Data Favoring Another Israel Rate Hike

The central bank of Israel hiked rates in August to become the first to begin to normalize monetary policy during the recovery. It held rates steady in Sept and Oct, but speculation is increasing that it will hike rates again when it meets on Nov 23.

Israel reported that Q3 GDP rose a preliminary 2.2%, the most in over a year, flattered by exports and investment. This is more than twice the Q2 annualized pace of 1%, which was revised from 0.8%.

Over the weekend, Israel reported that consumer prices rose 0.2% in October for a 2.9% year-over-year increase. Prices are particularly sticky in Israel. Although an outright decline in CPI was experienced in H1 07, the rise housing prices, administered prices and taxes has ended the deflation threat.

Inflation is now at the upper end of the central bank's 1-3% target. The benchmark 10-year note extended its rally to new 9 month highs and yields slipped a basis point to 4.32%, 93 bp above similar US yields. The eight day rally may be partly predicated on speculation of a rate hike later this month.

At the end of last week, Israel reported a trade surplus for the month of October. Although the surplus was a modest $45.7 mln, it was the first surplus for at least 14 years. The government's report underscored the importance of technology exports, which increased an average of almost 4.5% a month from August through October.

Meanwhile the governor of the central bank Stanley Fischer seemed to suggest the official selling of the shekels in the foreign exchange market will continue. This intervention operation began in March 2008 and since then reserves have nearly doubled to over $60 bln at the end of Oct and has contributed to a nearly 55% increase in M1 money supply over the past year.

The dollar has spent the better part of the last 3 months between ILS3.70 and ILS3.80, with minor exceptions to the downside in mid-Oct and minor penetration of the upside at the start of the Nov. Near-term risk is on the dollar's downside with ILS3.7450 the initial target and then ILS3.70. Key support is probably closer to ILS3.67.