Israel's risk premium spikes on escalation risks

ISRAEL - In Brief 05 Aug 2024 by Jonathan Katz

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Geopolitics: Tension remain very high, following two assassinations (Haniyeh, Hamas leader in Teheran and Shukr, senior Hezbollah commander, in Beirut). Israel took credit for the killing of the Hamas leader. Iran and its proxies have vowed to retaliate. The scope or timing of this retaliation is still not clear. Iran retaliated two weeks after Israel bombed the Iranian embassy in Damascus on April 1st. The more encouraging news is that negotiations towards a cease-fire in Gaza continue and the disagreements are apparently not that significant as Biden continues to pressure Netanyahu Wage growth remains rapid, reaching 6.1% y/y in June, similar to the pace in May. This pace of wage growth is above the pace required to bring inflation down to target. Private consumption remains elevated Real domestic credit card purchases increased by 0.9% m/m in June and are 5% above the level in Q323, pre-war. Nevertheless, spending slowed in Q224. Domestic demand is being fueled by wage growth, low unemployment, and government transfers. Strong aggregate demand (combined with supply restraints) is inflationary. Hi-tech service export growth stalls in April-May following rapid growth in Q124. The bond market: The MoF will issue 7.85bn in bonds in August, in two weeks of issuance. The average duration will be slightly longer reaching 5.79 years in August, up from 5.54 in July. The MoF is still planning its bond issuance according to the assumption that the fiscal deficit will reach 6.6% GDP. Bond redemption (7.66bn) will be similar to bond issuance, which is a positive backdrop as well. Currently, elevated geopolitical risks are having more of an impact on the bond market. The spread o...