20/12/2011 Weekly Macroeconomic Review Expectations derived from the capital market Our forecast Inflation in the coming months Future cumulative inflation next 12 CPIs (through November 2012 CPI) Inflation through May 2013 CPI (average annual rate) December minus 0.2% January 0.0% 7.1% 2.7% 7.9% Bank of Israel interest rate, 6 months ahead Fed interest rate, 6 months ahead Yield on Israeli Government 10-Year bond, 6 months ahead Yield on US Treasury 10-Year bond, 6 months ahead Dollar exchange rate, 6 months ahead 2.84% )down 0.27( )unchanged( 8.66% )up 0.14( 7.96% )up 0.13( ILS 0.40 )up 0.3%( 2.00% 8.40% 2.00% ILS 0.40 Israel The consumer price index posted a surprising 0.1 percent decrease in November. Our forecast was a 0.1 percent increase, and the average and median estimates called for an increase of 0.2 percent. Prices of housing, food, and transportation were somewhat lower than our forecast. Prices of tenant-owned homes fell by 0.9 percent. Twelve-month inflation is at 2.6 percent, but is likely to fall below the midpoint of the inflation target range (2.0 percent) in the coming months, in our opinion. Balance of payments data for the third quarter of 2011 showed a rather surprising surplus in in the current account, in the amount of USD 0.6 billion, following a deficit of USD 0.3 billion in the preceding quarter (a more moderate deficit than in the previous estimate). In the third quarter, a
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Q1* 2011Q2* 2011Q3* smaller deficit was seen in the goods account and the revenue account, while the services account showed a larger surplus. The surplus in the current account in the last four quarters totaled 0.8 percent, a significant decrease in comparison to a surplus of 2.9 percent of GDP in 2010 and 3.6 percent in 2009. 10,000 The Current Account of the Balance of Payments U.S.$ millions 7,500 7387 6977 6337 5,000 4246 4882 2,500 0 1302 214 170 745 2343 1829 1228 2344-2,500-1406 -829-1265 -860-2411 -988-1217 -1901-2210 -1910-988 -5,000-3404 -4790-5175 -3275 2011 s.a. at annual rate -7,500 Direct investments by non-residents in Israel grew by USD 2.3 billion in the third quarter, similar to the average increase of the preceding four quarters.
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *2011 Net Inflows of Foreign Direct Investment in Israel (US$ billions) 16 14 *2011 - Q1/Q2/Q3 at annual rate 15.3 12 10.9 10 8 8.0 8.8 8.1 6 4 4.2 3.3 2.9 4.8 4.4 5.2 2 0 0.2 0.3 0.6 0.6 0.4 1.4 1.4 1.6 1.7 1.8 1.6 Investments in tradable Israeli securities by non-residents posted a substantial decline of USD 1.7 billion, resulting from net realizations of Makams (short-term notes) and shares. Investments by Israeli residents in tradable securities overseas fell by USD 1.0 billion, further to a USD 0.4 billion decrease in the preceding quarter. The international investment position stood at a surplus of assets over liabilities in the amount of USD 15.2 billion. This represents an increase in assets relative to the end of September 2010, when the surplus of assets over liabilities totaled only USD 0.2 billion.
150 125 Foreign Liabilities, Gross and Net (percent of GDP, end-period) Total liabilities Total assets Net foreign assets (IIP) 100 75 50 25 0-25 -50-75 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sep 2011 Indicators of economic activity in October were mixed, with a strong increase in industrial production, but a sharp drop in exports of services. Industrial production grew by 2.5 percent in October, and by 5.5 percent in the twelve months through October. Revenues of the economic sectors grew by 0.5 percent in October and by 0.1 percent in the twelve months ended in October. Exports of services (excluding start-up companies, in US dollar terms) dropped sharply, by 14 percent, in October, and by 11 percent in the twelve-month period. Inflation expectations, on average between mid-november and mid-december, according to calculations by the Bank of Israel, stood at 2.0 percent for the first year, 2.4 percent for the second year, and 2.5 percent from the third year forward. The data indicate an increase in inflation expectations for the first and second years, relative to previous months. United States The Fed kept the interest rate unchanged, with no further monetary expansion, contradicting some investors hopes. Its statement said that despite the European crisis, the economy has continued to grow, though at a moderate pace, and the interest rate is expected to remain very low until mid- 2013.
0.25% 0.34% 0.07% 0.09% -0.02% 0.13% -0.13% 0.08% Jan 06 Mar 06 May 06 Jul 06 Sep 06 Nov 06 Jan 07 Mar 07 May 07 Jul 07 Sep 07 Nov 07 Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11 Sep 11 0.21% 0.28% 0.14% 0.29% 0.25% 0.22% The consumer price index was unchanged in November, and inflation stood at 3.4 percent, below expectations. However, the core index rose by 0.17 percent, and core inflation reached 2.2 percent, higher than expected. 0.5% USA: monthly change in Core CPI (Seasonally Adjusted) 0.4% 0.3% 0.2% 0.1% 0.0% 0.29% 0.10% 0.14% 0.11% 0.17% 0.15% 0.21% 0.27% 0.22% 0.28% 0.21% 0.25% 0.01% 0.23% 0.13% 0.15% 0.09% 0.09% 0.03% 0.04% 0.12% 0.13% 0.10% 0.03% 0.01% 0.12% 0.07% 0.17% 0.05% 0.14% -0.1% -0.2% Euro Zone The euro weakened by 2 percent against the US dollar over the last week, reaching its lowest level since January 2011. The debt crisis in Europe, the resulting uncertainty, and the recession anticipated in the Eurozone in 2012 have contributed to the currency's weakening.
43.6 44.0 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 49.3 47.8 48.2 46.9 49.1 46.5 47.0 47.9 55.8 52.3 53.2 52.8 54.3 54.7 55.1 56.4 56.6 57.7 58.5 58.7 59.0 60.4 58.5 57.8 57.3 57.3 57.6 57.5 57.5 57.7 57.4 56.9 56.8 57.8 57.5 57.4 54.7 54.7 54.1 53.3 51.8 52.8 51.8 51.9 51.1 57.3 56.4 56.0 56.7 56.2 54.1 53.8 55.5 55.5 57.0 58.2 57.6 57.8 55.8 53.3 51.1 50.7 1.50 EUR-USD 1.45 1.40 1.35 1.30 1.25 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Industrial production fell by a minimal 0.1 percent in October, following a 2 percent decrease in September. Production grew by only 1.3 percent in the twelve months through October. The purchasing managers' index stood at 47.9 points in December, according to initial estimates. This figure was above expectations, but below the 50-point line for the fourth consecutive month, pointing to contraction of activity. 65 Euro zone PMI composite Index (less than 50 points indicates contraction) 60 55 50 44.6 47.0 50.4 51.1 53.0 53.7 54.2 53.7 53.7 55.9 45 38.9 38.2 38.3 36.2 38.341.1 40 35
Italy issued five-year bonds, drawing maximum demand, but at a yield of 6.47 percent, a fourteenyear high. Meanwhile, the broad austerity plan tax hikes, cutbacks to government ministries, an increase in the retirement age, etc. in the amount of EUR 33 billion was approved by the lower house of parliament. Our forecast of cumulative changes in price indices during the coming three months Forecast change, November 2011 index to February 2012 index Consumer Prices Index (CPI) Housing component in the CPI (mainly rental prices) Prices of Owner- Occupied Dwellings Price Index of Inputs in Residential Building Wholesale Price Index of Manufacturing (excl. Fuel) -0.1% -1.1% -1.8% 0.2% 0.6% Important Announcements in the Coming Week An update of the growth rate in the third quarter will be published in the United States on Thursday, December 22. Data on private income and consumption will be published in the United States on Friday, December 23. The Bank of Israel's interest-rate decision will be published on Monday, December 26. This review is posted online at www.harel-finance.co.il/macro in Hebrew and at www.harel-group.com/finance.html in English. Please address comments or questions to Mr. Ofer Klein at oferkl@harel-ins.co.il If you would like to be removed from the Harel Group mailing list, please let us know in a reply to this e-mail. This review reflects our opinion at the date of publication. Our opinion may change at any time without additional notice. The company shall not be liable in any manner for any damage and/or loss caused by the use of this review, and makes no commitment that reliance on the information appearing in this document is likely to generate profits. The company removes liability from the group, the employees of the company, and the employees of the companies in the group with regard to any claim and/or argument made based on the statements herein. The company and/or its related companies and/or its controlling parties and/or the interested parties of any of these may hold and/or trade, on their own behalf and/or on behalf of others, securities and financial assets mentioned in this review. This review shall not be considered as investment marketing or a substitute for investment marketing or a substitute for independent tax advice. This review is not adapted to the investment goals or the unique personal needs of each investor. The authors may hold and/or trade, on their own behalf and/or on behalf of others, securities and financial assets mentioned in this review.