In Israel:
The Bank of Israel is fighting for the strength of the shekel – in our opinion it is not going to be easy
In view of the strengthening of the shekel in recent weeks, even beyond the weakening of the dollar in the world that accelerated after the Senate election results and expected to print another trillion dollars in the US. This is the largest annual amount since the bank began its acquisition program in 2008.
The amount is large enough to offset all the expected surplus this year in the current account of the balance of payments. But it does not cover other large flows, including direct investment in Israel (FDI), the short capital movements resulting from the capital market and the issuances of Israeli companies abroad.
Therefore, in our estimation, this action will significantly slow down the appreciation of the shekel, but will not change the trend resulting from these currents alongside the weakening of the world dollar due to the endless expansions and prints in the US. In addition, in reverse, this amount To 50 percent of GDP this year and will be a significant ‘safety cushion’ for future crises (there always will be) that can prevent a sharp and consistent devaluation of the shekel.
In our estimation, the Bank of Israel will be able to prevent the continued appreciation of the shekel during 2021 against the currency basket. But in targeting the dollar, this depends on the development of the dollar against other currencies in the world: in US extensions (after all, the Bank of Israel will not purchase all the expansion that Biden intends to do), during the markets and in the development of the corona in the world.
The Bank of Israel’s intervention also has a positive effect on inflation expectations (which have risen significantly in recent times) affected by exchange rates.
Consumer price index – rents are falling, but apartment prices and input prices are rising
The latest price index for 2020 fell by 0.1 percent lower than our estimates (which will remain unchanged) mainly due to a large drop in expectations of vegetable-fruit prices (minus 2.2%). Inflation at the end of 2020 amounted to minus 0.7 percent when the fall in energy prices was the main cause of the decline in inflation (0.5 percentage points), and for the first time since 2006 the housing section (mostly rents) also had a negative (small) effect on overall inflation.
According to our initial estimates, the January index (almost always negative) is expected to fall by 0.4 percent. When the seasonal decline in clothing prices, housing and electricity will be partially offset by the rise in fuel prices. The February index currently ranges from zero to plus 0.1 percent, depending on whether the projected rise in fuel prices (following the rise in oil and the depreciation of the dollar) will remain until the end of the month. It is important to note that there is still uncertainty regarding the estimate of some of the sections by the CBS following the closure (especially the education section). Following the devaluation of the shekel in recent days, our forecast for the next 12 months rises to 0.7 percent.
Although rental prices are falling, the prices of owner-occupied dwellings (which are not part of the consumer price index) rose at a rapid rate of 1.0 percent (between mid-October and mid-November) and the previous two months’ figures were updated upwards. So in the last 12 months there has been a 3.2 percent increase in apartment prices. As we have already noted in previous reviews, this trend is expected to continue in light of supply disruptions on the one hand, and government actions and a variety of Bank of Israel actions that contribute to encouraging demand on the other.
At the same time, apartment construction costs rose more than we estimated in December, when the construction input index rose by 0.4 percent, due to a rise in the prices of imported raw materials (mainly iron). Thus the sharp rise in commodity prices that began last summer is beginning to be reflected in input prices. We therefore believe that this will lead to a rapid increase in construction inputs (unpaid) in the next two months.
In the US
First and not last offer
One of the things that continues to push the capital market over the past week is the presentation of President Biden’s new aid program even before the inauguration ceremony – with a whopping $ 1.9 trillion price tag. About 1 trillion of this is intended for direct payments to every citizen in the amount of about $ 1,400, along with an increase in weekly unemployment payments by $ 400 until September !! Almost three times more than the plan that went through just 4 weeks ago ($ 600 per capita and increased unemployment payments until mid-March). A breakdown of the main sections can be seen in the body of the review.
This plan will not prevent the contraction in GDP in the current quarter (and possibly also in the next quarter) in light of the spread of morbidity and the expectation of tightening restrictions under President Biden. But the generous aid will lead to our assessment of a very strong recovery in the second half of the year, especially of private consumption in the face of the sharp rise in disposable income rates in light of direct aid.
It is important to note that this is only a proposal that includes additional appendices such as: raising the hourly federal minimum wage to $ 15, changing parental tax credit points and direct assistance to states. Legislation to pass the plan in full requires the support of at least 60 senators, more than Democrats have.
In our view, the chances that the president will be able to recruit a minimal number of Republican supporters seems reasonable at the moment (along with changes to the plan), given the continued disappointing economic data following the spike in morbidity. At the same time, if negotiations fail the Democrats will be able to adapt the legislation which will include only expenditure items and the Vice President will be able to exercise the right to the equality voucher. This legislative capacity is longer and limited to only once a year so Democrats will try to fully exhaust the dialogue with Republicans beforehand.