The omicron is longer than expected? Clothing and travel prices are about to fall

by time news

| By Yonatan Katz and Economist Leader Capital Markets

The past week has been marked by sharp declines in stock markets amid fears of sharp monetary restraint by the Fed. Yields touched 1.9% on Wednesday.

Expectations of 0.5% are rising in March. The economic indicators were mixed, both the regional industry surveys and the real estate market data (increase in construction starts but decrease in sales).

The rise to 286,000 supported a drop in yields on Friday. Expectations of an interest rate hike by the ECB are rising even though Lagarde does not anticipate this. In the background, there is concern about Russia’s impending invasion of Ukraine.

| Macro Israel: Decrease in Unemployment

  • The rate in December dropped to 4.1% from 4.6% in November due to a decrease in the participation rate. The number of vacancies stabilized at 141,000, about 45,000 above the number on the eve of the corona.
  • In contrast, the number of potential job seekers stands at 58,000, which is holding back at half-wage, meanwhile.
  • In January, the Purchasing Managers’ Index fell by 2.5 points to 47.8, when there was a sharp decline in production output, probably due to the absence of workers due to the Omicron.
  • In September-November, revenue in the economy’s industries increased by 6.1% (on an annualized basis), especially in the services industries. Industrial production fell by 2.3%.

| Inflation environment:

  • Prices have risen in the past week amid escalating violence in the UAE.
  • As a result, we raised the February index forecast to 0.3% (from 0.2%).
  • The NIS depreciates against the dollar by 0.9% against the background of growing nervousness in the markets.

| USA: The construction industry will continue to be a locomotive for activity

  • January The Empire State Survey (New York Industry) indicates deterioration (January 0.7 from 31.9). In contrast, the Philadelphia poll rose to 23.2 from 15.4.
  • In December, the number increased by 11.4% and the number of building permits increased by 9.1%, well above expectations, after an increase in November. This is a growth locomotive looking ahead.
  • The number (second-hand) fell by 4.6% after rising by 12% in June.
  • The number of job seekers rose by 55,000 to 286,000, against the backdrop of the Omicron wave.

| China: Moderation in activity

In the fourth quarter, China moderated to 4.0% on an annualized basis (compared with 4.9% in the third quarter). China also fell in the second half of the year.

| Europe: Inflation surprise in the UK

UK: Increased 0.5% in December and 5.4% in 2021 (above expectations of 5.2%). In calculating housing prices by rental prices, inflation rose by 4.8%.

| Bond market:

  • A sharp rise in yields abroad has clouded the domestic bond market.
  • The U.S. bond market is already pricing a relatively aggressive yield-raising route.
  • Rising yields in Israel increase the attractiveness of long-distance channels.
  • The inflation environment is moderate relative to market expectations in Israel, supporting the shekel channels.
  • In the short term, moderation due to the omicron supports discounts on clothing, convalescence and flights.

| Zoom In: In 2021, inflation in Israel was relatively low

  • In 2021, Israel amounted to 2.8%, while core inflation rose by 2.7% and the core, without government-initiated price increases, rose by 2.29%.
  • In the US inflation rose by 7% and in the UK by 4.8% (in definitions similar to ours).
  • The “excess” inflation in these countries is mainly due to a sharper rise in energy prices. Clothing and food prices also rose more in those countries.
  • In the background, Israel pursued a more limited fiscal policy (a deficit of 4.5% of GDP compared to 15% in the US and 12% in the UK).
  • The UK suffered from a certain shortage of products due to the Brexit.
  • In the background, the shekel rose by 7.9% against the currency basket and the pound depreciated by 6.8% against the euro.

| Macro Israel: Decline in private consumption in January

According to data from purchases at the Bank of Israel’s daily credit cards, in January (until 17.1) the volume of purchases decreased by 9% compared to the average for December (original data), especially in the tourism, leisure, restaurants and electronics / clothing / furniture industries.

The Workplace Mobility Index indicates a decrease of about 10% (in the week of 14.1) relative to December. In the short term, the decline in private consumption is expected to push prices down in sectors such as hotels, overseas travel and clothing (end-of-season sales ahead).

Despite the expectation of a short wave, the prolongation of the omicron wave may lead to a prolonged moderation in activity, which is expected to postpone discussions regarding raising the Bank of Israel interest rate.

| Stabilization in the number of vacancies

In December, the number of vacancies stabilized at 141,000, similar to November. This is still a high level of 45,000 vacancies compared to the eve of the Corona crisis (95,000).

At the same time, there is a “surplus of unemployed” of about 58,000 people (according to the employment rate on the eve of the corona), so there is not necessarily a shortage of workers in the economy except in a number of finishing industries such as high-tech industries. The Bank of Israel notes that the rate of wage increase has returned to the rate that was on the eve of the corona.

If this trend continues, it is a particular anchor in terms of inflationary pressures.

Some important data will be published this week: Monday: Labor Force Survey (December), Exports of Services (November), Thursday: Credit Card Purchases (December).

| Overseas Macro: Europe: Meanwhile, wages are rising at a reasonable rate

As we have emphasized (and will continue to emphasize) in analyzing future inflation factors (beyond “supply disruptions”), wage pressures are of paramount importance. We noted for the signs of wage pressures in the US and UK compared to a more moderate rise in wages in most European countries.

This gap explains, at least in part, the inflation gap when in Europe (excluding the effect of energy) it rose by 2.7% (similar to Israel) in 2021. The labor market in Europe is still characterized by a high rate of incorporation and industry wage agreements. Meanwhile, the rate of wage increase has returned to the rate on the eve of the corona (about 2.4%.

Undoubtedly the labor market in Europe is tightening. The rate is 7.2% on November 21, compared to 7.4% on February 19, but it is estimated that the “broad” unemployment rate (including underemployment, etc.) is 8%.

However, there is a shortage of workers in a number of sectors and in a number of countries it has been decided to raise the minimum wage significantly (by 25% in Germany).

Some wage agreements are affected by historical inflation so it is very possible that a 5% rise in inflation in 2021 (total inflation) will lead to wage pressures in 2022. This is not an automatic linkage but an important factor in negotiations with the unions.

In conclusion, wage developments in Europe are similar to the situation in Israel: meanwhile, the rate of increase has returned to its level on the eve of the corona and does not pose an inflationary threat. At the same time, the effect of tightening the labor market and the pressure of trade unions (more in Europe than in Israel) may put upward pressure on wages in Europe, and therefore also affect the inflation environment. This process, if it occurs, is expected to be very gradual.

Important macro data to be published worldwide: Second: Purchasing Managers’ Index (Industry + Services) in a number of important countries and regions, including, Europe, andUK (January). Third: US Index – Conference board(January).

Wednesday: The Fed: No change in interest rates is expected, but the Fed will prepare the markets for an interest rate hike on March 16, emphasizing the improvement in the labor market and the rise in the inflation environment. It will be important to hear the hints about the expected policy of balancing the balance sheet.

Thursday: Orders of (Dec.), first estimate of the fourth quarter (expectations are 5.1%), Friday: disposable income, e and inflation PCE (December).

| Zoom In: What explains the (relatively) low inflation in Israel?

  • In 2021, inflation in Israel amounted to 2.8%, while core inflation rose by 2.7% and the core without government-initiated price increases rose by 2.29%. In the US inflation rose by 7% and in the UK by 4.8% (in our definitions).
  • In the background, it is important to emphasize that historically, the inflation environment in Israel has been lower than that of the United States and the United Kingdom:
  • Israel pursued a more limited fiscal policy (deficit of 4.5% of GDP compared to 15% in the US and 12% inUK). The UK suffered from a certain shortage of products due to the Brexit.
  • In 2021, the shekel is up 7.9% against the currency basket, the pound depreciates by 6.8% against the euro. In the background, wages also rose at a more moderate pace in Israel relative to the United States and the United Kingdom.
  • We will analyze the main sections that explain the inflation gaps between Israel and the US and the UK. The consumption basket differs from country to country so it is really difficult to isolate and accurately calculate the gaps in the various sections.
  • Clothing and footwear: In Israel, this item decreased by 7.3% in 2021 and contributed about 0.21% – to inflation. In the UK this item rose by 4.2% and contributed 0.25% to inflation. In the United States, this item increased by 5.8% and contributed 0.18%. The clothing and footwear item explains about 0.5% of the inflation gap. What is the explanation? The appreciation of the shekel is the main explanation. And evolving and pushing local prices downward.
  • food: In Israel, food prices (including fruits and vegetables) rose by 2.6% and contributed 0.46% to inflation. In the US this item rose by 6.3% and contributed 0.9% to annual inflation. In the UK there was a 4.2% increase which contributed 0.6% to inflation. Explanations: Social pressure makes it difficult to raise prices in Israel, in addition to the effect of appreciation.
  • Energy: In Israel, all energy items (fuels, electricity, etc.) contributed 0.2% to inflation. In the UK, the contribution was 1.2% (electricity prices rose by 19%, compared to stability in Israel, fuel prices rose by 27% compared to 17% in Israel). In the United States, energy items rose by 29.3% and contributed 2.2% to inflation. The explanation for the gap: domestic gas in Israel at a fixed price and the effect of the appreciation in shekels.
  • Cars: In Israel, car prices rose by 7.9% and contributed 0.4% to inflation. In the UK the contribution was 0.5%, and in the US the contribution was 1.7%! In the US the prices of used cars increased by 37% and the prices of new vehicles increased by 11%.
  • Housing prices: In Israel, the broad housing component rose by 3.4% and contributed 0.8% to inflation (including an increase in purchase tax). In the United States the contribution was 1.3% (at a more significant weight: 32.4% compared to 24.7% in Israel). In the United Kingdom, the housing item rose at a more moderate rate than in Israel: 2.2% and contributed 0.56%.

In conclusion, A more moderate rise in energy prices, clothing and cars explains most of the inflation gap. Looking ahead, it is likely that the inflation environment in Israel will remain relatively low compared to the US (and relative to most developed countries), against the background of continued pressure to appreciate in shekels and a relatively restrained fiscal policy.

Additional note: In light of the lower inflation environment in Israel for many years, it is difficult to explain why inflation expectations in Israel in the capital market 5 years ahead came very close to expectations in the United States.

PDF Document: Weekly Macro Review by Leader Capital Markets Economists

The authors are economists at Leader Capital Markets. The review is based on information published to the general public by the companies reviewed in it as well as assessments and estimates and other information that Lider & Co. Investment House Ltd. (“Lider & Co.”) assumes is reliable, without conducting independent tests in relation to the information. Lider & Co., the authors of the review and its editors are not responsible for the reliability, completeness, accuracy of the information contained in it or for any omission, error or other defect in it. Rely on the information contained therein and is not subject to independent discretion and professional advice, including an investment advisor whose advice takes into account the data and special needs of each person. May hold the securities and / or financial assets described in the review.

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