Global Inflation Surges as Israel Deficit Narrows: Discount Bank Review
Discount Bank economic head Einat Meir analyzes global and Israeli markets, highlighting rising U.S. inflation, European rate hikes, and narrowing Israeli fiscal deficits.
Einat Meir, head of the economic department at Discount Bank, released a comprehensive weekly review covering the hottest trends in the global and Israeli economies.
United States Economy and Federal Reserve Policy
In the United States, August inflation data came in high, supporting expectations for further rate hikes. The August CPI rose by 0.4%, leaving annual inflation steady at 3.4%, driven entirely by surging energy prices. Meanwhile, core inflation rose by 0.3% due to higher service costs, though the annual pace moderated to 2.4%.
These inflation figures and the sharp spike in energy prices reinforce expectations that the Federal Reserve will raise interest rates by 25 basis points to a range of 3.75% to 4% at its upcoming meeting. Committee members' inflation forecasts are expected to be revised upward, while core inflation projections will likely be adjusted downward due to methodological changes in inflation measurement.
European Markets and Government Bonds
In the eurozone, the European Central Bank raised interest rates by 25 basis points to 2.5% amid persistent inflationary risks and projections that inflation will remain above target for an extended period. Markets are currently pricing in more than three additional rate hikes over the coming year, pushing rates toward 3.35%.
Global government bond yields have climbed steadily, driven by rising oil prices and higher interest rate expectations. In the United States, 10-year Treasury yields reached 4.97% and briefly surged past 5% during trading, marking the highest level since 2023.
Israeli Fiscal and Monetary Developments
Israel's state budget deficit continued to narrow in August, dropping to 3.2% of GDP over the trailing 12-month period. This reduction stems from a 5% real increase in state tax revenues, fueled by a 10% jump in indirect taxes driven by robust consumption. Conversely, capital market revenues and purchase tax collections declined, reflecting weakness in the housing market.
Government expenditures grew by 3.2%, well below the original planned increase of 7.2%. However, defense spending surged by 10.9% against a projected 2.7%, while economic ministries experienced a 6.1% contraction contrary to a planned 12.1% expansion. Yields on Israeli government bonds rose across the entire yield curve, tracking global trends and shifting inflation expectations.
Commodities and Geopolitical Pressures
Geopolitical escalations triggered a sharp spike in crude oil prices, which briefly surpassed $107 per barrel following Houthi actions in the Bab el-Mandeb strait and Saudi pipeline closures. Meanwhile, Donald Trump announced that Russia and Ukraine agreed to halt attacks on each other's energy infrastructure, providing a potential stabilizing factor for global energy supplies.
