Dr. Gil Michael Befman, Chief Economist Dudi Reznik, interest rate strategist Government and macro bonds in Bank Leumi
Weekly Look – Relatively low volatility was recorded in the past trading week. A slight decrease in yields was recorded along the index-linked curve, a mixed trend was recorded in the unlinked shekels. Against the background of the rise in the inflation environment in the US, there was an increase in local inflation expectations along the entire curve. The shekel set records of close to three decades against the leading currencies.
The local government bond market traded relatively stable this week with gains and declines in yields along the index-linked curve compared with a mixed trend along the unlinked shekel curve. As a whole, the past week has been relatively stable in the government bond market, with bonds trading at relatively low volatility. Against the background of rising US inflation to a peak of more than three decades, the domestic market has also seen a rise in inflation expectations. The CPI-linked stocks traded in declining yields with an emphasis on the short part of the curve. The unlinked shekel A mixed trend was recorded with the medium-short shekels trading steadily and even recording a slight decrease in yields compared to a tendency for a slight increase in yields in the long part of the unlinked shekel curve.
In the US, there has been a further increase in the inflation environment to record levels of more than 3 decades (see extension below). The inflation environment measured in the last 12 months has risen above 6% and is expected to continue to rise in the coming months. Yields in the US as short yields continue to rise compared to stability in the long yields and even decline in the longest part of the dollar curve. Over the past month, the trend of crooked flattening in the United States has stood out, with short-term yields of two years recording an increase of about 25 basis points compared with stability and even a decrease in long-term yields of 10-30 years. This is against the background of the relatively “ionic” Fed announcement last week and the continued rise, as mentioned, in the inflation environment.
Last week as part of the interest rate announcement the Fed unveiled its QE decline plan, while still insisting that the rise in inflation is “largely” transient. The question is to what extent the Fed will be able to adhere to this conception against the background of the continued rise in the inflation environment and whether a stage will not come in which it will realize that it is in fact lagging behind the curves.
In Israel, the consumer price index, which is expected to rise by 0.4% and complete an increase of 2.6% in the last 12 months, will be published on Monday evening. This is the ninth consecutive index that is expected to be positive, something that has not happened for many years. Despite the rise in the local inflation environment that is expected to continue in the coming months, it seems that the Bank of Israel will continue to enjoy relatively many degrees of freedom in conducting monetary policy against the background of the continued strengthening of the shekel. The strengthening of the shekel, along with the fact that inflation in Israel despite the rise in prices is still within the price stability target (even if for a short time it is expected to exceed slightly upwards) is expected to moderate the pressure to raise interest rates in Israel. . This scenario may lead to a continued rise in the steepness of the unlinked shekel curve mainly as a result of rising yields in the long run.
Global macro
The inflation environment in the US is at a peak of 30 years and is expected to continue to rise in the near future.
The October Consumer Price Index jumped 0.9% in the US – above and beyond the consensus forecast for a 0.6% increase. The increase comes after a 0.4% increase in September. Over the past 12 months, the index has risen by 6.2%.
The monthly increase was broad, with increases in indices for energy, housing, food, used cars and trucks, as well as new vehicles. The field of services has also risen. The energy index rose by 4.8% during the month of October, while the gasoline index rose by 6.1% and the other energy components also rose. The food index rose by 0.9%.
The core index rose by 0.6% in October (consensus – 0.4%) after rising by 0.2% in September. The rise of the index in the last 12 months, by 6.2%, is the largest increase since November 1990. The core index has risen by 4.6% in the last 12 months, the biggest rate since August 1991. The energy index has risen by 30.0% in The last 12 months, and the food index has risen by 5.3%. Over the next few months, The annual rate of increase in the annual index is expected to continue to reach about 7% and even a little beyond that.
Growth in the UK is slowing down and significantly reducing the potential for interest rate hikes.
GDP in the UK rose in the third quarter of the year by 1.3% compared to the second quarter and this is a moderate growth rate of 5.2% in the second quarter of the year. GDP in September was just 0.6% below the peak of February 2020 – the period before the plague. At the quarterly level, GDP in the third quarter of 2021 was 2.1% lower than the peak of the end of 2019.
The data show that England’s import and export volumes are well below pre-epidemic levels. It also seems to be linked to Brexit and exports to the EU have fallen by 7.8% since the beginning of the year, at a time when world trade has been recovering.
The bottlenecks and the damage to the real purchasing power of businesses and households, with the expectation of rising taxes and rising prices of services, will lead to a slow growth in GDP over the coming year. This will probably not prevent the interest rate rise from 0.10% to 0.25% in the coming months, but probably not much beyond that over the next year.
An increase in the Chinese producer price index for the time being does not affect underlying inflation, which has remained relatively low.
Manufacturers’ prices continued to rise and reached a new high last month, due to the lack of energy. Manufacturers’ prices soared in China from an annual rate of increase of 10.7% in September to a new high of 13.5% in October, well beyond the consensus. At the monthly level, price increases accelerated from 1.2% to 2.5%, a record for the monthly rate of increase. The shortage of energy is reflected in rising prices of coal mining and processing output, petrochemical industry output, cement and metals.
For now, the surge in the prices of finished consumer goods has remained moderate and after four months of decline, inflation of the consumer price index has risen to a 13-month high of + 1.5%, partly as a result of a sharp rise in fuel prices. The decline in food prices slowed, but there was a sharp rise in vegetable prices due to bad weather. These factors may turn out to be temporary and core inflation has risen slightly to 1.3%, so the big picture is still that underlying inflation remains low. Beyond that, inflation is not expected to be a major constraint on the PBOC in the implementation of the expansion of monetary policy.