Weekly report, June 29, 2026: Netanyahu prepares for a post-election deadlock; markets reassess geopolitical risk, AI valuations, and the upcoming Bank of Israel rate decision
Executive Summary
- Netanyahu's agreement with the ultra-Orthodox parties appears aimed at preserving the Likud-ultra-Orthodox bloc after the elections. With current polls pointing to the loss of the coalition's parliamentary majority, the agreement reduces the likelihood that the ultra-Orthodox parties would cooperate with an alternative government led by the opposition.
- Israel and Lebanon signed a framework agreement to reduce tensions along the northern border. While the agreement is a positive diplomatic step, full implementation remains uncertain due to Hezbollah's and Iran's opposition.
- Economic activity rebounded sharply in April following the end of the war, with both industrial production and VAT-based revenue indices pointing to a broad-based recovery across most sectors.
- The labor market remained exceptionally tight. Broad unemployment fell back to 3.9%, while the seasonally adjusted unemployment rate remained at just 2.8%.
- Part of the labor-market tightness reflects weaker labor supply rather than stronger labor demand, as the labor-force participation rate declined to 61.6%, its lowest level since late 2023.
- Housing activity remains mixed. Although transactions remain weak and developers continue to face difficult market conditions, mortgage lending and investor activity continued to recover, suggesting that underlying housing demand remains resilient.
- Tourism remains the weakest sector of the economy. Foreign tourism is still far below pre-war levels despite a gradual recovery, while domestic tourism remains relatively resilient.
- Lower global oil prices prompted us to revise our near-term inflation forecast lower. We now expect the July CPI to increase by only 0.1%-0.2%, with annual inflation declining to around 1.5% by July.
- Inflation expectations continued to decline across both financial markets and private forecasters, while inflation has remained below 2% for four consecutive months.
- We continue to expect the Bank of Israel to cut the policy rate by 25bp on July 6.
- Following the foreseen July rate cut, we expect the Monetary Committee to pause for several months to assess the cumulative effects of four rate cuts.
- Our baseline scenario remains one additional 25bp rate cut during the fourth quarter of 2026, provided inflation remains below 2% and geopolitical risks do not intensify.
Next week will be data heavy, with several key indicators of economic activity scheduled for release ahead of the Bank of Israel's interest-rate decision on July 6.
- Tuesday (June 30): The March–May credit card purchases report will offer a gauge of private consumption and consumer confidence.
- Tuesday (June 30): The CBS will publish April services exports, with particular attention to high-tech services, a key indicator for Israel's balance of payments and the foreign exchange market.
- Thursday (July 2): The average gross wage for April and flash estimate for May will provide an updated assessment of labor market conditions and wage pressures, an important indicator for the rate decision.
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