3rd Trimester, 2015

Available in French and Spanish
Economic Review
3rd Trimester 2015
No. 40
Published: September 2015
Israel
The September interest rate of
the Bank of Israel will remain
unchanged; however, the
possibility of a rate cut in the
coming months still exists
The Monetary Committee of the
Bank of Israel (BoI) decided on August 24th to keep
its interest rate for September unchanged at 0.1%.
This comes despite the weak economic growth data
for the second quarter of the year and the decline
in the inflation expectations recently, alongside the
heightened global risks against the backdrop of the
weakness in the economic activity of China (the severity
of which is still too early to estimate).
One of the background factors emphasized by the BoI
in its September interest rate decision includes the
stabilization in the inflation environment, despite the
decline in inflation expectations for the short-term.
The rate of increase in the CPI in recent months has
been consistent with the price stability target range
(1%-3%), while simultaneously a sharp decline has
occurred in inflation expectations for the short-term.
The BoI emphasizes that this decline occurred against
the backdrop of a renewed decline in the prices of
international supply factors (energy and commodities
prices), in combination with expectations for upcoming
one-time price declines (for example the planned
decline in local electricity prices). That is to say, the
decline in the short-term inflation expectations does
not indicate a moderation in local demand.
The BoI also referred to the apparent slowdown in the
global economic growth rate, and the rise in the level
of global risks, headed by the weakness in Chinese
economic activity. On this regard, we note that the
situation is still developing, and thus it is still too early
to estimate what will be the impact of the slowdown in
China on the global economy, and particularly on Israel.
However, it can be said that the recent developments,
among them being the instability in the global financial
markets caused by the concerns of the investor public
over a global financial crisis, will apparently lead to an
environment of low interest rates for a longer period
than originally expected. Against this backdrop, it is
possible that the initial interest rate hike in the US will
be delayed, and more importantly, the upward path of
interest rates will be slower and more moderate than
originally expected, which will impact over a longer
period of time also the upward path of Israeli interest
rates.
In light of all that is mentioned above, and in light of
the estimate of the Monetary Committee that “the
risks to attaining the inflation target, and to growth,
have increased”, we estimate that the possibility of
an additional interest rate cut in the coming months
cannot be ruled out (perhaps even in the upcoming
interest rate decision), and also additional expansionary
monetary steps are possible, among them being
quantitative easing (via the foreign currency market) –
all this being dependent on changes in the underlying
economic conditions. The background conditions that
could trigger such moves likely include a renewed
appreciation of the shekel vis-à-vis the currency basket,
a decline in the inflation environment to a rate that
deviates from the borders of the target range, and
continued moderation in global economic growth.
Looking over the longer term, a change in the trend
with a hike in the Israeli interest rate is also dependent
on, as mentioned, the path of the interest rate in the
US – as this process is delayed, then a delay can also
be expected for a change in the trend of local interest
rates.
The depreciation of the shekel in August stemmed
primarily from external factors; in the long-term, the
potential for depreciation of the shekel is limited
During August a 4% depreciation occurred in the
exchange rate of the shekel vis-à-vis the basket, as the
shekel weakened vis-à-vis the two main currencies
(the dollar and the euro), in contrast to the trends that
have characterized the local currency in recent months.
Thus, a 3.9% depreciation occurred in the exchange rate
of the shekel vis-à-vis the dollar; and simultaneously a
sharper depreciation of 6.4% occurred in the exchange
rate of the shekel vis-à-vis the euro.
We emphasize that the current depreciation in the
exchange rate of the shekel stems primarily from the
influence of external factors, headed by the instability
in the global financial markets due to the concerns
of investors regarding a global financial crisis starting
from the situation in China. The high volatility in
the markets has led to the search for more stable
investment channels, which contributed to volatility in
the exchange rate of the dollar vis-à-vis the euro, as well
as the exchange rates of these currencies vis-à-vis the
shekel.
As mentioned above, the latest developments created
expectations that the interest rates of the central banks
in most of the developed countries will remain low for
longer than previously expected. These expectations,
together with the continuing improvement in the
overall macro-economic data coming out of the euro
bloc, led to a strengthening of the euro vis-à-vis the
dollar and also vis-à-vis additional currencies around
the world, including the shekel.
At the same time, the trend of depreciation in the
shekel last month can be partially attributed also to the
weak initial growth data of the Israeli economy that was
published recently for the second quarter of the year. It
is possible that the weak data affected the expectations
on the interest rate path in Israel, and from this there was
a certain effect on the exchange rate of the shekel. The
current depreciation in the exchange rate of the shekel,
if it is maintained, represents a positive development
for most Israeli exporters. In the event the depreciation
is maintained, it will likely support a slight increase in
inflation, via a rise in the prices of tradable.
Looking forward, it can be said that the potential for
depreciation of the shekel is limited, this due to the
underlying background conditions (in combination
with a stable fiscal environment) that are expected to
continue to support a strong shekel also in the coming
years. These conditions include: a large surplus of
foreign currency assets over liabilities held by the Israeli
economy; a surplus in the current account of the balance
of payments; an inflow of real direct investments from
overseas; the natural gas production from the Tamar
offshore reservoir (and in the future also from other gas
reservoirs, including for the purpose of export); and an
increase, albeit slow, in the interest rate differential of
Israel vis-à-vis some of the developed countries around
the world in the coming years (particularly vis-à-vis
Europe and Japan).
By: Yaniv Bar, Economics Department, Finance Division, Leumi Israel
Renewed weakness for the
European economy ahead
The migrant crisis and the black
clouds of storm coming from
Eurozone
the large emerging economies
keep the news lines this autumn and put a shadow on
the prospect of recovery in the Euro Area’s economic
activity.
The migrant inflow announces new strains on the already
distressed social insurance systems in the Western
economies, where most of them seem so determined
to arrive. The benefits of a younger work force for the
aging Europe could appear only on the long term
and provided new jobs can be created. On the short
run, the stock crisis in China and the fast deteriorating
macro imbalances in Brazil add new uncertainty for the
exports dependent Euro Area economy.
While these two subjects keep the news lines, the hot
subject of the spring – the meltdown of the public
finances and banking system in Greece has gone in
the background, after the Government gave in to
international partners and reached a new arrangement.
However, the Prime Minister announced his resignation
after losing the majority in Parliament in August, so we
will be hearing about Greece again.
During the second quarter of 2015, economic activity
slowed down just a tic, with Gross Domestic Product
(GDP) growth coming in at 0.3% (versus the previous
quarter). It was 0.4% in the previous two quarter.
When compared to the same period of 2014, the GDP
increased by 1.2% in the second quarter, up from 1.0%
in the first three months of the year. In the United States
of America, economic activity expanded by 0.6% (versus
the first quarter) and by 2.9% versus the second quarter
of 2014. Thus, the European economy has a sluggish
recovery, despite the ample quantitative easing (QE)
programme deployed by the European Central Bank
since 2014. Currently, the ECB pumps 60 bn. euros
in the financial markets monthly, via sovereign bond
purchases.
Furthermore, inflation remains much tamed in the Euro
Area, with prices barely rising at a 0.2% annual pace.
Given the renewed weakness in global economy and
the drop in fuel prices, inflation projections, already
bearish, need adjustment. The ECB staff projections from
September indicate HICP inflation at 0.1% in December
2015 and 1.1% by December 2016, down from the 0.3%
and 1.5% seen in the June projections. GDP growth
forecasts were adjusted by up to 0.2 percentage points,
to 1.4% for 2015 and 1.7% for 2016.
Correspondingly, the European Central Bank sent a new
dovish message at its policy meeting in September.
The main interest rates were kept 0.05% for the main
refinancing operations, 0.30% for the marginal lending
facility and -0.20% for the deposit facility. Furthermore,
the ECB made some adjustments to the bond
purchasing programme, by increasing the issue share
limit from the initial limit of 25% to 33%, subject to a
case-by-case verification that this would not create a
situation whereby the Eurosystem would have blocking
minority power, in which case the issue share limit
would remain at 25%.
“The risks to the euro area growth outlook remain on
the downside, reflecting in particular the heightened
uncertainties related to the external environment.
Notably, current developments in emerging market
economies have the potential to further affect global
growth adversely via trade and confidence effects”,
Mr. Mario Draghi, President of the ECB, told a news
conference following the September policy meeting.
Under these conditions, the ECB plans to continue
unaltered with the deployment of the assets purchases
programme until September 2016, as planned, or
beyond, if necessary and, in any case, until we see a
sustained adjustment in the path of inflation.
The Governing Council will closely monitor all relevant
incoming information. It emphasises its willingness and
ability to act, if guaranted, by using all the instruments
available within its mandate and, in particular, recalls
that the asset purchase programme provides sufficient
flexibility in terms of adjusting the size, composition
and duration of the programme, Mr. Draghi stressed in
the news conference. As the market builds expectations
for further ECB measures against the fading economic
recovery, one course of action would be the extension
of the maturity of the purchasing programme, or
even an increase in the montly ammounts. Mr. Draghi
dismissed demands from journalist to comment on
these aspects.
Despite current expectations for diverging monetary
policy between ECB and the Federal Reserves the
technical support for Eur against Usd remaind above
1,10, after touching a 12 year low of 1.04 EUR/USD in
April. The medium term forecast has always been to fall
to parity.
By: Liviu Chiru, Economist, Bank Leumi Romania
The information in this newsletter is based on sources, including published sources, which Bank Leumi le-Israel B.M and its subsidiaries
believe to be reliable but which the Bank has not independently verified. The Bank makes no guarantee, representation or warranty as to the
information’s accuracy or completeness. The opinions expressed in this newsletter are subject to change with no notice. The information in
this newsletter should not be construed to buy or sell, or the solicitation of an offer to buy or sell any securities or currencies. The Bank and
its affiliates may have positions in the securities or currencies referred to in the newsletter, or in other securities or currencies whose value
may be affected by the value of securities or currencies, referred to in the newsletter. Nondeposit investment products are not insured by
the FDIC; are not deposits or other obligations of, or guaranteed by, the Bank or its affiliates; and are subject to investment risks, including
possible loss of the principal amount invested.
Leumi International
Private Banking Centers
Global View: USA
Edition:
(as
of
September 6, 2015)
The
employment
landscape in the
United
States
is
nearing full employment.
The Labor
Department Nonfarm payrolls have been
steady, reporting +173k jobs added in
August and +245k in June and +215k in July.
Year to date, the average monthly gain was
+212k, down from +317k in Q4—reflecting
some weakness in the economy in the
first quarter. The unemployment rate has
continued to tick down and currently stands
at 5.1%.
After some weakness in the early part of the
year, GDP growth rebounded considerably
in Q2 posting a stronger than expected
reading of 3.7%. The advance release was
2.3% and the consensus forecast was 3.2%.
The strength also showed good breadth,
with inventories contributing less, and
investment more than expected. GDP
growth averaged 2.2% in the first half, which
is much stronger than economists originally
anticipated after initial Q1 estimates were
negative. To a data-dependent FOMC, GDP
growth is accelerating from Q1 to Q2 and
from H1 2014 to H1 2015.
ABT • Tali ilan Design • 054-4494885
The United States
In light of the falling unemployment rate, and
moderate GDP growth, the Federal Reserve
appears poised to slowly begin removing
its extraordinary accommodative monetary
policy despite the sharp decline in oil prices
and the general lack of inflation pressures.
. The Fed upgraded its assessment of the
labor market and said that it continued
to improve with “solid” job gains. The
Fed reiterated that U.S. growth “has been
expanding moderately,” and housing has
shown “additional” improvement. In June,
FOMC Chair Janet Yellen told Congress the
economic fallout from Greece and China
are not likely to hurt the U.S. economy
significantly enough to forestall rate
increases this year. Yellen has indicated that
the future path of short term interest rates
is higher, but that the removal of monetary
accommodation will likely be very slow and
shallow.
Interest Rates repriced significantly during
the month of June. Five-year U.S. Treasury
Notes ended May at 1.48%, then spiked to
1.78% only two weeks later. After June’s
volatility, the Treasury market has trended
to lower rates during July and August. Five
year notes have retraced the entire move,
reaching 1.37% in mid-August, and are
1.47% at the time of this writing.
Despite Chair Yellen’s comments above, a
risk to the U.S. economy and the future path
of short term interest rates is a slowing of the
Chinese economy. The Shanghai Composite
is down 45% from the highs, which caused
the People’s Bank of China to intervene in
the foreign exchange markets and weaken
the yuan 3% in August, sending shockwave
through the global markets in August.
The turbulence in the Chinese equity market,
coupled with some uncertainty surrounding
the timing of the Fed embarking upon a
tightening cycle has caused a correction in
U.S. and global equity indexes. After touching
new all-time highs in May, the S&P 500 Index
had, at one point in late August, fallen 12%,
before posting a modest rebound. Still the
S&P is down 6.5% for the year
All-in-all, the U.S. economy remains on firm
footing, and the Fed seems to be on a path
of normalizing monetary policy before year
end and perhaps as soon as the September
17th FOMC meeting. Although there is
some anxiety in the financial markets, we
do not see real cause for alarm, especially
with the employment landscape steadily
improving, GDP growing at a moderate
pace and interest rates remaining at or near
historic lows.
By: George Boyan, J.D., CFA, Portfolio Manager
Bank Leumi USA
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