Meitav Predicts Bank of Israel Rate Cuts Amid Global Tightening

Meitav, an investment house, forecasts that the Bank of Israel will continue to lower interest rates despite global trends of rising rates. This projection comes as the Israeli economy shows signs of continued expansion, with business sentiment returning to pre-war levels, though a rapid recovery is not yet evident. Inflationary pressures in Israel remain moderate, with the inflation rate excluding housing estimated at a mere 0.5% annually. The shekel has also offset global import price increases, leading to a 10% drop in the import price index in shekel terms.

The Israeli budget deficit stands at 3.2%, aided by higher-than-expected tax revenues and lower-than-planned expenditures. However, Meitav anticipates the deficit will widen due to increased defense spending and a slowdown in revenue growth. The housing market remains sluggish, experiencing a temporary sales surge in May-June followed by a July decline, particularly in central Israel. Meitav suggests the market may stay dormant until elections.

In the bond market, Israeli yields have risen moderately, with long-term yields increasing more than short-term ones. While market expectations for rate cuts have diminished, Meitav believes the Bank of Israel will proceed with reductions, citing domestic conditions. Globally, Meitav highlights risks from energy and supply chain disruptions, particularly concerning the Strait of Hormuz and Russian production.

In the U.S., the Federal Reserve's hawkish stance is impacting bond markets, with yields rising significantly. Meitav argues the market is pricing in overly restrictive monetary policy, and the Fed might raise rates to stabilize markets and maintain credibility. However, the U.S. economy, weakened by slowing consumption, falling real wages, and declining housing investment, may not withstand further monetary tightening without significant damage. Meitav warns of a potential sharp economic slowdown or recession and stock market downturns, drawing parallels to historical crashes.

Meitav notes that U.S. households hold record exposure to stocks and have been major buyers of stocks and bonds, potentially acting as "weak hands" prone to selling during downturns. The investment house recommends a higher allocation to equities and suggests focusing on medium to long-term Israeli government bonds and 5-10 year U.S. Treasuries. For corporate bonds, ratings between BBB and A are advised.