Aggressive foreign exchange buying policy supports indexed

main points

Markets have struggled to find direction in the past week. Expectations of a broad $ 1.9 trillion fiscal plan supported markets, but fears of violence at Biden’s inauguration, the possibility for Republicans to oppose part of Biden’s fiscal plan that would delay its approval and a new corona outbreak in China clouded markets. The economic data were mostly negative with a decline in retail trade and an increase in the number of job seekers, but there was an increase in industrial production.

Macro Israel: Relatively moderate decline in growth is expected in the fourth quarter

וק Tightening of the closure led to a decrease of about 4.5% in purchases of credit cards, especially in tourism and clothing, furniture and electronics. Purchases at food chains and pharmacies have gone up.
 In the second half of December, the consumer confidence index rose to 11 points from 20 in the first half.
 In November, the number of new apartments sold increased by 22% compared to November last year.
 In the fourth quarter, industrial exports increased by 9.5% with rapid expansion in most industries.
וא Imports of consumer goods increased by 13% (vehicles by 30%), other components of imports also increased. The totality of the data indicates that the contraction in GDP in the fourth quarter of 20 is expected to be moderate, if at all.

Inflation environment: The devaluation trend may continue

 The December index fell by 0.1% (expected to be zero) with a sharp moderation in rental prices.
The shekel has depreciated by 3.1% in the last two days (against the basket) due to the Bank of Israel’s announcement regarding a commitment to purchase foreign currency in the amount of $ 30 billion this year.
 We expect that this commitment is expected to stabilize the shekel around -3.40-3.35 NIS per dollar.
בעולם World oil prices have risen to $ 55 a barrel of Brent amid Saudi Arabia’s announcement of a sharp cut in output. Fuel prices are now expected to rise by 2.5% in early February.
 US: Weakness in trade and employment, but rapid expansion in industry
 In December, there is a sharp decline in the optimism of small businesses against the background of an increase in restrictions.
 In December, core inflation remained stable at an annual rate of 1.6% (similar to Nov.).
In December, retail trade fell by 0.7% (expected to be 0.1%) after falling by 1.4% in November.
 Industrial production (excluding energy) increased by 0.9% after an increase of 0.8%, above expectations.
 The number of new job seekers increased to 965 thousand (the expectation was 790 thousand) due to the increase in morbidity and restrictions on activity.
 The Michigan Consumer Confidence Index fell 1.5 points in January to 79.2 (expected to be 80.0).

Europe:

 In November, industrial production rose by 2.5% after an increase of 2.3% in October. Industry activity continues to expand during the crisis.
EC The ECB increased its bond purchase program by another 0.5 billion euros to 1.85 trillion.

Bond market:

 Fitz has confirmed Israel’s rating of A + and expects growth of 5.4% this year.
בנק The Bank of Israel’s announcement regarding a commitment to purchase foreign currency restored its attractiveness to the linked. A further depreciation of the shekel this week is expected to support the linked channels.
In our estimation, in an optimistic recovery scenario, the Bank of Israel’s involvement in the markets will decrease, and therefore yields are expected to rise by the end of the year, especially the shekels.
Zoom In: Excess fundraising in 2020 is expected to ease the financing of the deficit this year
2020 In 2020, the budget deficit reached NIS 160.5 billion.
 The Treasury raised almost NIS 183 billion net, due to fears of a much higher deficit.
 This surplus of funding raised the “deposit” of the Ministry of Finance to more than NIS 40 billion.
 We assume that the deficit this year will reach 8% of GDP, or about NIS 115 billion.
 We assume that the Treasury will utilize about NIS 10 billion of the fundraising surpluses from previous years.
 One third of the fundraising is expected to take place abroad, so a net local fundraising of NIS 75 billion is expected.
 This means a local gross tradable raising of about NIS 124 billion.
 We expect a moderation in the recruitment rate in the second half of the year.

Macro Israel

Index lower than expectations in December
The December index was down 0.1% from our forecast for stability. One major item surprised downwards: apartment prices in renewable contracts (17.2% of the index) which remained stable (we assumed a seasonal increase of 0.5%, in December 19 this item increased by 0.9%). In the last 12 months, rental prices have risen by only 0.2%, compared to 1.1% a month ago and 1.7% two months ago. Such a low annual rate of increase was not seen in the first and second closures. In contrast, the housing survey (not included in the consumer price index) regarding purchase prices indicates an acceleration in the rate of increase in housing prices to 3.2% in the last 12 months (from 2.7% a month ago). In the last six months, housing prices have risen by 2.7% (annual rate of 5.5%!).
Inflation in 2020 amounted to 0.7% and core inflation to 0.4% (down from 0.2% a month ago). Such a low inflation environment was one factor that persuaded the Bank of Israel to increase its involvement in the foreign exchange market (the main reason: to maintain the competitiveness of the tradable sector). A commitment to purchase $ 30 billion this year is expected to support moderate devaluation in the short term. At the end of the year, however, in the scenario of sharp declines in the markets (which will support the strengthening of the dollar and the demand for foreign exchange by institutions), this commitment may intensify the devaluation of the shekel.

We expect inflation of 0.8% this year

Our inflation forecast assumes a stabilization of NIS around NIS 3.3-3.4 per dollar, a continued rise in commodity prices ($ 60 per barrel of Brent at the end of 2021), including agricultural commodities, the effect of rising prices of overseas transport prices, and an acceleration in housing prices as the economy recovers. On the other hand, when travel prices abroad return to be measured (probably in the second quarter), a reduction is expected. Electricity prices were reduced by 2.3% in January, and a reduction in Bezeq’s telephone service prices is expected.

Rapid expansion in both exports and imports in the fourth quarter

In the fourth quarter, industrial exports increased by 9.5% compared with the previous quarter (seasonally adjusted, in dollars, not at an annual rate), after an increase of 1% in the third quarter. There is a rapid growth in most industries. In the fourth quarter, imports of consumer goods increased by 13.4% (and by 11% without imports of vehicles, which increased by 30%), imports of raw materials increased by 4.7% (this part increased by commodity prices) and imports of machinery and equipment increased by 5.4. %. These are a series of positive indicators (some of them leading indicators) that support the assessment that a relatively moderate, if any, contraction is expected in the fourth quarter. The increase in vehicle imports is also expected to support growth through a sharp rise in import taxes.

There is an expectation of a rapid increase in imports in 2021, after the moderating effect of the crisis in 2020, a factor which should reduce the current account surplus. But in the end, imports of consumer goods (excluding vehicles) rose to 9% in 2020, a relatively rapid rate, so it seems that the potential for a sharp increase in imports of goods in 2021 is limited.

Decrease in consumption after tightening the closure

The tightening of the closure led to a decrease of about 4.5% in purchases with credit cards (in the last week to 12.1), especially in tourism (31%) and clothing, furniture and electronics (26%). Purchases at food chains (+ 8% +) and pharmacies (+ 13% +) have risen in the past week. The continuation of the tight closure beyond a short period and a slow opening may hurt growth in the first quarter of 21.

Households are optimistic about the future

In the second half of December, the CBS consumer confidence index rose to 11 points from 20 in the first half of the month, approaching the high level on the eve of the Corona of 6 points in February. In previous closing periods, this index fell to a level of 32 “Points. The improvement in optimism is mainly due to the expectation of rapid immunization of the population and the opening of the economy. The component of the confidence index that rose especially was” expectations of the economic situation in the country in the coming year “(from 19 to 5), The intention is to make a large purchase in the coming year. “Rapid immunization and the removal of restrictions in the second quarter are expected to support a rapid recovery in activity. In this scenario, the Bank of Israel is expected to reduce its involvement in the bond market in the second half of the year.

Some important data will be published this week: Monday: The broad unemployment rate for the second half of December, Tuesday: The number of job vacancies (Dec.), Wednesday: The consumer confidence index for the first half of January.

Macro Overseas.

US: There is no acceleration in inflation, at this point

In December, core inflation remained at an annual rate of 1.6%, similar to the rate in recent months. However, it is important to note a number of trends:
ירי Commodity prices in the index (core) rose by 1.6% year-on-year (0.2% in December versus November), accelerating from an annual rate of 1.0% – six months ago, due to the increase in demand, rising world commodity prices, devaluation of the dollar, and rising commodity prices.

 On the other hand, services prices moderated to 1.6% in December from a rate of 3% at the beginning of the crisis (see graph), against the background of declining demand due to fears of infection. This moderation is felt in the prices of flights, accommodation and hotels.

 Housing prices (rental prices) have risen by 2.2% in the last year, a clause that is also on a moderating trend (from 3.3% a year ago).

What about the future? The weakening of the dollar and rising commodity prices will continue to support inflation. In addition, the opening of the economy (although not until the second half of 2021) is expected to support an acceleration in service prices. It is likely that by the end of the year, core inflation in the US will reach 2.0%.

Important macro data to be published worldwide: Monday: China: Growth in the fourth quarter, industrial production, retail trade and investment (December). Tuesday: Germany: ZEW (Business Confidence) Survey in January. Thursday: US: Construction starts (December), number of new job seekers in the last week, Europe: Consumer confidence index (January). Friday: PMI purchasing managers’ indices in a number of countries including the US, Europe, UK, and Japan, including industry And also in the toilets (January).

Zoom In: Excess fundraising in 2020 is expected to ease the financing of the deficit this year

In 2020, the budget deficit reached NIS 160.5 billion. The Treasury raised almost NIS 183 billion net, due to fears of a much higher deficit. The deficit forecast for both the Treasury and the Bank of Israel was around 13% of GDP several months ago. Full of corona capsules and also lower tax collection.

 Therefore, in 2020 the fundraising surplus reached NIS 22.3 billion, an exceptional volume relative to previous years (see graph). This excess fundraising raised the cumulative “deposit” of the Ministry of Finance at the Bank of Israel to more than NIS 40 billion.

. Looking at 2021, we assume that the deficit will reach 8% of GDP, or about NIS 115 billion, similar to the Bank of Israel forecast (in the optimistic scenario).

 We assume that the Treasury will utilize about NIS 10 billion from fundraising surpluses from previous years.

Revenue from privatization is not expected this year.

 A third of the fundraising is expected to take place abroad, so a net local fundraising of NIS 75 billion is expected, of which net non-negotiable fundraising (above the fund’s revenue) of about NIS 20 billion.

 This means a net tradable local fundraising of NIS 55 billion or NIS 124 billion gross tradable fundraising (the updated fund redemption forecast is NIS 69 billion).

 Since the beginning of the year, the Ministry of Finance has continued to raise at a rate of NIS 12 billion per month (3 billion per week). We expect a moderation in the recruitment rate in the second half of the year, and perhaps even before, to a rate of about NIS 9-10 billion per month. At the same time, the Bank of Israel is also expected to slow down the rate of bond purchases in the second half of the year (assuming an economic recovery), so it does not appear to us that the decline in government borrowing will significantly affect yields.