraine is also not expected to resume any time soon, certainly in the event that Russia conquers it.
- The rate of increase in the producer price index in Europe rose to 30.6%. There is a long-term relationship between this index and the consumer price index excluding housing in Israel, which implies that there is a risk of a further rise in the inflation rate.
- Following a sharp deterioration in the economic situation, a large increase is expected from Ukraine and Russia. According to a study by the Jewish Agency, about 200,000 Jews lived in Russia and Ukraine in 2021. Even if only 20% of them decide to immigrate, the number of immigrants will reach a peak of the last twenty years. A significant wave of increase will increase demand in general and in particular for housing, especially for rental apartments that are measured in the price index.
- We would add that Bloomberg’s inflation forecast for 2022 has risen 1% in Europe and the UK, 0.6% in Australia and 0.4% in the US and Canada in the past month. The forecast range is 3.3% in Australia and 5.7% in the UK.
- All this is happening when in the meantime the economy is growing at a high pace, with strong domestic demand, rising inflation and a very easing monetary policy.
It should be noted that the implied inflation expectations have risen sharply recently, especially in the short and medium term. Because short- and medium-term expectations rose much more than long-term ones (5-year expectations rose from 2.5% to 3.05%), future expectations for 5 in 5 years fell from 2.6% to 2.2%. Future expectations in Israel are even lower in Israel than in the United States.
There is no reason for investors to change their assessment of long-term inflation precisely when there is a sharp rise in short- and medium-term expectations. A reduction between expectations for the short and medium and long term is likely to occur.
Bottom line: We continue to recommend a short-to-medium maturity in the bond portfolio. We recommend tilting to the adjacent channel.
| Although not included inMSCI EuropeThe domestic stock market is expected to continue to stand out favorably
Israel did not enter the index MSCI Europe, but in the past year close to $ 4 billion has flowed into the Tel Aviv stock market foreign money, an all-time record.
The entry of foreigners into the domestic stock market may reflect the overperformance of the Israeli economy, which grew at almost the highest rate in the world last year, a developed technology sector, lower inflation and smaller fiscal risks than in many countries.
Examination of current key parameters, such as profit multiplier, capital multiplier and sales multiplier (according to Bloomberg) of each of the major stock indices for 2010-2022 indicates that the pricing of an index relative to past multipliers is not significantly different compared to major indices in Europe, Japan and Asian markets. “B.
It should be noted that despite a return of 31% in 2021, institutional investors in Israel sold net shares in Israel for about NIS 800 million last year. Overall, these sales are in line with the pattern of institutional activity against the trend in recent years.
The security events that are currently taking place on European soil make the security-political risk in Israel at least noticeable. It will also be recalled that during the coming year, the designation of designated bonds is expected to inject several billion into the local stock market.
Bottom line: We recommend continuing to hold excess exposure to shares in Israel as part of the overall exposure to shares in the portfolio.
| The labor market Continues to improve
Total wages in the economy returned in December to the pre-crisis trend. The rate of increase continues to be very fast, so that with a high chance over the coming year the total wage will rise well above the trend.
In contrast, the number of employee jobs is still lower than the trend. The lag in jobs is mainly due to the services sector. It is likely that with the decline in the morbidity wave in February, the demand for workers in the services sector has risen.
| world: The economic data are improving, but …
The latest economic data in the US have been pretty good overall:
- According to, the definition of growth increased from “Modest pace“In a report published in mid-January to”Modest to moderate“In the latest report.
- Sustainable product orders have exceeded the forecast, especially investment product orders by the business sector continue to grow.
- The industry was higher than forecast.
- Labor market data were very good with close to 1.2 million jobs created since the beginning of the year, well above forecasts. The rate decreased from 4.0% to 3.8%. If the economic situation does not worsen in the wake of recent events, the unemployment rate may fall well below past lows.
Although the average did not rise in February, contrary to expectations, this is mainly due to the fact that many jobs are added at relatively low wage levels.
At the same time, the wages of the younger workers (Nonsupervisory) Is growing at a significantly higher rate than the average wage in the economy in contrast to the pattern that existed in the past.
| The risks have increased
Despite the good economic data being published, recent events raise concerns that the picture may change in the coming months. The risks to growth have increased:
- Exacerbation of the risk of inflation and its effect on growth.
- Impact of financial conditions on economic activity.
- Monetary restraint.
- Increase in geopolitical risk.
| Inflation fed by rising commodity prices is hurting growth
Retaining commodity prices at a high level over time can hurt growth. This is how the historical data teaches us. The effect of a change in the commodity price index a year later on US growth between 1962-2019 presents a fairly clear picture.
A year later, after an annual increase of over 25% in commodity prices, US growth averaged about 1.3%, compared with an increase of about 3% in the case of a rise of less than 25% or a decline in commodity prices. In the past year, the commodity price index has risen by about 50%, which increases the risk of a slowdown in growth.
| Deterioration in financial conditions can also hurt growth
The Bloomberg Financial Conditions Index in Europe has dropped to one of the lowest levels since the debt crisis in 2011-2012, not including the March 2020 events.
In the United States, too, there was a significant decrease in the financial terms index, but less sharply than in Europe. The risk premium in interbank loans rose sharply (FRA-OIS), But it is still at a lower level than in the turmoil in the financial markets that has occurred in the last five years. Rising bond yieldsHEWhich are still at a relatively non-exceptional level.
Financial conditions may also be affected by the effect of inflation on stock market performance. During periods of high inflation between 1950-1993 the performance of weakened as the rate of inflation exceeded the levels of 4% -5%.
| No delay in monetary restraint is expected
Finally, last week it became clear that the Fed governor did not share the idea that he feared a slowdown in growth should prevent or delay the process of immigration. According to the content and tone of his remarks, all of the Fed’s other targets other than curbing inflation are now becoming secondary.
In our estimation, in order to curb inflation, the Fed will need to raise interest rates to a higher level and at a faster rate than the market estimate, which now embodies that the interest rate will reach a peak of about 2% in 2023.
It is important to note that we see this approach of the central bank as much more correct than the ideas that call for waiting with a rise in interest rates because of the war.
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The writer is the chief economist of Meitav Dash Investment House. This analysis is intended for the purpose of providing information only, and in no way should it be considered an opinion, offer, recommendation or advice / marketing for the purchase and / or holding and / or sale of securities and / or the financial assets described therein. The information contained in this review does not purport to contain all the information necessary for a potential investor and does not purport to constitute a complete analysis of all the facts and details appearing therein. This review is not a substitute for investment advice / marketing that takes into account the data and special needs of each person. Meitav Dash Brokerage, and its sister companies and other companies in the Meitav Dash Investments Ltd. group and / or stakeholders for any of the companies listed above and their clients, may have an interest in the securities and / or financial assets included in this review.