Markets Eye Inflation Data as Dollar Trades Above 3.06 Shekels

Markets opened a calm week focused on upcoming inflation data. On Wednesday, the US Consumer Price Index (CPI) for September is scheduled for release, followed by the Producer Price Index (PPI) on Thursday. Domestically, Israel's local September inflation data will also be published on Thursday.

Foreign Exchange and Global Markets

In the local market, the US dollar traded slightly above 3.06 shekels, while the euro hovered above 3.43 shekels. Globally, the US Dollar Index showed no significant changes, standing at 102.2 points. The euro edged up by 0.1% to trade around 1.12 dollars, and the British pound rose by 0.1% to trade above 1.32 dollars.

In their weekly review, Leader Markets economists led by Jonathan Katz noted that business sector trend surveys point to several critical indicators regarding the inflation environment.

"Inflation expectations for the coming year continue to decline, dropping to 1.95% in September, compared to 2.02% in August and 2.4% at the end of 2025. This is the lowest expectation level since January 2022," economists stated.

However, Leader added that expectations point to a faster acceleration of inflation in October compared to previous years, likely driven by rising global commodity prices. Furthermore, in August, institutional investors increased their foreign exchange exposure rate to 20.9%, compared to 20.4% in July, even though foreign asset exposure remained almost unchanged at 29.9% in August versus 29.8% in July.

Fiscal Policy and Bond Yields

Economists at Bank Hapoalim noted that despite the positive baseline of Israel's economy, rising local yields indicate market concerns regarding potential negative shifts ahead.

"The fiscal deficit in September (trailing 12 months) remained at an annual level of 3.2% of GDP, well below the 2026 deficit target of 4.9%. Inflation is low, and the central bank's recent action was an interest rate cut. Why, then, are bond yields tracking global trends?," Bank Hapoalim analysts wrote.

According to the bank, investors may view the starting point of low inflation and a modest fiscal deficit as temporary, or at least subject to high volatility over the coming year. Given expectations of inflation gradually climbing back toward 2.0% alongside rising global interest rates, further rate cuts by the Bank of Israel become less likely. Additionally, from a domestic political standpoint, investors remain primarily concerned about potential electoral gridlock and escalating uncertainty.