Macro (shekel) fundamentals improve in Q121

ISRAEL - In Brief 20 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 was apparent in domestic vacations (up 8.5%) and parties and events (4.0%). We expect inflation to reach 1.2% in the NTM, impacted but 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 ave 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. The bond market: In the last 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 previousl...