Rate Preview: Markets will react to the BOI macro forecast revisions

ISRAEL - In Brief 25 Sep 2016 by Jonathan Katz

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Main points: Recent economic indicators have been mixed but suggest steady growthThe labor market remains strong with unemployment remaining low.Employment growth remains respectable (0.2% m/m for ages 25-64).A tight labor market is expected to support wage pressure.Volatile service exports were down in July m/m but up 8.3% y/y.IP slowed in June-July, especially non-high tech production.Following blistering PC growth in Q2 (10% SAAR), slowing retail trade suggest some moderation in the recent months.The composite index of the BOI points to growth of 2.4% SAAR in June-August, slowing slightly from Q2.BOI expected to revise GDP forecast for 2016 to around 2.7% from 2.4%.Inflation forecast for NTM likely to remain unchanged at 1%.BOI rate stability expected today, but market will focus of rate forecastThe big question will be the policy rate forecast.Last forecast (from end-June) forecasted first rate hike in Q417.On the one hand, more robust growth could move rate hike forecast sooner.On the other hand, a more dovish Fed (since June) could push BOI rate hike out to early 2018 (this option appears more likely).Labor market approaches full employmentUnemployment declined to 4.6% in August from 4.7% in July and 4.8% in Q216. Unemployment for the important category (for the BOI) of ages 25-64 (excluding students and soldiers) remained stable at 4.0% in August, down slightly from 4.1% in Q216. This category witnessed employment growth of 9k or 0.3% m/m following growth of 0.6% in July. The labor participation rate increased to 80.3%, from 80.1% in July and up from 79.9% at the beginning of the year.Clearly the labor market remains tight, "close to full employment" (as stated ...