Ten Factors Shaping Your Finances in the Coming Year

Ten key factors are poised to significantly influence personal finances over the next year, ranging from elections in Israel and the US to global economic trends. These include the outcomes of upcoming elections, the ongoing impact of the war on oil prices, rising bond yields, substantial investments in artificial intelligence funded by debt, a burgeoning non-bank credit market facing defaults, and China's export of deflation.

Elections in Israel on October 27 and US midterm elections on November 3 are critical, shaping economic policy and creating a period of heightened sensitivity. Israel's political landscape shows no clear majority, potentially leading to prolonged coalition negotiations and a delayed budget, impacting tax policies, benefits, and new initiatives. In the US, a divided Congress could stall fiscal decisions and revive debt ceiling debates. Historically, decisive election outcomes in Israel have reduced the country's risk premium, strengthened the shekel, and lowered borrowing costs, especially if coinciding with the end of hostilities.

The conflict's impact on oil prices, with Brent crude above $108 per barrel, is a major concern. Higher energy costs fuel inflation across various sectors, complicating central banks' decisions on interest rates and adding unique costs for Israel, including increased risk premiums and impacts on tourism. Conversely, a swift end to the conflict could rapidly decrease energy prices, easing inflation and allowing for interest rate cuts.

Interest rate policies present a divergence: Israel's central bank has lowered rates due to a strong shekel and low inflation, while European and US central banks face inflationary pressures. This gap risks weakening the shekel and reintroducing inflation. For borrowers, falling rates reduce mortgage payments, while savers see diminished returns on deposits. The shekel's strength, influenced by these rate differentials, plays a crucial role in moderating imported inflation.

Global bond markets are experiencing significant yield increases, with US 10-year Treasury yields nearing 5%. This rise, driven by increased government debt issuance, sets a higher benchmark for all borrowing costs, impacting mortgages, corporate debt, and stock valuations. However, it also presents an opportunity for savers to lock in higher real returns with lower risk.

Massive investments in AI, funded by corporate debt, are a significant trend. Tech giants are raising substantial capital for data centers and infrastructure, creating a robust demand for AI-related services. While this fuels economic activity, the reliance on debt financing and the long-term realization of revenues pose potential risks. The bottleneck for this industry is increasingly electricity supply.

The non-bank credit market, valued at $2 trillion, is facing its first major test since 2008, with rising default rates. This market's interconnectedness with traditional banks poses a systemic risk. Meanwhile, China's economic growth, driven by exports, is exporting deflation, which can erode profitability for manufacturers globally but also helps keep Western inflation in check.

Extreme weather events are increasing insurance costs for consumers, while the global energy transition presents opportunities for Israeli companies in renewable energy and related infrastructure. Housing and mortgages remain a primary concern, with potential interest rate cuts offering relief, though inflation and construction labor shortages could counteract these benefits. Finally, the unpredictable 'black swan' events, like pandemics or financial crises, underscore the importance of emergency funds and diversified investments.