Mizrahi Tefahot Bank Warns of Major Weakness in Israeli Economy

Yoni Pnini, chief strategist at Mizrahi Tefahot Bank's trading room, has issued a warning regarding a significant weakness detected in the Israeli economy, despite some positive indicators. In his weekly economic review, Pnini noted a continued rise in yields in the US market, coupled with a decrease in demand for bonds. He also addressed energy prices and highlighted the surprising strength in Israeli credit card data, which suggests a positive trend.

In the US, Pnini observed a further increase in yields, not primarily driven by oil prices, but by a reduction in global demand for US bonds. This has led to unusually high real yields, even in short-term bonds. Despite some easing in energy prices, recent increases, combined with wider refining margins for gasoline and diesel, are expected to push September price indices to exceptionally high levels, potentially offsetting the high real yield. The upcoming September inflation data, due close to the mid-term elections, will be influenced by increased fiscal spending, leading Pnini to anticipate a trend reversal soon.

While the impact of rising energy prices on tradable goods in Israel has been less significant than in 2022, increased demand in the US, alongside supply and employment constraints, points to a growing potential for future price hikes. Data on durable goods orders indicate that much of this demand stems from AI-related capital expenditures. On the consumer side, a rise in new home purchases is evident, attributed to rising mortgage rates, suggesting some pre-emptive buying ahead of further rate increases.

Consumer sentiment remains pessimistic, largely due to high fuel prices, though Pnini believes current levels are not yet critical. In Israel, July revenue indices indicated some weakness, likely due to a surge in international travel, which is expected to negatively impact third-quarter activity data. However, September credit card data showed a degree of recovery, which the bank anticipates will continue throughout the year.