Israel
A decrease in the number of new infections and in severe patients in the past week raises optimism and expectation of further relief. Meanwhile, trading activity is largely closed, at least formally.
Despite the restrictions on activity we are seeing a jump in all components of goods imports. Consumption of consumer goods was 28% higher in January than in the corresponding month last year. During the closure period, households consume fewer services, and it is possible that with the income that has become available, they increase the consumption of goods, which can also be purchased online. There was also a sharp increase in imports of investment products and raw materials. The big positive surprise last week was in tax revenues for January – an increase of 6% compared to January last year.
Financial markets are not the only ones ignoring the recession. It’s a bit difficult to explain this increase in collection, but it’s probably an effect of the polarity that the corona creates, quite a few businesses have not been harmed at all, and may even have benefited from the closed skies and efficiencies. The abolition of the ban on moving away from home unnecessarily is well felt in road traffic. Economically, it probably does not contribute much to GDP, compared to the previous situation, that is as long as most trading is disabled.
The budget deficit in the last 12 months has risen to 12.1% of GDP. This is a period that is entirely included in the corona crisis, and is therefore an indication of the level of the deficit in the coming months as well. The main increase in the deficit is in expenses for dealing with the corona, the damage to tax revenues was limited, and other expenses in January were 1.8% lower than last year, due to the lack of approval of the budget.
Elections to the Knesset will take place next month, and another month or two will pass before a government is formed. Until then, it is not expected that we will see a decrease from the current deficit rate of about 12% of GDP. The deficit is expected to begin to decline in the second half of the year, but also at a slow pace, so that we will reach an annual deficit of about 10% of GDP.
The large deficits in the world and the rise in inflation expectations are leading to a slump in yield curves. Long-term yields have also risen in Israel – the long-term bond yield of 26 years reached 2% last week, the highest level since the beginning of April 2020. At this stage we see that the rise in yields in the domestic market is very much in line with the world. .
We estimate that as yields around the world continue to rise, the Bank of Israel will not increase bond purchases just to keep yields significantly lower than those in the United States. In other words, there is no disconnect between yields in Israel and those in the United States, even though the inflation environment is different and the budget deficits in Israel are smaller.
The trade deficit grew in January to about $ 2.6 billion – the highest level in a decade. The increase in the deficit was due to a jump in imports alongside a certain slowdown in exports in January. The trade deficit is expected to continue to grow in the coming months in light of rising commodity prices and especially oil prices. On the other hand, the surplus in the services account also increased due to the closing of the sky and an upward trend in exports of high-tech services. We estimate that when the restrictions are removed and the sky opens for travel abroad we will see the total surplus in the goods and services account go down, and this will reduce the appreciation pressures.
The shekel strengthened again to 3.25 after already being at 3.30 against the dollar. On the sellers’ side were the institutional bodies, which hedge profits in the world’s stock markets. Data for December, for example, indicated foreign exchange sales of $ 2.6 billion by the institutional entities, and from May to December about $ 6 billion. The rate of foreign exchange purchases by the Bank of Israel is high, and we believe the effect of the intervention will increase if and when market prices rise. Stocks will moderate.
Inflation expectations are on the rise worldwide, and also in Israel. We raised the inflation forecast for the coming year to 0.8% following the rise in the price of oil ($ 62.5 per barrel of Brent). The market forecasts inflation at a rate of about 1.5% in 2022. This is a reasonable scenario, but in order for it to materialize we need to see a return to routine, and an increase in the prices of various services, including rental prices. At this point price increases are mainly in commodity prices.
The Bank of Israel continues to “print money” at a rapid pace as part of government foreign exchange and bond purchases. The public’s current account balances have been growing at a rapid rate of 32% in the past year. The empirical link between liquid balances and future inflation has not been significant in recent years, but it has not been examined under conditions such as today. “Of the public has risen and not fallen, and private savings have also risen. This situation creates greater uncertainty in inflation estimates, and markets have begun to embody this risk.
Central banks will not react to rising inflation and that means more negative real interest rates. How central banks will be tolerant of higher inflation is difficult to know, as inflation targets have become very flexible. The Fed intends to compensate for low inflation in the past with higher inflation than the target in the future, but if for example it intends to compensate for only one year of low inflation from the past, then as early as next year it can raise interest rates (less likely scenario at present). In any case, the Bank of Israel will not be the first to react here, both because of the pressure of appreciation and because our inflation is low.
global
Improvement in morbidity data and acceleration of the immunization process against the corona worldwide supported the continued rise in stock indices over the past week. In the US, the average number of new diagnoses daily (last 7 days) dropped from a peak of 248,000 in early January to 97,000 last Friday. Overall, the improvement in data is reflected in a decrease in the daily average during this period from 733,000 new cases to -400 thousand.
Towards the end of the week, President Biden announced the acquisition of an additional 200 million doses of vaccine, which added a boost to Wall Street. This is in addition to the impact of a relatively successful reporting season for American companies in the last quarter of 2020.
The crack has reached a new high, and since the beginning of the year the Russell 2000 index has risen by about 16%. Rises in the US last week were led by the Russell 2000 index at 2.4%. The cracking indices, the S & P500, and the Dow Jones rose by an average of 1.3%. The rises in Europe were more moderate, and the Eurostocks 50 and 600 indices rose by In Asia, stock indices in Japan, China and Hong Kong rose by 2.6%, 5%, and 3%, respectively.
In the global commodity market, the rise in oil prices this week stood out. The price of a Brent barrel rose 5.6% to $ 62.5, completing a 21% increase since the beginning of the year. Expectations for a near-approval of the US aid package and the improvement in morbidity data supported an increase in government yields and the ten-year US government bond yield rose to 1.21%. From the beginning of the year at an average rate of about 0.3%. In the US expectations rose to 2.35% in the UK to 3.0% and in Germany to 0.93%.
US: The Biden administration’s bailout package is expected to be approved by the Senate next week. The proposed package amounts to $ 1.9 trillion, an amount that is considered too large by the Republican opposition in the Senate. President Biden has signaled his intention to keep the size of the package unchanged, even at the cost of approval by a marginal majority in the Senate (a majority of 51 to 50 votes, including a double vote by Vice President Camela Harris), but new attempts may be made this week to reach an agreement More, which would allow approval by a larger majority in the Senate.
For the central bank, in a speech by the Fed president at the New York Economic Club, he reiterated his commitment to a long-term low interest rate policy and $ 120 billion a month bond purchases. Powell’s remarks were supported by recent Fed figures. On a non-change in the core component of the consumer price index in January, despite forecasts indicating a 0.2% increase.
Annual core inflation stood at 1.4%. However, in the past week there has been an increase in inflation expectations from the five-year bond market, from 2.28% to 2.35% per year. Ten-year inflation expectations have risen slightly to 2.23% per year. Of 76.2 points, contrary to expectations that were actually expected, and its level is the lowest in the last six months.The surprise in the index was due to a decrease in the component of expectations for the future situation of consumers.
Europe
Germany extends the closure period until March 7. In addition to extending the closure in the country, Prime Minister Angela Merkel has announced the closure of borders with the Czech Republic and the Tyrol region in Austria. In England, Prime Minister Boris Johnson announced his intention to publish a plan for the gradual opening of the economy in about two weeks. Restrictions on movement and trade across the European continent affect economic activity and growth forecasts for 2021. The European Commission has announced a reduction in the eurozone growth forecast to 3.8% this year (from 4.2%), and an increase in the projected growth rate to 2022 to 3.8 % (From 3.0%).
After a sharp-above-average contraction in the eurozone in 2020, relatively high growth of 5.5% in Spain and France is expected this year, and the growth forecast for Germany this year is 3.2%. In the UK, GDP in the fourth quarter rose above expectations by 4.0% in annual terms, however by the end of 2020 the UK economy had shrunk by a sharp 9.9%. The Bank of England estimates that in the first quarter of this year, too, there will be a sharp contraction in activity against the background of the tight closure.
China
The financial markets will reopen this coming Thursday, with the end of the Chinese New Year holiday. A new record was set in January in the volume of new loans from the banking system: 3580 billion yuan. This figure, which includes an increase in long-term loans to companies and households, is another indication of the recovery of the Chinese economy. Mortgage performance was relatively high in January, apparently as a result of advancing purchases for fear of imposing restrictions soon on housing loans.
The consumer price index rose by 1% in January, but compared with January 2020, negative inflation was recorded at a rate of 0.3%. The trend of the core component of the index continues to indicate a low inflation environment as a result of the restrictions on the activity of many industries, especially services. Among the manufacturing industries that stand out in their growth intensity is the automotive industry. Car sales rose 30% in January, after also rising in the previous nine months.