Inflation surprised slightly on the downside in May

ISRAEL - Report 21 Jun 2021 by Jonathan Katz

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Highlights
Inflation surprised slightly on the downside in May:
* Inflation reached 1.5% y/y and core inflation 1.0% y/y.
* The main surprise came from clothing prices, with a modest seasonal price increase. This suggests that the seasonal price decline in the summer months will also be more modest.
* Housing rental (equivalent) prices accelerated to 1.3% y/y from 0.9% last month.
* Signs of pent-up demand were apparent in domestic vacations (up 8.5%) and parties and events (4.0%).
* We expect inflation to reach 1.2% in the NTM, impacted by higher commodity and global shipment costs, as well as higher housing rental prices (housing inventory has declined in the past year), partially offset by a stronger shekel. Taxes will not increase until 2023.
* The average inflation forecast of the macro forecasters stands at 1.4% NTM.

Economic recovery remains strong:
* New home sales were up 11% in April and up 35% y/y.
* Job vacancies reached 133k in May, above the 102k level in 2019.
* Broad unemployment actually increased to 9.9% in the second half of May from 9.6%, but this was due to the temporary setback from the escalation in hostilities.
* Credit card purchases are up 4% m/m in the first two weeks of June.

FX: Macro fundamentals remain strongly pro-shekel, with the CA surplus reaching 5.8bn USD in Q121 (up from 5.4bn in Q420) and net FDI at an all-time high.
Israeli savings institutions were net sellers of 3.7bn USD in April and 10.5bn YTD.

The bond market: In the most recent rate decision, one member of the MPC voted to reduce rates to zero, underlying the dovish stance of the committee. We do not expect a rate hike in the coming two years, at least.
* We are encouraged by the appointment of Belinkof as Director General of the MoF, who is generally a fiscal hawk who was previously head of the Budget Department.
* Monthly bond issuance is expected to decline to 7.5bn in July from 9.0bn in June.

Few restrictions remain: Israel is basically Covid-free and has opened up totally. All restrictions have been removed, including wearing masks indoors, which has been cancelled. The main restrictions involve serological (blood) testing upon arrival for foreign tourists.