Rate stability with a more dovish forward guidance likely this week

ISRAEL - In Brief 05 Jul 2020 by Jonathan Katz

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The highlights of our Weekly Macro Wrap Up 6.7.20Recent data points to a slow recovery as PC growth remains weak:Credit card purchases increased in the last week of June but remains 8% below the level at the beginning of the year.Chain store sales in May are down 16% y/y, while food sales are up.High tech service exports are up 9.3% y/y in April, and remain an important driver likely to better weather the Covid storm.Monetary policy: We do not expect a rate cut on Monday (although we cannot rule this out). More likely we will see a more dovish forward guidance, which could include “rates will remain low for a considerable period of time” (with a possible timeframe). The Governor in the past has often adopted Fed policy (but less aggressively) and the Fed has signaled rate stability through 2022. In addition, the BoI could pledge to continue bond purchases into 2021. The BoI macro growth forecast will most likely be revised downwards in light of the recent rebound in Covid infections and a more pessimistic IMF outlook.The Bond Market: The bond market reflects low breakeven inflation one year from now at 0.3%. We think inflation will reach 0.6% (despite weak growth) on technical factors and higher petrol prices. Politics: Annexation appears to be off the agenda at the moment, with the spike in Covid-19 infections and economic implications the main focus of the government (and the public). The coalition’s stability will be tested with Netanyahu moving on a one-year budget (2020) and Gantz insisting on a two-year framework (2020-2021) in order to insure political stability. Covid-19 infections have increased significantly to around one thousand per day. Events and weddings...