Israel’s risk premium continues to decline

ISRAEL - In Brief 08 Dec 2024 by Jonathan Katz

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Geopolitics: There has been some good news on several fronts, but uncertainty remains elevated. Firstly, the ceasefire in the North is holding up, nearly two weeks after implementation. Secondly, ceasefire negotiations appear to be more tangible with Hamas (although we have been there before). Thirdly, although the Syrian front could still lead to unexpected negative consequences, the general feeling is that the overthrow of the Assad regime (and more importantly: its close relationship with Iran) is a positive development, hopefully disrupting the flow of armaments from Iran to Hezbollah through Syria. Israel’s risk premium continues to decline The shekel appreciated by 1.3% against the basket last week and continued to appreciate Friday afternoon, following the official exchange rate announced at 13:30 PM. Israel’s 5-year CDS declined to 107 basis points after peaking at 170 bp. in October (and around 60bp before the war). Business sector optimism has improved November’s business survey points to a modest pickup in activity and expectations going forward, following October’s weak print. Inflation expectations have declined and the lack of labor is less acute (except for construction). The high-tech service expects expansion in exports and employment next month. Inflation forecast: we currently expect inflation to reach 2.3% in the NTM due to further shekel appreciation and dissipating supply constraints. Fresh produce prices have declined sharply recently on warm weather, supporting low inflation in the short run (negative prints in November and December). Policy rates likely to come down in early Q2 Weaker inflationary pressure and a strong shekel will support monet...