Israel
The number of new infections fell sharply to 1,000 a day, a level similar in terms of per capita infections to that in the US for example and lower than in Europe. Removal of restrictions on trade led to a sharp jump in purchases of clothing, furniture and equipment to more than 50%. Even in restaurants, which are still subject to occupancy restrictions, there has been an increase in revenue relative to the pre-pandemic period.
This trend is expected to remain with us for several weeks, and may even intensify during the Passover holiday, in light of the Israelis not going abroad. The increase in local consumption will slow down in our estimation in the second half of the year, after consumers complete the closure period and government assistance is gradually reduced.
The cash held by the public is growing at a rapid pace. In the last 12 months, the number of guests in circulation has increased by about 23%. A rapid increase in cash was also observed in other countries, in the United States 17% and in Europe 12%. In contrast to the sharp increase in current account balances, which reflect the Bank of Israel’s “money printing” (money printed by the Bank of Israel is digital and not necessarily banknotes) and zero interest rates, the increase Cash reflects more public preferences: At the beginning of the pandemic, the increase in demand for cash may have signaled a fear of household shortages and a difficulty in reaching ATMs.
At this point the sharp increase in cash is a sign, in our estimation at least, of an increase in the share of the black economy in the last year.
Two days before the election, the markets prefer a decision. The government that will be formed will soon have to make a series of decisions, including some less popular decisions, such as tightening the conditions for receiving the NPA, and later also approving a budget and measures to reduce the deficit. Credit rating companies want to see a stable government, but do not seem to be in a hurry to reduce The credit rating of a country that leads in the world of vaccination rates.
The increase in the inflation environment that we are seeing in recent months is mainly compensation for the declines in prices during periods of closure and the import of inflation from around the world. This can be seen, for example, in housing prices, which rose again, after falling last year, in the prices of furniture and household equipment, which are rising due to transportation prices and, of course, in fuel prices. Inflation is sometimes a process that feeds itself, it can happen for example, if wage increases are seen as an adjustment to a rise in prices, or if the government does not reduce the deficit and the Bank of Israel continues with the expanding policy.
Markets now estimate that the risk of this happening has risen recently. Long-term inflation expectations reach a level of 1.75%, with inflation in recent years and last year being nil. The change in the perception of the risk of inflation is due to the unfamiliar territory in which we are in terms of economic policy.
We estimate that in the coming months we will continue to see high price indices also in relation to seasonality, due to the influence of the factors we mentioned. The CBS will soon measure items such as hotels, culture, events and finally travel abroad. All of these are likely to become more expensive. We estimate that inflation in 2021 will reach 1.5%, and 1.1% in the next 12 months. The more important question is whether inflation will increase in the coming years, because the level in 2021 will probably still be lower even than the center of the Bank of Israel’s inflation target.
We believe that at some point fiscal policy will change and with it monetary policy, this assumption rests on the high fiscal responsibility that governments have discovered in recent decades. After adjusting the policy, we will return to the basic factors that led to low inflation, such as technological improvements, an increase in competitiveness and a appreciation of the shekel. At the same time, the global environment today does not “punish” governments that increase debt, and if we add to this a risk of political instability that makes it difficult to make decisions, it is understandable why inflation expectations have risen in Israel as well.
Long-term yields continued to rise, and the ten-year marker yield reached about 1.3%. Since the beginning of the year, the yield has risen to ten years by 46 basis points, which places Israel between the United States (81 basis points) and Europe (30 basis points). Inflation pressure in Israel is lower than in the United States, and in Israel That the Fed will raise interest rates. The curvature of the curve does not reflect an estimate that central bank interest rates will rise in the coming year, but rather an estimate that in subsequent years central banks will require rapid interest rate hikes to curb inflationary pressures.
The inflation environment in Israel has changed, and if it includes the prices of financial assets, it can no longer be said that it is low. We therefore estimate that the Bank of Israel will not act like the European Central Bank and accelerate bond purchases in order to curb the rise in yields, but rather like the US Fed examining whether the rise in yields is “orderly”, meaning that there is no panic that causes a quick sale of bonds “H. The unique risk that Israel currently has is political – if the election results do not allow for the formation of a stable coalition, we may see yields continue to rise.
global
While in the US and UK the population vaccine is advancing rapidly and returning to routine economic activity, in the eurozone and a number of emerging economies, there is an increase in morbidity, restrictions and recurring closures, and the population vaccine is almost non-progressive. % In annual terms, while in Germany and France a contraction of about 4.0% in GDP is expected.
Rising inflation expectations characterized most developed countries, which contributed to the rise in government yields. Central banks in developed countries reacted differently, and while the US Fed remained patient and did not change its bond buying policy or the expectation of a first rate hike, the ECB chose to take a different approach and announced increased purchases to moderate long-term yields. In Norway, the central bank also left the interest rate unchanged at 0.0% this week, but unlike other central banks in developed countries, it signaled interest rate hikes later this year. Annual core inflation in Norway is high, reaching a level of 2.7% in February, above the target of 2.0%. At the same time, there has been a sharp rise in real estate prices.
A week of declines in most stock indices in parallel with a further rise in long-term returns. The yield on ten-year US government bonds reached 1.73% over the weekend, the highest yield in the last 14 months. Part of the weekly increase in yield reflects an increase in inflation expectations for ten years, from 2.26% to 2.31%, and the remaining part is attributed to an increase in the real interest rate component. Inflation expectations for five years remained unchanged this week, at 2.51% per year.
The declines in stock indices last week were led by the Russell 2000 index in the US and the CSI300 index in China, by about 2.5%. The Nasdaq index fell by 0.8% and the Eurostox 50 and 600 indices remained unchanged. Last week, there was a sharp drop of about 6% in the price of a Brent barrel of oil, to a level of $ 64. The agricultural commodity index also fell by 1.4% this week.
The increase in yields mainly reflects investors’ assessment of a near normalization of US activity, given the rapid immunization of the population and the expanding policy of the Biden and Fed administration. The Fed’s interest rate policy remained virtually unchanged – the Fed left interest rates unchanged at 0.25% per annum. According to the points chart published by the Central Bank, no Fed member expects an interest rate increase in the current year, and the majority even believes that the interest rate will not rise even in 2023.
Four members (out of 18) expect at least one interest rate hike by the end of 2022, and seven members expect an interest rate hike by the end of 2023. The Fed also announced its intention to continue with an unchanged bond purchase program. The Fed’s message was of patience, with no proactive rise prevention policy Yields The Fed has raised its growth estimate for U.S. GDP this year from 4.2% in the previous forecast to 6.5% now.The growth forecast for 2022 has been raised slightly to 3.3%.
The Fed also expects a temporary rise in inflation, with the forecast for the PCE index rising this year to 2.4% from the previous forecast of 1.8%, and the forecast for 2022 rising to 2%. Fed President Powell stressed that the expansionary policy would be maintained for the time needed to return employment to the level prevailing before the Corona crisis.
The Fed does not extend the relief in the leverage ratio given to banks, which will come to an end at the end of March. The relief temporarily exceeded the government bond holdings from the leverage ratio. The banks wanted to maintain the relief but government officials did not support it. The end of the relief signals that the Fed believes the banks are stable enough, and do not lack capital. Consequently their holdings in U.S. government bonds.
Concurrent with the growth forecast, there was a negative turnaround in most weekly macro data in the US. The new weekly demand for unemployment benefits rose to 770,000 against a forecast of 700,000 – the highest level since the middle of last month. Industrial production fell in February by 2.2% after rising 1.1% in January, apparently due to the severe winter in some countries. Retail sales fell by about 3% in February against a half-year decline, after rising by 7.6% in January. In the housing market, building permits fell by about 11% in February, after Which reached a record high of 15 years in January, and construction starts fell by 10.3% in February, and their level has been the lowest in the last six months.
Eurozone: The immunization process continues to be very slow and meanwhile there is an increase in morbidity in some of the bloc countries. Over the weekend, about a third of the French population went into quarantine, with Italy and Spain opting for a temporary local curfew policy. Poland has also started a closure that is expected to last three weeks. The core component of the Consumer Price Index, the main indicator of price increases for the ECB, rose in February by 1.1% year-on-year in February from February last year, after 1.4% in January. This figure supports the continuation of the central bank’s expansionary policy.
Japan: The central bank announced its intention to continue intervening in trading in the bond market and ETFs as long as it is necessary to maintain financial stability. A smaller 0.3% increase in the Nikkei index, and the prime minister announced an end to the state of emergency in parts of Tokyo.
China: There has been no change in political and economic tensions with the US following high-level talks in Alaska. These were the first talks attended by the Foreign Minister and other representatives of the Biden administration. Minority populations in certain areas, and on Chinese pressure on Taiwan. The economic data in China continues to be good. There was a double-digit increase in retail sales and industrial production in January-February this year compared to the same period last year.
This is not surprising, since these two months last year were the peak of the closure and damage to China from the corona. China’s largest chipmaker, SMIC, which has been boycotted by President Trump since the US term, will collaborate with the Shenzhen government on a $ 2.4 billion plant construction project. The intention is to reduce technological dependence on the US over time.