The Israeli economy is growing at a rapid pace: are the chances of interest rates rising?

by time news

| Alex Zabrzynski, Chief Economist of Meitav Dash

Highlights of the Macro and Markets Weekly Review:

  • Although the growth rate of the Israeli economy in the third quarter was relatively low, most components reflect that it continues to grow at a rapid pace while increasing its growth potential. Growth in 2021 is expected to total 6.2%.
  • The low price index for October does not, in our opinion, reflect a decline in the inflation environment.
  • Short- and medium-term shekel bond yields do not reflect a reasonable chance of a rise in interest rates.
  • According to various indications, the recent move of strengthening the shekel has caused urgent sales of Israeli forex holders.
  • Imposition of closures and restrictions in Europe may return the European economy to negative growth, but will not necessarily lead to significant weakness in the European stock market.
  • Data in the US economy continue to indicate an acceleration in growth.

| Israel: The Israeli economy continues to grow rapidly

In Israel, it rose by only 2.4% in the third quarter. However, the main components grew at a high rate. Exports rose by 7.5% and investments by 14.8%. Private consumption, which grew at a low rate of 0.7%, was mainly affected by the decline in consumption of durable goods, food and clothing after very high growth in the first half of the year.

Overall, GDP in the economy has not yet returned to the pre-crisis trend line. It is expected to close the gap in the coming year, which did not happen after the crises that have occurred in recent decades.

Private consumption is still about 6% behind the pre-crisis trend, with consumption of sustainable construction products much higher than the trend, despite the decline in the third quarter. In contrast, services consumption is still about 20% lower than the trend and even far from the level on the eve of the crisis, despite an annual increase of 18.4% in the third quarter, after 47.1% growth in the second quarter.

The most prominent manifestation of the recovery and optimism of the business sector is reflected in the rapid growth in investments, with the exception of investments in vehicles. In recent quarters, investment in construction has accelerated, particularly in residential construction. Since the outbreak of the plague, there has been a real jump in investments in information and communication equipment, in parallel with the continued rapid growth in intellectual property. Investments in these areas are expected to lead to improved productivity and growth.

Bottom line: The economy continues to grow at a rapid pace. Growth relies on a variety of areas, including private consumption, investment and exports. The growth rate this year is expected to be about 6.2%.

| Have the chances of an interest rate rise in Israel decreased?

It is difficult to argue with the market, but in our opinion its response after publication was excessive, including the sharp decline in forecasts for rising interest rates and inflation:

  • The month of October was not supposed to significantly change the forecast going forward. A single item of travel abroad shifted the index down by 0.3%. Apart from that, the rate of inflation in most other items continued to rise. There was an increase in the local services price index and the producer price index.
  • The average weight of the items in the index whose prices have risen in the last six months has been significantly higher than in any of the years since the beginning of the previous decade. This fact illustrates that price increases do not focus on individual items, but are spread over many products and services.
  • According to the Bank of Israel publication, the consensus of forecasters ‘inflation forecasts, the inflation expectations embodied in the banks’ interest rate contracts and their internal interest rates were higher after the October index was published than in the previous month, illustrating that the latest index did not change estimates.
  • As reported last Friday, the German producer price index rose from 14.2% in September to 18.4% in October, well above forecasts.
  • The labor market continues to improve rapidly with a decline in the rate and an increase in the number of job vacancies.
  • The rate of increase in apartment prices is skyrocketing. Credit to real estate-related areas is rising rapidly, with mortgage rates almost at an all-time low.
  • The Fed is likely to anticipate a rise against rising inflation in the U.S. The Bank of Israel must also raise interest rates in the coming year if necessary.

Bottom line: In our estimation, the inflation environment will continue to rise, which is expected to cause the Bank of Israel to raise interest rates. In light of this assessment, current inflation expectations justify a bias in the linked channel. Also, the yields of shekel bonds in the short-to-medium part of the curve are too low in relation to their risk.

| Panic signs of forex holders

“Not only is the behavior in the bond market not entirely in line with the publication of the price index, but also of the shekel. The last index effectively eliminates the chance of a rise in interest rates in Israel, the shekel was supposed to weaken. Apparently, the strengthening of the shekel this time did not happen against the background of a change in interest rate expectations.

A week ago, we showed that the main reason for the shekel’s behavior in recent years was hedging transactions by institutional investors. Nevertheless, it seems that another dominant factor was involved in the recent strengthening.

Both facts can hint at this:

  • The strengthening of the shekel took place against the background of the increase in the trading volumes of local investors, when the turnover of foreigners actually decreased.
  • The strengthening of the shekel occurred while declining trading volumes in swap transactions and an increase in turnover of conversion transactions. In general, the strengthening of the shekel in the past year was accompanied by an increase in swap transactions against the background of institutional investor activity.

Bottom line: It is possible that most of the recent strengthening of the shekel was not caused by hedging transactions, but by urgent conversions of Israeli foreign exchange holders in light of the rapid fall in the exchange rate and the break of historical record levels.

| World: Europe has entered a new wave. What are the possible consequences?

Some European countries have again entered restrictions and closures at various levels due to morbidity:

  • Previous waves of illness have caused the European economy to slide into negative growth.
  • The euro weakened rapidly against the backdrop of declining yields between the US and Europe reflecting expectations of changes in interest rates. We are not sure it will continue over time. In our estimation, inflation in Europe will continue to rise. From the rest of the country, the abnormal rise in energy prices and the weakening of the euro, and the ECB will probably have to restrain its policy in the coming year, which may lead to a reversal of the trend in the European currency.
  • In periods of weakening the euro in recent years the European stock market has achieved a similar return to. In contrast, as the euro strengthened, European stock performance was relatively inferior to the global stock index.
  • Since mid-2020, the Consumer Cyclical, Utilities, Materials and Financial sectors have achieved excess performance during periods of rising morbidity in Europe. In contrast, based on past experience it is now worthwhile to stay away from stocks of healthcare, current consumption and technology.

| Growth in the US economy is accelerating

U.S. economic data reflects an acceleration in growth in the fourth quarter. The leading indicators index is rising at a high pace in October. They continue to reflect strong demand for products, although it is not clear what effect price increases will have on them.

The various indicators show that pressure for rising prices in the US economy continues to increase. In last November’s Fed branch surveys, the component that reflects the price level continued to rise. At the same time, the components that reflect delivery times are also at very high levels, which indicates continued problems in the supply chain. At the same time, the strong rise in the industrial production index in October may signal an increase in supply and expected disruption.

In the US, too, there has been an increase in the number of patients in many countries. Unlike in Europe, the experience of the epidemic on the stock market in the past year clearly illustrates that there are only two sectors whose performance relative to the stock index was clearly affected by a number of patients. Compared to inferior performance of energy stocks.

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.

You may also like

Leave a Comment