Meitav Review: Israeli Economy Expands Moderately Amid Global Risks
Meitav's weekly review highlights Israel's moderate inflation, complex budget deficit, and dormant housing market, while warning of U.S. monetary tightening risks and high household equity exposure.
Meitav investment house chief economist Alex Zabezhinsky has published his weekly macro and markets review, analyzing economic trends in Israel and globally with a focus on the United States and Meitav investment strategy recommendations.
In Israel, the review indicates a continued expansion of economic activity, with the business trend survey showing that the current conditions component has returned to levels recorded on the eve of the conflict with Iran. However, the data does not point to a rapid economic recovery. Meanwhile, local inflationary pressures remain moderate. Companies, particularly in the retail sector, continue to expect moderate price increases. According to Meitav's ex-housing inflation model, the annual rate stands at only about 0.5%. The shekel is offsetting a significant portion of global import price increases, with import prices dropping by about 10% in shekel terms.
The budget picture remains complex. The deficit stands at 3.2%, driven among other things by faster-than-expected growth in tax revenues alongside lower-than-planned expenditures. However, Meitav estimates that the deficit is expected to grow later, partly due to rising defense expenditures that are currently reflected only partially, alongside an expected slowdown in state revenue growth.
The housing market remains weak and in a wait-and-see mode. Following a sharp rise in sales during May and June, which proved to be a temporary phenomenon driven by several isolated projects, sales dropped again in July. Concurrently, an unusual negative gap was recorded that month between sales in central areas, including Tel Aviv and Jerusalem, and the rest of the country. Meitav estimates that the housing market may remain in a state of hibernation until the elections.
Bond Markets and Monetary Policy
The Israeli bond market saw a rise in yields following global trends, though the increase was relatively moderate compared to other nations. Unlike global trends, the Israeli yield curve became steeper, with long-term yields rising at a higher rate than short-term ones. Although the market has almost erased expectations for interest rate cuts, Meitav estimates that the Bank of Israel will continue lowering the rate, despite rising global yields.
Internationally, the review addresses risks stemming from the energy and supply crisis. The blockade of energy transport through the Strait of Hormuz, alongside damage to production facilities in Russia, is depleting oil and gas inventories and could cause significant disruptions in global supply chains.
In the United States, central bank policy and the hawkish messaging of the new Fed chair continue to impact the bond market. According to Meitav, remarks reminiscent of Paul Volcker's approach in the 1980s are contributing to exceptional volatility and rising yields, despite core inflation dropping from 2.9% in May to 2.4% in August. Meitav notes that a substantial part of the recent yield increase stems from rising real yields rather than inflation expectations. The investment house assesses that the market is pricing in an overly rigid monetary policy, and the Fed might raise rates primarily to stabilize the bond market and maintain its credibility.
Risks and Investor Behavior
Simultaneously, Meitav warns that the American economy is not strong enough to handle monetary tightening without damage. Growth in private consumption is significantly weaker compared to past periods, real wages are declining, and residential construction investments are falling. Positive activity in the economy is concentrated mainly in massive investments in artificial intelligence infrastructure. According to the review, interest rate hikes at this stage could lead to a significant slowdown and even recession, alongside the risk of sharp declines in the stock market, similar to historical events such as the 1987 crash and the dot-com bubble burst.
The review also addresses U.S. investor behavior. American households are at peak equity exposure levels, accounting for nearly 35% of their financial assets. Alongside ETFs, households are currently among the primary purchasers of stocks and bonds, while large institutional investors tend to sell. Meitav notes that households have also purchased significant quantities of bonds, making them potential "weak hands" prone to selling during downturns—a situation that may explain part of the recent sharp surge in bond yields.
Along with the analysis, Meitav presents its core investment recommendations. The investment house recommends high exposure to equities. In government bonds, it is recommended to focus on medium to long duration, preferring Israeli shekel bonds and U.S. bonds in the 5-10 year range, which are considered attractive against the backdrop of expected slowdown and potential yield declines. In corporate bonds, the recommended rating range is BBB to A.
