Shekel appreciation will support lower inflation and stable rates
Highlights:
The shekel appreciated by 0.8% last week (against the basket).
* We think the shekel has strengthened in part due to the divergence of monetary policies, with the BoI still projecting a tightening bias while most other central banks are reducing rates.
* The shekel has appreciated by 6.9% YTD.
* This trend will moderate inflation and support stable rates.
Chain store sales are up 2% in Q2 2019 (0.0% per capita).
* Other PC indicators (retail trade, credit card purchases) point to some softening of PC demand as employment growth slows.
Total revenues from the various economic branches (derived from VAT) increased by 1.4% saar in March-May, slowing from 2.1% in the previous three months.
Manufacturing increased in March-May, due to a 26% saar increase in high-tech manufacturing.
The BoI Composite index increased by 2.6% saar in Q2 2019 from 3.8% in Q1 2019, suggesting some slowing of growth.
* Nevertheless, the BoI sees growth returning to potential in June.
Exports of services have stabilized at a high level in April-May.
* This will contribute to a soft GDP growth print for Q2 2019.
In the last rate-hold decision (a 4-1 vote, with one member voting to hike), the main reason the MPC expected a rate hike in the coming months had to do with inflation (sa) reaching 2% annual in Dec-May. This was underscored in the 1H 2019 Monetary report.
* Since then, June's very low CPI print has changed this view.
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