| Victor Behar, Director of the Economics Department at Bank Hapoalim, and Hapoalim Economists
| Israel: The wave of travel abroad by Israelis is expected to reduce the consumption of Israelis in local chains
Revenue from retail chains from November to February has fallen slightly, and we estimate that this trend is expected to continue in the coming months. Credit card purchases present a slightly different picture, where the increase continues, although it can be seen that this is mainly a contribution of services, probably against the background of the decrease in morbidity.
The contribution of private consumption to growth is expected to decrease this year, also against the background of the damage to the purchasing power of households and a halt in the increase in the value of the public’s asset portfolio.
| Tight labor market
The employment rate rose to 60.6% in February and the unemployment rate stabilized at 3.7%. The tight labor market and in our estimation we are expecting increasing pressure for wage increases, which will be reflected in the coming months.
Wage increase is a risk factor that may leave the high over time. Prices of oil or agricultural commodities can rise, but also fall. The effect of inflation on these prices is not high. Wages on the other hand are less likely to update downwards (although we have seen periods of recession with declining wages) and may be affected by actual inflation.
| Towards very high price indices
The March index is expected to rise by 0.8% and the April index by 0.9%. These price increases will be affected by fuel prices, a sharp rise in travel prices abroad and seasonal factors. Inflation in the coming year is expected to be 3.1%, assuming that we see a slight decline in world prices later this year.
Even if the trigger for the rise in inflation was exogenous factors such as energy prices and transportation, we see that these are now affecting all items, including the services industries.
The effect on inflation is low and slow, and is more designed to prevent the risk of a further rise in the level of inflation. The effect of interest rates on inflation in asset prices could be more significant, and this is another target that policy is now aiming for.
| Falling oil prices and appreciation of the shekel moderated short-term inflation expectations
In the past week, short-term inflation expectations derived from the bond market have moderated by about 20 basis points. Inflated inflation for two years has fallen to about 3.8%. Over a ten-year period, implied inflation remained unchanged at 2.7%.
Even after the decline in inflation expectations in the bond market, these are still high relative to inflation in derivatives (a gap of about 30 basis points over a ten-year period), which suggests in our assessment the premium of inflation risk inherent in bond prices.
| Towards raising interest rates in Israel
Next week, the interest rate is expected to rise by 0.15% to 0.25%. There is also some probability that the Bank of Israel will choose to raise the interest rate to 0.5%, in light of the fact that the US markets now embody interest rate increases in doses of 0.5%.
The derivatives market now embodies an interest rate of about 1.5% in a year. Given the high level of inflation, and in light of the fact that the uncertainty regarding inflation will not become clear in the near future, we estimate that central banks, including the Bank of Israel, will raise interest rates, at least to the point where we see real interest rates reset.
The process of lowering inflation expectations is expected to be gradual, so interest rate hikes in Israel will continue at least to a level of about 2%.
| In contrast to the American curve, which is partially inverted, the Israeli yield curve has a positive slope along its entire length
Some economists see the reversal of the American curve as a prelude to a sharp slowdown that will require a change in the Fed’s monetary policy. By the same token, it can be said that this slowdown is not expected to reach Israel.
An alternative interpretation that seems more plausible to us now is that the markets estimate that the long-term real interest rate is low today compared to the past, so even if the Fed responds to the high inflation data in the coming year, it is a process that does not represent the long-term reality.
In Israel, on the other hand, the market embodies much more moderate interest rate increases over the next two years, so the curve is not reversed either.
| global:
The war in Ukraine has been going on for more than a month, and the volatility recorded in the financial markets and commodity prices is high. The eurozone inflation estimates released last week, as well as the U.S. employment report, are another signal that inflation is becoming a major problem, and that the response of central banks will dictate market trends in the coming year.
| Rises in most stock indices over the past week while a sharp drop in world oil prices
Uncertainty about developments in the war between Russia and Ukraine has affected volatility in commodity markets and world financial markets. The F-indices ended the week with gains of 0.1% and 0.7% respectively.
In Europe, stock indices in Germany, France and the UK recorded weekly gains of 1%, 2% and 0.7% respectively, and the index rose by 1.3%. In Asia, the Chinese index rose 3.6% this week, but has fallen about 13% since the beginning of the year. India and Hong Kong stock indices also recorded weekly gains of about 3%.
In commodity markets, the sharp drop of about 8% in the price of a barrel of oil to $ 104.4 per barrel stood out this week, mainly as a result of the US president’s decision to open the country’s oil reserves and return to the market every day. The slowdown in demand in China against the background of the closure announced in Shanghai with the resurgence of the corona.
China continues to pursue a policy of reducing contagion as much as possible, even at the cost of slowing economic activity.
| A positive U.S. employment report supports the Fed’s rapid interest rate hikes
The number in March rose by 431,000 jobs, slightly lower than the forecast for the number of new jobs, which stood at 490,000. However, the data for the previous two months have been updated upwards by 95,000 jobs, so that since the beginning of the year the average monthly increase in new jobs has reached 562,000, a figure that indicates a significant improvement in the employment situation.
The number of employed persons is now only about 1.6 million workers (constituting about 1% of the total number of employed persons) than the level that prevailed in February 2020, before the outbreak of the corona.
The rate fell in March to 3.6% from 3.8% in February and the participation rate rose to 62.4%, the highest rate since March 2020. The hourly rate rose 0.4% in the last month, similar to the forecast, and the annual increase in wages reached 5.6%.
The number of job vacancies has stabilized at a high level of about 11.3 million jobs, a level that indicates an excess demand for workers which supports further wage increases.
| U.S. economic activity is expanding, albeit at a slower pace
In February, households rose by 0.5%, but expenditures rose by 0.2%. The rate of private savings from disposable income rose slightly to 6.3% from 6.1% in January. Savings rates in the US and other developed countries, which rose sharply during the crisis, have dropped to pre-crisis levels in recent months.
The decline in world savings rates has been one way for households to cope with the erosion in their purchasing power as a result of last year’s price increases.
The Industry’s Purchasing Managers’ Index fell to 57.1 points in March, from 58.6 in February, but its level still indicates an expansion in activity. In the analysis of the components of the index, there was a slowdown in new orders and output, and a delay in the delivery dates of previous orders.
However, there has been an increase in the employment component. The conference board index was down 3.3 points from the original February figure, but since it was sharply downgraded, the March index indicated a slight increase. The relatively low level of the index was affected by consumers’ fears of the effects of inflation.
| A reversal in the yield on US government bond yields
In the last week the yield has dropped from 2.5% to 2.39%, while the yield has risen from 2.37% to 2.47%. The change in yields is mainly due to the strengthening of estimates for sharp, half-percent interest rate hikes in the Fed’s upcoming meetings.
Inflation expectations from the bond market have moderated in the past week. Five-year inflation expectations have fallen from 3.59% to 3.29% and ten-year expectations have fallen from 2.95% to 2.79% per year.
| Eurozone: The inflation rate rose to 7.5% in the 12 months to March 2022
A first estimate for the eurozone indicated a further increase in the inflation environment, from an annual level of 5.9% in February to 7.5% in March. The rise in energy prices is the main cause of the acceleration of inflation in the eurozone, with these prices rising in March at an annual rate of about 45%.
Excluding energy prices, the annual inflation rate in March reached 3.4%, and core inflation (excluding energy and food) has risen by 3.0% in the last 12 months.
Fell in February to 6.8%, a low level compared to the past, but most economic confidence indices continued to fall in March. The Purchasing Managers’ Index for the manufacturing sector fell slightly in March, but still indicates an expansion at 56.5 points.
The Central Bank of the Eurozone has reduced its growth for 2022 to 3.7% in the baseline scenario. In a scenario where the negative effects of the war between Russia and Ukraine are intensifying, including the sanctions imposed on Russia, the growth forecast for 2022 is 1.2% lower and estimated at 2.5%.
As for natural gas imports from Russia, President Putin has demanded that payments be made in rubles starting in early April, but Germany, including the G7 countries, have rejected the new requirement, declaring that payments will continue, as in the past, in dollars or euros.
It is still too early to determine whether the confrontation on this issue will lead to further disruptions in the supply of natural gas to the eurozone. In any case, an emergency plan for natural gas rationing has been prepared in Germany in the event that imports from Russia cease.
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