| By Yonatan Katz and Economist Leader Capital Markets
In the protocol of the interest rate decision, the Fed members supported the reduction of the balance sheet by $ 95 billion per month (the expectation was 80 billion). In addition, Brainard who is considered “June” in the Fed has been in favor of a rapid reduction starting in May. The bond market responded with a rise in long-term yields. The economic data were positive, with a decline in job seekers and an increase in the index of procurement managers in services.
| Israel: The labor market is tightening
In the first half of March it dropped to 3.2% from 4.0% in the second half of February (and 3.7% on average in February). The broad unemployment rate fell to 4.7% from 5.8%. 22,000 employed persons have been added in the last two weeks and the employment rate has returned to the state on the eve of the corona. A tight labor market supports wage pressures and from the point of view of the Monetary Committee also supports raising interest rates.
| The average wage in the economy continues to rise at a moderate pace
In January, the average wage rose by only 0.3% (seasonally adjusted) compared to December. The average wage in the information and communications industry rose by 1.6%. According to our calculation, the average annual rate in the last two years (from January 20 – the eve of the corona, to January 22), the average wage increased by 4.3% per year with a sharp increase in the information and communication industries (7.4%) and finance (6.9%).
The Bank of Israel also states this in the Bank of Israel report (“No pressure was created to raise wages”). In April, the minimum wage will rise by 1.9%. We assume a gradual acceleration in business wages to a rate of 5.5% by the end of 2023.
| Improving the optimism of the business sector
A survey of trends in the business sector indicates a continued expansion of activity in the economy and a significant improvement in the hotel industry. The “leading” components indicate an acceleration in activity in the coming months, with an expectation of an increase in orders in industry and services (both for exports and the domestic market) and an expectation of a rapid increase in the trade industry (also under the influence of the approaching holidays).
Expectations for the year ahead rose slightly to 2.3% from 2.1% a month ago and 1.85% in January. Acceleration in economic activity supports the tightening of monetary policy.
| The shortage of workers continues
Major sectors continue to report a shortage of workers as a constraint on activity expansion. In the manufacturing and services industries, the intensity of the limitation of the shortage of workers has stabilized at a high historical level, while in the trade industry there is an increase in the intensity of the shortage of workers.
A shortage of workers supports wage pressures and, therefore, also inflationary pressures. We assume an acceleration in the rate of wage increase to an annual rate of 5.5% in 2023 (from 4% now).
| USA: Expansion of activity continues
In the US, economic data indicate continued expansion (and even acceleration) in activity and certainly not stagnation. (From 51.6 to 54 points) and in the new orders (from 59.3 to 60.1).
As is well known, the product of the service industries (or rather: all industries of the economy except industry: non-manufacturing) constitutes more than 80% of the American business product.
So far there are no signs of stagnation. The price component continues to rise to 83.8 points (from 81.3), which means that the pressure continues to rise in prices in the economy.
| The Fed signals that the balance sheet reduction is approaching
Most recently, the Federal Reserve has signaled that it will reduce the volume of assets in its balance sheet, at a maximum rate of $ 95 billion a month in parallel with the increase.
The minutes of the Fed members said: “Participants generally agreed that it would be appropriate to carry out monthly government bonds of up to $ 60 billion and mortgage-backed bonds of up to $ 35 billion.”
This is a significantly higher rate than the monthly record rate of declining asset volume in the previous period, in which the Fed reduced its balance sheets in 2017-2019 ($ 50 billion).
During the Corona years, the Fed acquired $ 4.5 trillion in assets. The balance sheet reduction plan aims to reduce the balance sheet by 1.0-1.1 trillion per year to return to the desired balance sheet level. The Fed does not intend to refinance the current maturity of bonds. In the meantime, there is no intention to actively sell government bonds in the market.
Consequences: As is well known, the purchase of bonds (QE) is mainly intended to lower the long-term yields during the crisis and to provide liquidity in the economy. The consequences of reducing the balance sheet (QT) will be the opposite of the consequences of bond purchases (QE).
That is, the Fed is expected to reduce market liquidity (not positive for the stock market), contribute to a rise in long-term yields (and raise mortgage prices). A very restraining monetary policy is expected: a combination of aggressive interest rate hikes with a reduction in the balance sheet at a relatively rapid pace.
Meanwhile, the response in the bond market seems to have been relatively moderate: the pressure to rise long-term yields is expected to continue towards 3% (bonds).
Compared to the Fed, the ECB is in no hurry to raise, when in Europe there is a real fear of a significant moderation in activity due to the impact of the surge in energy prices, so the ECB has adopted a policy of “wait and see”. The significant gap in monetary policy contributes to the strengthening of the dollar.
| Zoom In: What causes the length of construction time?
- The pressure to increase housing prices is due, among other things, to a decline in the stock of finished apartments, in addition to demand factors such as low interest rates and an increase in the public’s financial wealth.
- In recent years, there has been an increase in the number of construction starts to 65,000 in 2021, but the number of construction finishes lags far behind and stood at only 47,000. In fact since 2013 the number of construction finishes has remained relatively low compared to the number of construction starts
- The cause of the “security situation” has diminished in recent years, as has the “difficulty in obtaining credit” (but increased slightly in 2022). Two significant (but stable) factors are “lack of available land” and “delays in obtaining building permits”, but these two factors do not explain the gap between construction starts and ends (after construction has begun)
- During 2021 the shortage of workers (both professional and non-professional) worsened and delayed the proliferation of activity in the industry, but there was some relief in early 2022. At the same time, there was an exacerbation of shortages of construction materials and equipment as a factor limiting expansion in the construction industry (war in Ukraine May further exacerbate the shortage in the number of construction inputs such as aluminum and copper)
- The construction industry is still very thirsty for workers as the number of vacancies in the industry continues to grow, especially in January-February 2022
In conclusion, looking at the shortage of workers (despite the relief) and the shortage of construction materials, it is difficult to expect a very rapid increase in the completion of construction this year. In the background, an increase in demand is expected against the background of a “wave” of immigrants from Ukraine and Russia. Therefore, the pressure to increase housing prices (including rental prices in the index) is expected to continue. We expect an acceleration in the rate of increase in housing prices in the index to 4.3% a year ahead, which will contribute 1.1% to inflation (out of a total inflation forecast of 3.0%).
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 estimates and estimates and other information that Lider & Co. Investment House Ltd. assumes is reliable, without conducting independent tests in relation to the information. However, it is emphasized that Lider & Co. And its editors are responsible for the reliability of the information, its completeness, the accuracy of the data contained therein or any omission, error or other defect in it. To replace independent discretion and obtain professional advice, including an investment advisor whose advice takes into account the data and special needs of each person.