Main points
In Israel and around the world
In the first half of November the unemployment rate continued to fall. Despite the improvement, in our estimation, the unemployment rate next year is expected to remain high compared to its pre-crisis level. This supports the continued expansion of the Bank of Israel’s policy, as does the summaries of the discussions from the last interest rate decision.
As expected, just before the US administration was shut down, Congress agreed to an additional temporary budget. The saga will return in 3 months while in the meantime the budget will be relatively curb.
We believe that inflation in the last 12 months in the US will rise by close to 7 percent on Friday. -2 interest rate hikes next year.
Inflation in the eurozone continued to rise to 4.9 percent in November, mainly due to a jump in energy prices. The situation with manufacturers is even worse, where the raw material price index rose by 22 percent.
While the Chinese government’s zero – tolerance policy has prevented recurrence of morbidity and high mortality, it has left most of the population exposed to each new variant. Therefore, in our opinion, the state will continue to impose strict traffic restrictions and the danger of repeated local closures has increased significantly. This will weigh even more heavily on growth next year, especially in the services industries. As a result, the central bank reduced the reserve ratio (= reduction of interest rates).
The Bank of Israel will remain patient, despite the continued improvement in the labor market
The labor force survey for the first half of November was encouraging when there was a decline in the unemployment rate in its broad definition to 6.7 percent, the lowest level since the onset of the crisis while rising in the employment rate.
Despite the improvement in our estimation, the unemployment rate next year is expected to remain high compared to its pre-crisis level. This is due to a mismatch in the professional training between the jobs sought and the skills of the unemployed and due to the uncertainty regarding the periodicity of waves of illness. This supports the continued expansion of the Bank of Israel’s policy. This is also clear from the summaries of the discussions from the last interest rate decision, even before the Omicron, when all members of the committee supported leaving the interest rate unchanged. In general, we believe that the Bank of Israel will not rush to raise interest rates even when the US sees such an increase – it is important to remember that Israel’s inflation rate is among the lowest in the world, that the government deficit is relatively low and that structural factors continue to support the shekel.
US strong data before the omicron
The employment report for November recorded a lower-than-expected increase in the number of new jobs to 210,000, after an upward update of the previous two months’ data and a sharp drop in the unemployment rate to 4.2 percent (calculated in a separate survey). The publication adds to the rest of the data indicating a significant acceleration in growth in October-November, including the ISM Purchasing Managers’ Index which broke a record when it rose to 69.1 points in November. It is important to remember that these data are before we see a possible effect of the omicron.
Inflation data for November will be published this Friday and is expected to continue to rise to close to 7 percent (6.2% in October) due to the jump in energy prices, with the sharp drop in oil in the last week being reflected only in the December index. In his testimony to Congress the Governor of the US Federal Reserve noted that the term temporary is inaccurate to describe the high inflation at present. Next, the bank will update upwards its estimates for 2 interest rate hikes next year and may even announce a faster reduction of its acquisition plan.In our estimation it would be a mistake to start applying pressure before we understand the meaning and possible impact of the new variation on the economy, mistake Which may increase market volatility.
As expected, just before the US interim budget came to an end, Congress reached an agreement, an additional interim budget until February 18. It is not certain that even in 3 months the parties will reach an agreement, which in practice means a restraining budget.
Expensive energy
The jump in energy prices from September to November continues to be reflected in world inflation data, especially the rise in energy prices in Europe against the background of rising natural gas prices. This is burdensome for households despite certain concessions made by governments (subsidizing some of the increase in the price of electricity and gas for heating in several countries). On the other hand, aid to producers is relatively meager and the price index for producers has risen by 22 percent. Despite the high inflation we expect the ECB to show tolerance especially after the spike in recent morbidity and restrictions, and may delay the completion of the emergency purchasing program.
China’s policy has no variants
The omicron poses a greater danger to growth in China due to the government’s zero-tolerance policy for any case of infection. This policy prevented recurrent disease waves (unlike the rest of the world) and high mortality, but left the majority of the population exposed to the virus due to a minority of recovering alongside a local vaccine whose effectiveness is vague. Thus without an effective vaccine, it would be almost impossible for the government to withdraw from this policy. Therefore, in our estimation, the Chinese government will continue to impose strict restrictions on the movement of businessmen and tourists (the Winter Olympics in Beijing will probably be without crowds) and the danger of repeated local closures remains high. This will hamper growth next year, especially in services, even without the recent slowdown in the residential real estate industry. This slowdown contributed to the central bank’s decision to reduce the reserve ratio for large commercial banks by half a percentage point (= to reduce interest rates).
What is currently disguising the slowdown in China is the rise in exports that continued to break records with a 22 percent increase in the last 12 months to November.
The country’s commercial surplus was reduced in light of a sharp increase of 31.7 percent in imports mainly due to abnormal imports of energy products (with an emphasis on coal). China is the world’s largest customer of raw materials such as iron ore, oil, soybeans and the slowdown in China will hurt the big exporters most of whom are emerging market countries (and in our opinion will also push prices down in 2022). Some of these countries are already experiencing a slowdown and devaluation of the currency in light of fears of a rapid tightening of the US Federal Reserve. Therefore, we estimate that 2022 will also be a weak year for emerging markets.
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