The shekel weakens on market volatility

ISRAEL - Report 29 Nov 2021 by Jonathan Katz


The Governor stresses lower for longer
* The MPC emphasized that inflation in Israel is lower than in most countries and within target, allowing for patience regarding tightening. The MPC stressed the downside risks of another Covid wave, which appears more of a real possibility recently.
* The MPC is also (tacitly) targeting improvement in the labor market, which they view as disappointing so far.
* Wage growth has not been excessive (3.4% y/y in August) so far, and the public sector wage freeze through 2022 will provide a partial anchor.
* We expect the first rate hike in Q322, assuming that the Fed will hike before then, and of course, that the new variant is not a game changer.

Economic indicators point to continued expansion
* Credit card purchases (domestic) increased by 4.6% m/m in October and are up by 23% since October 2019, due mostly to the lack of travel abroad.
* Hi-tech service exports are up 7.4% saar in Q321.
* Although manufacturing expanded by only 0.7% saar in Q321, the PMI points to strong domestic orders and activity.
* Revenues from the various sectors expanded by 8% saar in Q321, while revenues from retail trade are up 8.9%.
* The BoI composite index of the economy increased by 0.25% in October.
* The macro presentation of the monetary decision noted that private consumption growth is robust, and business sector sentiment is back to pre-Covid levels.

Inflation: Petrol prices will decline by about 3.5% in the beginning of December, contributing to a low index. On the other hand, the purchase tax on second-home buyers (or more) will increase from 5% to 8%.
* It is too early to judge the impact of the new variant on possible renewed restrictions and household demand, but it could have a moderating effect, in addition to lower commodity prices. On the other hand, much will depend on the shekel.

FX: Last week, the shekel weakened by 3% against the dollar and 2.5% against the Euro. The shekel weakened by 2.1% against the basket of currencies on market volatility but is still up 1.9% since the beginning of month. Further negative market correction will likely support further shekel weakening.
* In September, foreigners maintained their share of the government bond market at 11.2% (similar to that in August and 7.8% in Sept 2020). Foreigners hold 32.6% of the Makam market (22.5% one year ago).

Important data this week: Tuesday: Chain store sales (October), Thursday: Average wages (September).

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