The inflationary environment remains subdued

ISRAEL - In Brief 15 Nov 2020 by Jonathan Katz

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October’s CPI surprised slightly on the downside reaching 0.3% m/m (we had expected 0.4%, while consensus was in the 0.3%-0.4% range) - details below.. Core inflation remained stable at -0.4% y/y, similar to September. Housing rental prices remain sticky, up 1.7% y/y following 1.6% in Sept. We expect inflation to reach 0.5% in the coming year, supported by higher commodity prices, acceleration domestic demand and a modest increase in housing prices. Some shekel appreciation is expected to continue, despite BoI intervention. Economic indicators continue to point to a gradual recovery In August-October, manufacturing exports increased by 5.7% q/q. Consumer imports increased by 11%, with strong new vehicle imports. In September, new home sales increased by 13% m/m and 6.9% y/y. The weekly indicators of activity point to expansion, both in private consumption as well as workplace mobility. Consumer confidence increased slightly in the 2nd half of October. S&P reaffirmed Israel’s rating with a stable outlook, siting Israel’s strong growth potential, active central bank and strong external position. The lack of a coherent fiscal policy poses some risks. The rating agencies will wait to see if the 2021 budget is approved, or whether Israel will go again to elections in 2021. This negative scenario could justify a “negative” outlook. Bond market: Long yield reacted positively yesterday to the rating news. We note that inflation expectations in the bond market are way below that of the major forecasters (on average). This is due in part to low inflation y/y, and the past record of forecasters who have expected mostly higher inflation compared to actual inflation. This could shi...