Israel
The week begins with the easing of the closure, such as the abolition of the ban on moving away from home, a permit to work in places that do not accept crowds and the possibility of taking independent trips from restaurants. A decision on educational institutions will be made later this week. These facilitations are not expected to have a significant impact on the volume of economic activity, as the degree of compliance with the closure was not high, and a large proportion of businesses continued to operate even during the closure. The broad unemployment rate rose to 16.7% in the first two weeks of January. And a trend of an increase in the number of workers leaving the labor force following the corona can be identified, Whether it’s because of layoffs or job closures. These number reached about 120,000 people, who constitute about 3% of the labor force. The chances of these returning to the labor force are low in relation to workers who have gone out to work.
Israel is a world leader in the rate of vaccinators, about 3.4 million people have long been vaccinated and they make up 51% of the total population over the age of 16. However, the morbidity data are still difficult and in the last week an average of 6.7 thousand people per day were infected. We are reducing the growth forecast for 2021 to 3.5%, against the background of high morbidity, continued restrictions on economic activity, and a low immunization rate in the world, which will not allow a full return to routine this year. The moderate decline in growth in 2020 was influenced by a very expansionary budgetary policy that led to a situation in which household incomes were barely affected. Over time the government will not be able to persevere with this deficit policy. During the crisis, the public reduced consumption and accumulated savings, after which a reverse process will take place – transfer payments will decrease, total public income will decrease, and private consumption expenditure will increase. This effect on growth will be relatively short-term, as much of the demand will be directed to spending abroad. Slower growth will also be reflected in a budget deficit of about 10 percent of GDP, and a public debt-to-GDP ratio that will exceed 80% of GDP during the year. Approve a budget for 2021, and close to that is already a budget for 2022 that will include measures to curb the deficit.
The Bank of Israel purchased $ 6.8 billion during January, a record amount per month, which is needed to stop the strengthening of the shekel. Following the major acquisitions in January, the Bank of Israel has $ 23.2 billion remaining for the rest of the year, which is an average of $ 2.1 billion per month. We continue to estimate that these amounts are high and in the coming months they are expected to weaken the shekel. The impact of the Bank of Israel’s large acquisitions will be felt when price increases in the world stock markets stop, and the hedging needs of the institutional investors decrease.
The price of a barrel of oil soared last week to about $ 60 a barrel. At the same time we are also seeing an increase in the prices of agricultural goods. Concerns about rising inflation in the world are rising. We are seeing a sharp increase worldwide in the amount of liquid means of payment, which is a direct result of the “money prints” of central banks. The empirical link between the means of payment and inflation has not been strong in recent years. However, bond purchases that finance high budget deficits over time, and lead to an increase in the public’s liquid assets as well as its total financial assets, constitute new territory, and it is difficult to know where it will lead. We are raising the inflation forecast for the coming year to 0.8%, mainly due to rising oil prices. We still estimate that the rise in inflation in Israel will be more gradual relative to the world.
The central banks of the world are not expected to respond to the rise in inflation, and will probably even see it as an achievement. The yield curves in the world have become steeper, assuming that in two years the three central banks will begin to respond. In Israel, inflation is lower than in the United States and Europe, and the slope of the curve depends very much on the Bank of Israel’s bond purchase policy. As yields around the world rise, the Bank of Israel’s determination to continue purchasing government bonds will diminish. In January, the Bank of Israel purchased NIS 4.2 billion in government bonds, and NIS 50.4 billion since the crisis. This leaves the Bank of Israel with NIS 34.6 billion to reach the purchase quota of NIS 85 billion. At the current average purchase rate, this amount will be sufficient until the last quarter of the year. The nine-year bond yield (330) rose by 12 basis points to 0.89%. In the US, the ten-year yield rose by 25 basis points to 1.17%.
global
The financial markets back up last week are encouraged by the approval of the Senate aid package and good financial statements relative to estimates. The pace of vaccine advancement in the world is slow, but Wall Street is currently more affected by cheap money, than by macroeconomic factors. The one who actually criticized the size of the incentive package is economics professor Larry Summers, who is very much identified with the Democrats, and even served as finance minister during the Clinton era. Prof. Summers argues that this move will lead to the highest inflation we have seen in the last generation, an erosion in the dollar exchange rate, and ultimately also to a rise in interest rates that will take an economic toll.
In the meantime, central banks are ready to take this risk. Concurrent with the rise in financial asset prices, commodity prices also began to rise, and the price of a barrel of oil reached $ 60. Yield curves have become steeper, in anticipation of future inflation risks.
Yield curves and rising US inflation expectations. The ten-year US government bond yield reached a level of 1.17%. Five-year inflation expectations have risen in the past week from 2.2% to 2.3%, and ten-year inflation expectations have risen to 2.2%. The gap between the thirty-year yield and the five-year yield has risen in the past week from 1.41% to 1.51%. The market is beginning to translate inflation expectations into higher long-term interest rates. Central banks are not expected to respond to rising inflation, so there has been no increase in the short part of the curve.
Global stock markets have risen again in the past week amid the imminent approval of the Biden administration’s bailout plan. The leading indices in the US reached new highs and rose at an average rate of about 6.0% in the last week. The Eurozone also recorded adequate increases: the Eurostox 50 index rose by 5% and the DAX index in Germany recorded a similar increase. 8% on the price of a barrel of Brent oil to a level close to $ 60.The dollar continued to strengthen in the past week, recording a 0.8% appreciation against the euro to a level of $ 1.20 per euro.
The Senate has approved President Biden’s $ 1.9 trillion aid package By a majority of 51 to 50 votes (including a double vote of the Vice President, Kamla Harris), and then the proposal was approved in the House of Representatives by a majority of 219 to 209. The next step is to draft the bill on the subject, a process that Democrats hope will be completed by mid-month, so that the plan will be approved before March 15, when the benefits currently given to the unemployed will expire.
US: Decline in unemployment and recovery in the level of activity of the services industries. The Purchasing Managers’ Index (ISM) for services industries rose to 58.7 points in January, the highest level from February 2019, and is now similar to the index for the manufacturing sector. Employment data for January indicated an addition of 49,000 jobs to the US economy, after a 227,000 job decline in December. However, the previous two months’ data were updated downwards by 159,000 jobs. On the other hand, the number of jobs in the hospitality sector decreased, and the unemployment rate fell to 6.3% in January, along with a decrease in the participation rate in recent months to 61.4%, compared with 63.4% before the crisis.
Europe: At the end of 2020, the aggregate GDP of the eurozone economies shrank by 6.8%, after the fourth quarter of the year replaced the GDP in the eurozone shrinking at an annual rate lower than expectations of 2.8%. The sharpest decline in GDP in 2020 was in Spain which recorded a contraction of 11% in GDP. In Italy, GDP contracted by 8.9%, in France by 8.3% and in Germany by 5.3%. The unemployment rate in the eurozone remained at 8.3% in December. The unemployment rate among young people, under the age of 25, was 18.5%. The highest unemployment rates in the eurozone were recorded in Spain, Italy and France. The increase in the number of infected people on the European continent and the tightening of restrictions will probably lead to a worsening of the economic situation in the first quarter of the year and another quarter of a contraction in GDP. In Italy, Mario Draghi, the former president of the Central Bank of the Eurozone, has responded to the Italian president’s request to become prime minister, with the immediate goal of forming a stable government. Against this background, the stock index on the Milan Stock Exchange recorded a weekly rise of about 7%. In England, the central bank left interest rates unchanged. The growth forecast for 2021 was reduced to 5.0% and the forecast for 2022 was raised to 7.25%.
Inflation in the eurozone in January. After five months of negative annual inflation, the annual inflation rate in the eurozone rose to 0.9% in January and core inflation rose from 0.2% to 1.4% – a sharp rise above forecasts. Among the factors that apparently influenced the rise in the index were a variety of temporary factors such as the rise in VAT in Germany, after the temporary decline recorded, and changes in the product basket weights.
China: Against the backdrop of rising morbidity in the north of the country, in Beijing, and in other cities, the government has announced tight restrictions on traffic ahead of the upcoming New Year celebrations. This is the busiest time for long-distance travel. Restrictions on activity are likely to affect indicators of the state of the economy, especially those relating to the services industries.