Inflation data in the US was a pleasant surprise. The annual rate in October fell to 7.7%, compared to expectations of 7.9-8%. This is good news for the American economy, and investors showed their optimism and drove the Nasdaq index up more than 5% at the opening Trading on Wall Street. On the other hand, bond yields fell sharply. Now, after the publication of the data, the assessment among investors is growing that the central bank in the US will slightly slow down the pace of interest rate increases in December and settle for half a percent, after a sequence of four sharp increases of 0.75% and a total of six interest rate increases since then March.
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The good news came from the direction of the core index, which excludes food and energy prices and fell from the 40-year high it reached the previous month. Now, the data points to an annual core inflation rate of 6.3%, less than the expected 6.5%.
Looking into the price index, it is evident that the biggest impact on it was fuel prices, which jumped by 19.8% compared to last month, and the rent also continued to climb (0.7%), but at the same time there were noticeable price drops in the used car market, in the prices of flights, health services, Clothing and natural gas prices.
“There are three sections that pulled down,” says Yonatan Katz, the chief economist at Leader Capital Markets. “First of all, the prices of used cars decreased by 2.4%. This is a section that jumped by more than 40% against the background of the Corona epidemic which led to a shortage of chips and as a result to a shortage of vehicles, and a trend of an accelerated transition from the city to the suburbs. Now we see the downward correction.”
Another section according to Katz that has a major impact is health services, which decreased by 0.6%. Katz explains that these are data that are measured once a year, so every month it will continue to be a positive indicator that will repeat itself and pull the price index down. “When you look at the prices of medical insurance, you look at the balance sheet of the medical insurance companies and look at the expenses and income. Last year we saw a big increase there, and now it is changing and having an impact.” Another key section that contributed to the surprising data is clothing and footwear, and this is even before the aggressive November sales.
However, the housing section continued to rise, this time by 0.6%, a little less than in recent months. “Housing will continue to pour fuel in the coming months due to the inflation data, but probably in 6-9 months it will move into negative territory,” says Katz, and explains this by the cooling of the American housing market in recent months following the increase in interest rates.
The rate of interest may moderate, also in Israel
How are these data expected to affect the increase in the federal interest rate in the next decision? It is difficult to say at this stage, and until the next interest rate decision in December, the November index will also be published, which will provide a clearer picture of the rate of inflation. After the latest interest rate hike, Fed Chairman Jerome Powell gave a eloquent speech and said that it is too early to talk about the end of the wave of hikes as expected by the market. Today the interest rate stands at 3.75%-4%, and before the publication of the current inflation data the probability of another increase of 0.75% ( a fifth in number) stood at 48% – according to CME data. After the publication of the data, the needle moved sharply, and the probability moved to 80% for an increase of only half a percent in December.
In addition to this, the market now estimates that the interest rate at the end of next year will be 4.7%, as opposed to 5.1% at the beginning of the week.
Katz of Leader Capital Markets also estimates that in the next interest rate decision the central bank will slow down and settle for half a percent. He adds that the matter may also have an impact on the Bank of Israel. “He mainly looks at the inflation environment here, but is also very influenced by what is happening in the US and global policy. This figure will perhaps allow him to raise the interest rate at a slower pace than planned, as other countries such as Australia and Canada have done.”
Guy Beit-Or, the chief economist of Psagot, believes, on the other hand, that in terms of the local market, no special impact is expected without a surprise downwards in the inflation figure in Israel. “In our estimation, the set of data that came out recently, together with the fact that the USA, the UK and the Eurozone all raised interest rates by 0.75% in their last meetings, increases the probability that the Bank of Israel will choose to raise interest rates by another 0.75% at the next meeting. In any case, we estimate that the cycle of interest rate hikes in Israel will reach exhaustion at the end of the year with the possibility of another move at the beginning of January. We see the Bank of Israel interest rate reaching a peak of 3.5%-3.75% at the beginning of 2023,” he wrote.
Inflation will probably continue to be “sticky”
Does this figure indicate a continuation of the cooling trend? Modi Shafferer, Chief Financial Markets Strategist at Bank Hapoalim estimates that yes, but only on the supply side. As far as services are concerned, they predict that inflation will remain “sticky” and difficult to crack. “Looking to the coming year – we remain in our assessment that supply inflation in the US and Israel will continue to moderate – a fact that will lead to continued moderation in the annual inflation rate. However, service inflation is expected to remain very high in the coming year as well, and it seems that only a significant increase in unemployment in the US will be able to significantly moderate inflation towards the Fed’s target. We do not expect that inflation in the US will drop to about 2% in the coming year.
How will the layoffs of the high-tech giant affect?
The chairman of the Fed said in his speech last week that as part of the risk management he conducts, it is better to introduce a tight policy and then support the economy if necessary if it falls into recession, than to face the danger that the inflation environment will remain high for a long time.
Either way, the US job market is still hot. The employment report for the month of October showed a significantly higher addition of jobs than expected – 261 thousand compared to an expectation of 195 thousand. The rate of increase in the average wage did decrease slightly and the unemployment rate rose slightly to 3.7%, and according to macro data published today, the number of initial unemployment applications last week totaled 225 thousand, above the forecasts (220 thousand) and also higher compared to the previous week (218 thousand).
Now, it will be interesting to see how the wave of layoffs at the tech giants, led by Facebook, which this week announced the layoffs of 11,000 workers, will affect the picture in the coming months.