Market volatility in reaction to judicial legislation

ISRAEL - In Brief 30 Jul 2023 by Jonathan Katz

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The passing of the reasonableness cancellation law impacts markets Last week, markets reacted to the passing of the law cancelling the ability of the Supreme court to overturn government policy if deemed “unreasonable”. Following the decision, the shekel sold off and then stabilized (down 2.3% against the basket last week) while equity prices declined but then partially recovered, still underperforming globally. Both Moody’s and S&P released reports to investors warning of the detrimental impact of the internal strife on growth in general and specifically on investments and on the high-tech sector. Fitch will release a review of Israel’s rating in mid-August, and we could see a downgrade to a negative outlook from the current stable outlook. The direction of the shekel will impact monetary policy. In the last rate decision, one MPC member (out of 5) was in favor of hiking to 5.0%. Economic activity expected to slow in 2024 We see GDP growth reaching 3.4% this year before slowing to 1.8% in 2024. Our positive growth forecast for 2023 is due to a revised print for Q123 growth to 3.2% (originally 2.9%), and steady growth in Q223 as private consumption growth slowed to 1.1% saar but defense exports surged. The deceleration 2024 will be impacted by slowing global growth, the lagged effect from monetary tightening, higher unemployment, weakening private consumption (erosion of purchasing power), and contracting residential investments. Defense exports will continue to expand (to Europe mostly), offsetting weak high-tech service exports. FX: The shekel weakened last week by 2.7% against the dollar, by 1.2% against the Euro and 2.3% against the basket of currencies. Inflation:...