Markets await more bond purchases from the BoI

ISRAEL - In Brief 22 Mar 2020 by Jonathan Katz

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Highlights of weekly macro review: Most recent economic indicators refer to pre-crisis and therefore of little value. The PMI (manufacturing) declined in February by 4.8 points to 45.3. All components contracted especially production, employment and domestic orders. The Employment Agency is reporting a huge increase in the demand for unemployment benefits. Unemployment is expected to reach 12%-16%. We are revising our inflation forecast down to 0.3% in the NTM, and zero in 2020. This downward revision is due to the recession, lower energy prices, weakening demand, and expected lower housing rental prices. Offsetting this we see some shekel weakness on the back of further market volatility. Bond yields spiked last week, due to both demand for liquidity as well as the expectation that the fiscal deficit will increase sharply. The FTSE noted today that it is conducting market consultation to consider suspending rebalances in the WGBI, including Israel's joining the index, in light of recent market fluctuations. Last week the shekel appreciated by 5.1% against the Euro, and by 1.5% against the dollar. This could be due in part by the Bank of Israel announcing it will provide liquidity in the dollar-shekel swap market of up to 15bn USD. Monetary policy: The MPC announced that the Bank of Israel will provide liquidity in the Repo market as well as purchasing government bonds, in order to reduce long-term yields which have spiked recently. They did not go into specifics regarding quantities or durations. We expect a rate cut to 0.1% sometime this week, and hopefully a more detailed QE program. Politics: With the corona crisis the overwhelming concern, talk of a unity governme...