Weekly report, June 22, 2026: May CPI surprises on the downside; U.S.-Iran agreement reshapes market sentiment; shekel reverses course
Key headlines:
- The U.S.-Iran agreement dominated market attention last week. The agreement raised concerns in Israel regarding Iran's continued nuclear activities, the economic relief provided to Tehran, and limitations on Israel's future freedom of action in Lebanon. These concerns were reflected in higher CDS spreads, a weaker shekel and lower equity prices.
- May CPI declined by 0.3%, somewhat below our forecast. Annual inflation remained at 1.9%, while core inflation measures stood at 1.5%-2.0%. We view the appreciation of the shekel as the main factor moderating inflation and pushing it below the midpoint of the Bank of Israel's target range.
- The lower-than-expected CPI, together with lower oil prices following the U.S.-Iran agreement, strengthens our expectation that the Bank of Israel will cut rates again on July 6, to 3.5%.
- We continue to view Israel's external position as very strong. Balance-of-payments data for the first quarter showed another large surplus of $5.4 billion (3.2% of GDP) in goods and services trade, driven mainly by high-tech exports.
- Our analysis suggests that the recent appreciation of the shekel cannot be explained solely by current-account surpluses. Lower risk premiums, strong equity-market performance and reduced institutional FX exposure also played an important role.
- In recent weeks, however, geopolitical developments have become less supportive. The U.S.-Iran agreement and renewed fighting with Hezbollah contributed to a rise in Israel's CDS risk spreads. As a result, the shekel reversed part of its gains and weakened toward NIS 3.0 per dollar after appreciating by roughly 20% over the past year.
- Political developments continue to point toward elections on October 20, with the coalition advancing several religion-related bills ahead of the expected election campaign.
- Economic activity continued to recover following the war, although the Bank of Israel's activity index remains below its pre-war level. At the same time, the labor market remains tight, with unemployment declining to 2.8% and vacancies increasing further.
- The housing market remains the main weak spot in the economy. Transaction volumes remain low, home prices continue to decline, and developers are facing growing pressure on cash flows.
Looking ahead: key events next week
The macroeconomic calendar will be relatively light this week, and financial markets are likely to focus primarily on geopolitical developments, including negotiations between the United States and Iran on a final agreement and developments in Lebanon. In the domestic economy, attention will center on labor-market data for May, scheduled for release on Monday, June 22. The figures will provide additional insight into labor-market conditions following the end of the war. On Tuesday, June 23, the Central Bureau of Statistics will publish hotel-overnight-stay data for January-May 2026. Markets will also continue to monitor movements in the shekel and evolving expectations ahead of the Bank of Israel's July 6 interest rate decision.
Now read on...
Register to sample a report