| Alex Zabrzynski, Chief Economist of Meitav Dash
| A decline in technology shares, especially in Israel, is a sign of an expected weakening in the economy
The sharp declines in technology stocks in the United States, especially Israelis, are a preliminary indicator of an expected slowdown in Israeli economic activity.
There are signs that the local technology arena is already cooling down. As the geektime website reports, in March Israeli start-ups raised a lower amount than in March 2021 when April was one of the weakest months in recent years. There are also signs that there is a certain stagnation in the number of high-tech employee jobs.
At the same time, it is possible that this time the significant surplus savings in the private sector will soften the impact on the growth of a weakening in the technology sector. The general situation of lack of workers in many areas should also provide support for economic activity.
It should also be noted that the index has disengaged from the sharp decline in Israeli technology stocks, in contrast to the long-term trend of high correlation between them. It is difficult to expect continued disconnection over time.
| The labor market continues to improve rapidly
The labor market in Israel continued to strengthen in March. The unemployment rate in the traditional definition has dropped to a historic low of 3.4%. The broad unemployment rate fell from 5.4% to 4.9%. The decline in the unemployment rate occurred while stabilizing the labor force participation rate.
The employment rate (employed of the total working-age population) returned to pre-epidemic levels.
| In most industries demand continues to be much stronger than the long-term trend
The revenue index in all sectors of the economy at constant prices continues to rise well above the long-term trend. Sales in the trading industries are also higher than the trend, especially in the wholesale trade. The strong sales of the companies in the economy explain part of the increase in tax revenues, and part of the rising price trend.
With the exception of the trade industries, the industries with significantly higher sales than the trend are the electricity and water supply industry, finance, agriculture, transportation and storage, and professional services. In contrast, in the education, management and support, entertainment and leisure industries, and hospitality and food revenue is still below trend.
| Credit card sales reflect a decline in demand for products versus a rapid recovery in services
Credit card sales figures, which include March, reflect a change in the consumer shopping mix following a decline in morbidity and the removal of restrictions. Purchases of various products (furniture, electrical appliances and electronics) that were very popular during the epidemic period are starting to weaken possibly also due to the recurrence of travel abroad.
In contrast, after the decline in December and January, February and especially in March, there was a jump in spending on leisure and recreation services, tourism and hospitality. Increased consumption of services is expected to lead to an increase in demand for workers in these labor-intensive industries.
| A leap in chip production
The index has risen at a high rate in recent months. Most of the increase was recorded in high-tech industries. There was a sharp increase in the production of electronic components and boards (chips) and in the production of electronic and optical devices. In contrast, there is a decline in the industrial production index in traditional technology industries.
| Update for the April index
Following an increase in fruit and vegetable prices in April and the depreciation of the shekel, we raised the forecast for the April index from an increase of 0.8% to 0.9%. The annual forecast rose to 3.6%. The gap in inflation expectations between the short and medium term supports our assessment of the transition of some of the index-linked bond exposure to the medium term.
| World: Although US GDP has fallen, it does not reflect weakness in the economy
Although it fell in the first quarter, the decline does not really indicate a weakness in the economy. In fact, the main components of domestic demand, private consumption and investment in fixed assets, contributed more to growth than in the previous two quarters.
Mainly the “culprits” are the decline in current account deficit (the difference between exports and imports) and the decline in inventories. Overall, final demand (Domestic Sales to Domestic Purchasers) has long closed the gap with the long-term trend.
The current economic data in the US is quite strong:
- Reality in the U.S. is growing exactly in line with the long-term trend. Consumers are still consuming products above the long-term trend and services below it, but the gaps are gradually closing.
- The real income of households continues to erode and threaten continued growth in private consumption. To support the level of consumption, households reduce the savings rate, which fell in April to 6.2%, compared with an average of 7.5% in the two years before the plague.
- The US real estate market has weakened. There is a marked decline in the existing effect of a sharp rise in prices and the rise in mortgage prices.
- American companies continue to increase investment. Investments in equipment grew in the first quarter by 15.3%, and investments in intellectual property by 8.1%. In contrast, investment in buildings declined.
The Bottom Line: The amount of incentives given over the last two years is still enough to deal with the new risk factors that have recently emerged.
| Recent indicators suggest that inflation is not expected to moderate significantly any time soon
The main inflation figure is followed by the Fed, which recorded an annual decline in March for the first time in the past year from 5.3% to 5.2%. The overall index rose from 6.3% to 6.6%, slightly below forecasts.
However, other data released last week indicate that price pressures are not significantly easing:
- Surveys by the Fed branches for April show that the prices paid by businesses have once again returned to an upward trend.
- The Employment Cost Index rose above the forecast in the first quarter and reached an annual rate of 4.5%, the highest since the measurement began 20 years ago. This index indicates that the US has already taken root in the labor market.
| The Fed is expected to make a series of interest rate hikes at rates of about 0.5%
Pretty good macro data, which still does not indicate a weakness in demand, is almost certain to support the Fed at a rate of 0.5% at its meeting this week. This increase is already reflected in the markets.
The contracts embody that the Fed will raise interest rates in the next 4 meetings until September by a cumulative 2% from the current level. Against this background, long-term yields on the US bond curve once again approached 3%. In our estimation, the rise in yields has not yet come to an end:
- First, no significant weakness is identified in the American economy. The labor market by all indications was very strong even in April. The strength of economic activity makes it possible to increase monetary tightening.
- No significant signs of weakening in inflationary pressures are seen.
- The Fed is expected to announce a plan this week and begin implementation immediately, which will increase pressure for yields to rise.
- There are currently no exceptional short positions that can close demand for bonds. A large short position in the speculative investors’ bonds has recently closed and is now similar to a historical average. According to the JPMorgan Institutional Investors Survey (NYSE :), the Bank’s clients’ rate on “long” positions on bonds has been at its highest level in the past year.
- Rising interest rate differentials between the US and other countries increase the cost of currency hedging. As a result, the attractiveness of buying US bonds by foreign investors has declined. The equivalent fell close to zero compared to a yield surplus of about 1% that was about three months ago.
- The commercial banks that last year were among the largest buyers of U.S. bonds other than the Fed have almost stopped buying in the past two months.
The Bottom Line: We continue to recommend short-to-medium maturities in the bond channel.
| The ECB is expected to surrender
Growth in the European economy in the first quarter stood at 0.2%, similar to the fourth quarter of 2021. With the exception of Germany, in the other major countries the growth rate fell, while in Italy growth fell to minus 0.2% and the French economy did not grow at all.
Despite low growth, inflation in Europe continues to rise. The rate has risen above forecasts to 3.5%, the highest since the establishment of the eurozone.
The risk of inflation in Europe is also increasing due to the rapid weakening of the exchange rate, which fell by almost 5% in April as a result of widening interest rate differentials between the US and Europe.
The other currencies also weakened sharply against the dollar, in particular. The weakening of the wine is also in line with the widening yield gap between the US and Japan.
In our estimation, the European Central Bank will start at one of the forthcoming meetings.
| Flip on flip in the stock market
Relatively good macro data in the US, a reasonable reporting season and an increase in the earnings per share forecast were probably one of the reasons for the stock market’s weakness. And leading to declines in the stock market.
It should also be taken into account that exposure to equities in household and institutional portfolios has increased significantly in the last decade, especially in the last two years, mainly against the background of the lack of alternative and the perception that any decline in equities is a buying opportunity (FOMO, BTD, TINA).
The declines in stocks that have been going on for four months with high volatility are breaking these perceptions and combined with the creation of an alternative of risk-free interest rates that are expected to become more attractive from month to month, are causing funds to be withdrawn from the stock market.
It should be noted that the proportion of private investors in the US stock market with a “bearish” position has risen to the highest level since 2009. The flow of funds out of mutual funds and ETFs has been the strongest in the last week since the outbreak of the plague. Precisely a weakness in the sentiment of retail investors could have been a sign of the possibility of reversing the negative trend in the market, as has often happened in the past, but in light of all the circumstances it is difficult to see this happening.
The other risks to the stock market are not diminished either:
- The war in Ukraine is intensifying and threatening to spread to other areas.
- The slowdown in China is worsening, as evidenced by indices that fell sharply in April below forecasts and indicate a contraction in activity. The Chinese have sent a series of announcements in the past week about intentions to support economic activity, but as long as the epidemic treatment policy does not change, it is unclear how they can get out of the situation they are in.
The Bottom LineA: We continue to recommend low-medium exposure to the equity channel.
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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.