Israel
The trading activity opened last week and some of the leisure activities were allowed under restrictions. The daily number of infections has stabilized at a level of about 3,500 people per day, and this will probably prevent further relief in the coming weeks. The economic data are very polar and it is difficult to assess the level of activity of the economy. On the one hand, we see that exports of high-tech services rose by 22% in the fourth quarter of 2020, while on the other hand, restrictions on activity in January reduced credit card purchases by 8% compared with the previous month (4.3% compared with January last year). The unemployment rate is expected to fall following the return of trading workers to a low double-digit level. Government policy creates a smokescreen, which also makes it difficult to analyze: Knesset workers continue to receive wages and do not fundamentally change their consumption. It is difficult to expect a change in economic policy until a new government is formed after the election, and by then the budget deficit is expected to remain at 12% of GDP.
The corona crisis has increased the savings rates of households in most countries of the world. In Israel, the savings rate reached a peak of 31.2% of disposable income in 2020. The reasons for the increase in private savings are the government’s compensation policy (increase in transfer payments), and on the other hand a forced decrease in private consumption. Opposite the increase in private savings is a sharp decline in public savings (the increase in the deficit). That is, on paper there was a transfer of “financial wealth” from governments to households. The increase in private savings during a crisis probably had an effect on the prices of financial assets. Government deficits and their financing by central banks eventually reached the pockets of households, raising the value of financial assets. The savings rate is expected to fall after the end of the crisis, when the public will return to consumption and especially when the sky opens. At the same time, government transfer payments will be reduced, and taxes may even be raised.
The growing fear of inflation in the world also wrote the trends in the capital market in Israel last week. Inflation in Israel is significantly lower than in the US and Europe, but the markets believe this will not be the case over time. No one really believes we will see central banks raise interest rates in the coming year, but more and more believe that by 2022 this is already possible. The two-year bond (323) reached a level of 0.16%, which represents an increase in interest rates in a little over a year.In the past week, an increase in long-term real (CPI-linked) yields could also be seen, a phenomenon that is also not unique to Israel. Higher realities in the long run.The markets outline their limits for central banks: short-term interest rates, long-term interest rates and long-term inflation cannot be controlled.The Bank of Israel interest rate will not rise before US interest rates, but not long after, so the interest rate curve has become Steeper in Israel as well.
A one-time rise in prices or inflation, in our opinion, is the crucial question. At this point we are seeing increases in the prices of goods and tradable products in the world. Some of the prices of services are not measured at all and it is estimated that these will also become more expensive when the economy develops. Prices around the world are therefore expected to rise in the coming months, but this does not mean that we will see an ongoing process of rising prices, ie inflation. World inflation expectations have risen to all ranges and not just for the first year, the prevailing assessment at the moment is that the risk of inflation, higher than we have known in recent years, has risen. This estimate is based on the large money prints of the central banks, which financed the budget deficits.
In order for price increases to become an ongoing process of inflation, we need to see that the money printed translates into an increase in demand, and these lead to wage increases. Our inflation forecast for the coming year is 0.9%, and we estimate that there may be upward surprises if, for example, maritime transport prices remain at their high level, or we see a further increase in world commodity prices. The bond market embodies average inflation of about 1.6% over a ten-year period, which means a return to a normal level of inflation, which we have not really known in the last decade.
The shekel depreciated last week against the currency basket, and in interbank trading on Friday its exchange rate reached a level of 3.31 against the US dollar. The correlation between the stock and foreign exchange markets is high, and declines in world stock markets are leading to a weakening of the shekel. The Bank of Israel will continue to purchase foreign exchange in the coming months at a fairly constant rate of about $ 2.0 billion per month. The exchange rate will in our opinion depend on stock prices. In the scenario of stock price stability, we estimate that the devaluation trend will continue in the short term.
global
A sharp rise in yields on government bond yields has led to the largest weekly decline in the S & P500 index in the past month, and a sharp decline in the Nasdaq index since October. The yield to maturity on 10-year US government bonds rose from a level of 1.35% at the beginning of the week to 1.61% at its peak and at the end of the week fell to 1.41%. Since the beginning of 2021, yields for ten years in the US have risen by about 50 basis points. There has also been an increase in US-linked bonds, mainly since the beginning of the month, and they have risen from 1.1% – at the beginning of the year to 0.75% – today. The process of immunization and declining morbidity around the world has strengthened estimates for normalization of activity and exit from the corona crisis in the coming months. These estimates, coupled with rising inflation expectations since the beginning of the year, have led to rising yields. However, in the past week Stability at 2.15% per annum.
The rise in government bond yields since the beginning of the year is global. In Germany, the 10-year yield rose from minus 0.6% at the beginning of the year to minus 0.26 at the weekend. In England the rise was 0.2% at the beginning of the year to 0.8% now. 0.8% to 1.2% over the weekend For the time being, it does not appear that most central banks are interested in intervening in the market by increasing bond purchases in excess of planned amounts in order to moderate the rise in yields. However, it can be estimated that if there is a sharp and rapid increase in yields, the probability of such an intervention will increase. Christine Legard, President of the ECB, stressed in a speech last week that the central bank is closely monitoring the possibility that the swells in the bond market will increase private sector financing costs.
Most of the declines in stock indices were recorded in technology stocks and some markets in Asia. The Nasdaq was down 4.9% last week, while the S & P500 and Dow Jones were down 2.5% and 1.8%. The Eurostocks 50 and 600 were down 2.1% and 2.4%, respectively. In Asia, stock indices China led the declines, with the CSI300 index down 7.5%, followed by the Heng-Seng index down 5.4%. Most other indices fell by 2.5% to 3.5%. The increase in volatility was reflected in the VIX index which rose During the week to almost 30 points, however, it has moderated slightly since then.In the commodity markets, there were weekly price increases in Brent, copper, wheat, soybeans and other semi-commodities.
U.S
Positive macro data, expected for high growth in the first quarter of 2021. The index of leading indicators rose in January by a high of 0.5%. New orders for durable goods rose by a high 3.4% in January, and without vehicles there was an increase of 1.4%. Private income rose sharply by 10% in January, mainly due to an additional pulse received by households from the $ 900 billion aid package approved in December. Private expenditure also rose at a high rate of 2.4%, but due to the sharp increase in income the rate of private savings from disposable income rose from a level of 13.4% in December 2020 to 20.5% in January. The savings rate is expected to decline in the coming months, but its level is expected to remain significantly higher than before the crisis, which stood at 7.5%.
The new weekly demands for unemployment benefits recorded a surprising drop to 730,000 against a forecast of 838,000, the lowest level in the last three months. The University of Michigan’s Consumer Confidence Index fell in February while the Conference Board’s Consumer Confidence Index rose last month, however in both indices the level of the index remained low and is only slightly higher than the low level of the crisis. The PCE index rose 0.3% in January, and its rate of increase in the past year has reached 1.5%. This rate also applies to the core component of this index. These data are consistent with the Fed’s view that there is currently no acceleration in US inflation.
In 2020, US real estate prices rose by about 10%. The Case Schiller index of US real estate prices continued to rise in December, completing a 10.4% increase in 2020. House prices are now 27.5% higher than in 2007 before the crisis in the real estate market. The level of transactions remained high and rose in January. Of 4.3% in transactions in new dwellings, however in the signing of contracts for purchase a decrease of 2.8% was recorded in January but the level remained high.
The House of Representatives has approved President Biden’s bailout package, and the next stop in the process is a vote in the Senate. The approved package is worth $ 1.9 trillion and includes the transfer of payments of about $ 1,400 to some citizens, assistance to the unemployed, increased support for states and municipalities, and support for health system infrastructure. In principle, the representatives of the Democratic Party are interested in launching a process of gradual increase in the minimum wage, over five years, from the current level of $ 7.25 per hour to $ 15 per hour. However, it became clear last week that there are legal restrictions on including this section in a package that will come for approval by the Senate. At the same time, most Republican senators oppose the size of the aid and would prefer measures totaling just over a trillion dollars.
The Biden administration is keen to get Senate approval before March 14, when some of the unemployment benefit arrangements come to an end. Although the existing majority of 51 to 50 votes will allow the Democratic bloc in the Senate to approve the steps, there is still some uncertainty left mainly about the date of approval of the steps.
Europe
Only 6.4% of the EU population was vaccinated against the corona. As a result, it is difficult for decision makers to clearly define exit plans from closures and restrictions on activity. In England, the vaccination rate is higher than in other European countries, and so far about 29% of citizens have been vaccinated. The Prime Minister of the United Kingdom announced the gradual process of opening the economy between March 8 and June 21. The economic sentiment index in the eurozone rose to 93.4 points in February, the highest level since March 2020. Other surveys showed an improvement in consumer confidence in Germany and Italy, but no change in France.
Japan
Improvement in business sentiment. For the first time since mid-2019, the Reuters-linked Tankan index improved among manufacturers. This is against the background of rising demand outside Japan. The data shows that sentiment is expected to improve in the next three months, with the recovery in the global economic environment. Week of the abolition of the state of emergency in six areas.The immunization process of the elderly population will begin on April 12, after the completion of the vaccination of health care workers.
China
Towards the removal of some of the restrictions on investment abroad by the local population? Today, Chinese citizens are allowed to purchase up to $ 50,000 each year for tourism, study, or work abroad, but investing in properties abroad is prohibited. Policymakers are now considering allowing citizens to buy securities abroad as part of the above-mentioned total annual amount. Apparently the intention is to halt further strengthening of the local currency, especially after the appreciation of 6.5% against the dollar last year.