| Victor Behar, Director of the Economics Department at Bank Hapoalim, and Hapoalim Economists
| Summary of the weekly review
We estimate that growth in the first quarter will be low, due to the disease, and later this year we will see a significant recovery, although not as much as last year’s outbreaks.
Labor market data continue to surprise positively as the (narrow) unemployment rate fell in the first half of January 2022 to a level of 3.5%, a figure similar to the unemployment rate on the eve of the outbreak of the plague.
Wages in November 2021 were 8.5% higher than in November 2019, ie an average annual increase of about 4.2% in average wages. A further acceleration in the rate of wage increases may leave inflation in Israel at a level higher than 2% over time.
Price indices for the coming months are expected to be high relative to seasonality and annual inflation (looking back) is expected to exceed 3.0%.
The world interest rate environment is changing rapidly, and this opens up the possibility of raising interest rates early in Israel as well. We estimate that towards the middle of the year we will see the first rise in interest rates in Israel as well.
| Israel
The daily number of verified in Israel began to decline and the infection rate dropped below 1. If we rely on the congestion on the roads as an indicator of private consumption, then this has probably decreased considerably in the current wave.
Bank Hapoalim’s consumer confidence index fell by 5.8 points in January, due to high morbidity, price declines in the financial markets and price increases in the economy. The harm to other industries, which are not directly related to consumption, is moderate if at all. In the construction industry we are seeing a significant increase in investment.
Credit data in the economy indicate a rapid increase in business credit, which reflects the investment momentum as well as price increases, especially in the real estate industry. Past.
Labor market data continue to surprise positively as the (narrow) fell in the first half of January 2022 to a level of 3.5%, a figure similar to the level of unemployment on the eve of the outbreak of the plague.
The number of employed persons has increased in the past year by about 7.5%. The increase in the number of employed persons works technically to curb the increase in the average wage in the economy, since the new entrants are usually characterized by lower wages. It is therefore difficult to assess the trend of wage developments in recent months, but on the other hand the comparison with the data for 2019 now gives us a better picture of wage developments in the last two years. Wages in November 2021 were 8.5% higher than in November 2019, ie an average annual increase of about 4.2% in average wages. Although this wage increase is high in relation to productivity in the economy, it is not to such an extent that it should create high inflationary pressures. A further acceleration in the rate of wage increase may leave inflation in Israel at a level higher than 2% over time.
The government is trying to curb price increases in the economy. The working assumption is that price increases feed themselves, so efforts are being made to curb the rise in food prices for example. It is possible that the government will even try to curb further price increases such as electricity prices, using the state budget.
The price of a barrel has risen to $ 93, and has been declining since the beginning of the year by a sharp 3.2% against the currency basket.
Price indices for the coming months are expected to be high relative to seasonality and annual inflation (looking back) is expected to exceed 3.0%.
We leave the inflation forecast for 12 months at the level of 2.2%. If it appears that energy prices and the exchange rate are stabilizing at the current level, the inflation forecast will rise slightly in the next update.
The European Central Bank, ECB, changed its tone last week and markets expect Europe to rise again this year.
In the UK it has risen for the second time, and in the US there is no small probability that the interest rate in March will rise by 0.5%.
The world interest rate environment is changing rapidly, and this opens up the possibility of raising interest rates early in Israel as well.
We estimate that towards the middle of the year we will see the first rise in interest rates in Israel as well. The rate of rate hikes will be slower than that of the Fed, and may be more similar to the ECB rate hikes. The derivatives market now embodies a very high rate of interest rate hikes – between three and four hikes in the coming year.
Rapid rise in yields in Israel as well: the yield has reached 1.8%. The bond market was affected by overseas trends – since the beginning of the year, the ten-year yield in Israel has risen by about 50 basis points, compared with 40 basis points.
It is possible that the rise in yields in Israel was also affected by the cessation of purchases by the Bank of Israel, and by good labor market data, which bring the date of the rise in interest rates in Israel closer. The yield gap between the US government and Israel’s bonds now stands at only about ten basis points.
| global
Tensions on the Ukrainian border are growing, it is affecting energy prices, but markets seem to be treating it as a local event, with no potential for expansion into more countries. On the other hand, the change in monetary policy is here to stay, and may have an impact on asset prices. The change in the direction of the ECB is significant, because a rise in interest rates in euros will affect more central banks. JPMorgan estimates that 70% of central banks will raise interest rates in the coming year.
A volatile trading week in the stock indices ended with gains in US and Asian stock indices and declines in Europe. Also the publication of the employment report on Friday, which led to an increase in stock indices and bond yields.
In the weekly summary, the Dow Jones and Nasdaq indices rose 1.1%, 1.6% and 2.4% respectively. On the other hand, the 600 indices lost 1.4% and 1.3% of their value. Equity indices in Hong Kong, Japan, South Korea In India, there have been nice increases, between 2.5% and 4.3%. So far, quarterly reports have been published in the US representing a market value of just over a third of the market value of the S&P 500. In 79% of cases the reports have been pleasantly surprising.
High energy demand continued and the price of a type of oil barrel rose by 3.6% to $ 93 a barrel. Prices of base metals and agricultural commodities also rose last week.
| USA: The January employment report was a positive surprise
The US labor market has shown surprising strength, despite a record number of omicron infections. In January, 467,000 new jobs were added to the U.S. economy, compared to a forecast of 150,000. In addition, the data for the previous two months were updated upwards by 709,000 jobs, so that in December 510,000 jobs were added and in November 647,000 jobs were added. The total number of jobs is now only 2.9 million lower than before the crisis. In the labor force, it rose to 62.2% in January, from 61.9% in December, and with it the unemployment rate rose slightly from 3.9% to 4%. The broad unemployment rate, which also includes part-time workers for economic reasons and those who despair of looking for work, actually dropped to 7.1%, similar to its level before the crisis.
Along with the decline in the number of job vacancies in the US continues to rise, and in December it rose to a level of 10.9 million jobs. The average hourly wage rose in January by 0.7%, above expectations, completing an annual increase of 5.7%, up from 4.9% in the previous month. The surprising data from the labor market are accompanied by the impressive growth of the US economy in the fourth quarter, and they support the Fed’s rapid rate hike.
Additional indicators point to a continued rapid recovery in the U.S. economy.
Although the ISM’s purchasing managers’ indices for January fell slightly, their level is still high and signals a continued economic recovery in the US. The index for the manufacturing sector was 57.6 points in January and the index for the services sector was 59.9 points. Decreased by 0.7% in December, but without vehicles there was an increase of 0.6%.
The positive surprise in the employment report led to an increase in government bond yields, as an expression of the strengthening of estimates regarding the interest rate hikes expected by the Fed this year.
The yield to maturity on U.S. government bonds rose over the weekend to 1.32% from 1.16% the previous week. The ten-year yield rose from 1.77% to 1.91%. Inflation expectations embedded in the bond market remained relatively stable at 2.8% for five years and 2.4% for ten years. This coming Thursday, the US Consumer Price Index for January will be published. According to estimates, the annual inflation rate is expected to rise to 7.2%.
Growth in the Eurozone slowed in the fourth quarter of 2021 to an annual level of 1.2%, after growth of 9.4% in the third quarter.
At the end of 2021, the eurozone economies grew at an average rate of 5.2%. The unemployment rate in the eurozone fell in December to 7.0%, a rate that is even lower than before the crisis. Most estimates are that even in the first quarter of 2022 the moderate growth will continue, due to the high number of infections and the economic implications that this has on economic activity.
| Will the central bank in the eurozone still raise interest rates in 2022?
In January, annual inflation in the eurozone accelerated to 5.1%, and core inflation slowed slightly from an annual level of 2.6% in December to 2.3%. Energy prices, which have risen sharply in the past year, have made a significant contribution to the inflation rate in the eurozone.
The acceleration of inflation in the eurozone in January led to a change in the statement of the President of the ECB, Christine. Lagard, who has so far claimed that the acceleration of inflation is a temporary phenomenon and ruled out the possibility of raising interest rates this year, this time expressed concern about continued price increases, noted that the bank is much closer to its inflation target, and was unwilling to rule out interest rates rising this year.
The reactions in the market were not long in coming: an increase in the yield to maturity on bonds and the market now embodies that the interest rate in the eurozone will reach 0.1% in about a year. In the UK, which is not included in the eurozone, the central bank has raised interest rates for the second month in a row to 0.5%.
| China: Weakening economic activity according to recently released indicators
While the stock markets are closed due to the New Year celebrations, it was reported that the official Purchasing Managers’ Index of Manufacturing fell from 50.3 points in December to 50.1 points in January.
The industry index published by Caixin fell to 49.1 points in January, the lowest level from February 2020. This index covers small and medium-sized businesses in the private sector that are not included in the official index above. The weakness in the real estate industry continues and many companies have run into liquidity difficulties. Among the 100 largest companies, there was an annual decline of about 40% in sales in January.
The full weekly review of Bank Hapoalim economists (view website only) – in a PDF document