Moody's two notch downgrade and escalation weigh on bond yields

ISRAEL - In Brief 29 Sep 2024 by Jonathan Katz

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Geopolitics: Israel has escalated intensely its attacks on Hezbollah in a series of attacks, first the pager explosions, then massive air attacks and recently the Nasrallah assassination and bombing of missile storage facilities in Beirut. The retaliation from Hezbollah has so far been minor, possibility due to their reduced capability. It is not clear whether the next stage will be a ground offensive, as Israel seeks to return the evacuees from the North to their homes. Moody’s lowers Israel’s rating by two notches, with a negative outlook. Moody’s decision was overwhelmingly impacted by the escalation in the North and the increasing assessment that the end of hostilities is not near and therefore the impact on the economy will be prolonged. The lack of progress towards a 2025 fiscal framework, attempts to limit Supreme Court authority and social unrest were all contributing factors. Moody’s expects a fiscal deficit of 7.5% GDP this year and 6% in 2025. Initial data for Q3 point to acceleration Revenues from the various branches are up 3.3% m/m in July. Manufacturing is up 1.5% m/m, high-tech especially. • The PMI in August jumped 6.1 points on strong orders and production. High-tech service exports are up 1.8% m/m in July and 3.7% since March. FX: The shekel appreciated last week by 1.4% (against the basket of currencies) as markets viewed progress in neutralizing Hezbollah’s capabilities as positive (before the Nasrallah assassination). The Moody’s downgrade and possible ground attack are expected to weaken the shekel modestly this week. Rates: Governor Yaron stated that a rate cut is not expected until the second half of 2025 at the earliest, due to elevated inflat...