The BoI to continue to target the long end of the curve
Recent data continue to reflect contraction, but improving in May:
* The BoI Composite Index declined by 0.3% in April.
* Exports of services declined by 9% m/m in March (mostly tourism).
* We note that high-tech service exports are up 9.4% saar in Q120, an important driver making up 9% of GDP
* Chain store sales declined by 25.7% m/m in April (as food sales declined sharply) and are down 27.3% y/y.
* The Poalim consumer confidence index increased by 12.1% in May, erasing half of the decline in March-April.
* The number of salaried workers declined by 2.8% m/m in March (this does not include those on non-pay furlough).
* Business sector sentiment improved in May; expectations of both domestic and export orders are up.
The fiscal deficit increased to 6% GDP through May as spending is up 6.3% YTD and revenues are down 14.1%. We expect the deficit to reach 10% this year.
GDP: We expect the economy to contract by 4.2% this year and expand by 5.8% in 2021. We present our detailed GDP forecast.
Inflation: We continue to expect inflation to reach 0.5% in the NTM, but closer to zero excluding energy prices. Housing rental prices are expected to decline on weak demand. Macro fundamentals continue to support a strong shekel. The big uncertainty in our mind is when pressure will mount for fiscal restraint (including higher taxation) in 2021. Much will depend on the pace of economic recovery. Governor Yaron has stated that the economy needs to get back to solid ground before any consolidation is considered. We assume some higher taxation will occur in 2H21.
The bond market: In May, the Bank of Israel purchased 6.0bn ILS in government bonds (11% of TASE turnover), and 19.2bn in the past three months, from the total program of 50bn. Clearly, this framework can be enlarged if necessary. The Bank of Israel is expected to continue to intervene in order to prevent (or slow) a steepening of the curve.
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