Risk premium declines on optimism regarding a cease-fire, but much will depend on fiscal credibility

ISRAEL - In Brief 04 Nov 2024 by Jonathan Katz

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Geopolitics: Israel continues to exchange missile fire with Hezbollah in Lebanon and continues its ground operation. A lower-level war continues in Northern Gaza. Apparently, a cease-fire framework with Hezbollah and Lebanon appears increasingly likely, while the impasse with Hamas continues. The more immediate concern is escalation with Iran which has threatened to attack Israel again. Recent economic indicators point to some deceleration Credit card purchases declined by 3.7% saar in Q324 following a decline of 4% in Q2 (seas. adj. data). Revenues from retail trade declined by 4.9% m/m in August while the level of revenues in July-August remained similar to that of Q2. The BoI Composite Index declined by 0.3% in September following a decline of 0.42% in August. Official unemployment was up slightly in September to 2.7% (from 2.6%, SA) but broad unemployment (including those employed but unable to work) rose to 4.6% from 4.0% due to limitation on activities in the North. This weakness is expected to spillover onto Q424 with the escalation in the North and the widening range of Hezbollah missiles which has disrupted activity (schools, events, leisure etc.) for some 1.5 ml residents in the North (including Haifa). Bonds: The MoF will maintain their steady weekly pace of domestic bond issuance at slightly below 4.0bn ILS in November. Total issuance is targeted at 15.7bn compared to total redemptions of 10.4bn. The fact that this issuance pace has been maintained suggests that the MoF does not expect a significant overshooting of the fiscal deficit. The BoI expects the deficit to reach 7.5% this year. The differential between the Israeli 10-year bond yield and US yields n...