Fed Chair's Hawkish Stance May Delay Israeli Interest Rate Cut

The upcoming week of trading is set to be influenced by Federal Reserve Chair Kevin Warsh's hawkish speech at Jackson Hole, which has significantly increased market expectations for a US interest rate hike in September to nearly 60%. This development has led to rising bond yields and a strengthening dollar globally.

This shift in US monetary policy expectations comes just before the Bank of Israel's interest rate decision, scheduled for Tuesday. While market probabilities for an Israeli rate cut were around 50% as of late last week, analysts suggest the US rate hike outlook will "weigh heavily" on the possibility of a cut in Israel. The upcoming US August jobs report and Purchasing Managers' Index (PMI) data will be crucial for assessing the labor market and broader economic health.

The Tel Aviv Stock Exchange closed the previous week with modest gains, with the TA-35 index showing a slight increase and the TA-90 index rising by approximately 2.7%. Insurance and banking stocks have been the primary drivers of monthly gains, boosted by strong earnings reports. Conversely, defense stocks have experienced significant declines.

Dual-listed Israeli stocks are expected to open lower on Monday due to a significant negative arbitrage gap of around 1%. Shares in Tower Semiconductor, Nova, and Camtek are projected to fall between 4% and 7%, while Palo Alto Networks could drop over 4% and Teva Pharmaceutical Industries is expected to weaken by more than 1%. Conversely, NICE Systems is anticipated to rise over 4%.

Globally, the US dollar strengthened significantly following Warsh's remarks, with the dollar index rising by 0.5%. The Israeli shekel weakened by over 1% against the dollar, trading just below 3 shekels. Gold prices fell over 3% to around $1,450 per ounce, and Bitcoin dropped below $80,000. Oil prices also declined by approximately 5% amid a perceived easing of geopolitical tensions and the US transition to economic warfare against Iran.

Economists in Israel are divided on the upcoming interest rate decision. While falling inflation (1.5%) supports a cut, the strengthening shekel complicates the picture, with some estimating inflation closer to 2% when adjusted. The widening yield gap between Israeli and US government bonds, exacerbated by the Fed's hawkish stance, could also deter a rate cut. Analysts at Bank Hapoalim believe the dollar-shekel exchange rate will be a key factor, with a rate above 3 shekels making a cut less likely.

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