ILS: BoI Outlook in Two Scenarios
We have developed two macro scenarios for Israel: gradual de-escalation and prolonged war. In both scenarios, inflation is expected to approach the target early next year, allowing the BoI to cut rates below what’s priced for YE2026. We believe it makes sense to engage in 15x18m vs 3x6m curve flatteners. The first scenario, de-escalation, assumes a gradual reduction in military efforts starting in Q3 2025. In this scenario, we expect the vacancy-to-employment ratio to return to 0.75, similar to the pre-invasion period. Additionally, we anticipate that USD/ILS will decline and stabilize around 3.40 due to reduced fiscal pressure. The prolonged war scenario assumes the vacancy-to-employment ratio remains above 1, with USD/ILS staying steady at its current level. Under the prolonged war scenario, our inflation outlook aligns with consensus and the BoI’s expectations. Inflation is projected to fall within the target range by Q3 2025 (Drax: 2.4% YoY), rise slightly in Q4 2025, and then stabilize around 2.2% from Q1 2026 onward. Despite the tight labor market, our interest rate model suggests that the BoI will gradually cut rates starting in Q4 2025, bringing 3M Telbor to around 3.2% by year-end 2026. In the de-escalation scenario, the inflation outlook is more dovish, with impacts on inflation dynamics becoming evident from Q4 2025. Our models suggest that a more normalized labor market and a stronger currency would likely drive headline inflation below the target throughout most of next year. In this scenario, our interest rate model indicates the BoI may lower its policy rate to 2.75% by year-end 2026. Both scenarios ultimately suggest a lower policy rate by Q4 2026 compared to the current market pricing of around 3.6%. In the de-escalation scenario, the BoI may opt to hold rates longer than priced, given risks from a tight labor market, and might wait until inflation falls within the target range before cutting. In the prolonged war scenario, the BoI may anticipate a normalization of the labor market and further inflation declines, leading to quicker rate cuts. Our analysis suggests that engaging in STIR curve flatteners (15x18m vs. 3x6m) makes sense at -59bps. The core conviction is on the 15x18m ILS FRA receiver leg (3.75%), as it seems likely that the policy rate will be lower than what’s priced by then, even if the military effort continues. The 3×6 FRA currently trades 16bps below the fixing at 4.34%. We believe that the combination of (1) core and headline inflation running slightly above the 3% upper bound in the next three prints, (2) a very tight labor market, (3) no clear indication of de-escalation, and (4) high global uncertainty means the BoI may choose to remain on hold in its next two decisions.
Brazil CPI: (IPCA) March/2025
The IPCA print for April was approximately in line with expectations, registering at 0.42% (consensus: 0.43%). On an annual basis, the index increased to 5.53% from 5.48%. Breaking down the data, all core measures remained significantly above target. The core average stayed near 6% on a three-month moving average seasonally adjusted annual rate (3mma SAAR) for the fourth consecutive month. Core services inflation was around 7.7%, with all subcomponents still elevated, especially the labor-intensive group, which remained near 8%. Core goods inflation rose to 5.3% 3mma SAAR from 4.3%, likely due to last year’s currency depreciation. Overall, Brazil’s CPI remains well above target, showing no signs of disinflation at the margin.
ZAR FX: inflation outlook ahead of budget – March/2025
South Africa’s inflation outlook has improved further due to the recent drop in oil prices. We see both headline and core inflation running bellow target for the foreseeable future. Next weeks budget announcement will likely be inflationary on net, however, its impact is unlikely it be large enough as to bring inflation back to target by year-end. Figure 1: South African Inflation – %YoY We update our South Africa inflation outlook to incorporate the recent data as well as the move lower in oil prices. The outlook remains very benign: the move lower in oil prices – if persistent – might drive headline inflation below the 3% lower bound in March if there are no new shocks until then. We then see inflation gradually accelerating to 3.6% YoY by 4Q25 and 3.8% by 4Q26. Both headline and core are expected to stay under 4% throughout the entire forecast horizon. Our forecast is much more benign than the SARB’s and consensus’ as both see convergence to target by 4Q25. Figure 2: South Africa Headline Inflation Forecast Paths – %YoY This scenario does not incorporate the impact of the upcoming budget announcement, which will likely be inflationary on net. If the government delivers a VAT hike, this will mechanically push inflation up: we estimate a ~+42bps impact on headline for a one-point increase in VAT based on the 2018 episode. If the budget does not include measures to curb the deficit, the currency is likely to weaken and bump up the inflation outlook. The budget announcement would only be disinflationary if the government manages to deliver a spending-based adjustment – something that apparently is not under discussion. In terms of the outlook, the current forecast had more moving parts than usual, including a reweighting of the Consumer Price Index by Statistics South Africa, and the proposed Value Added Tax (VAT) increases announced in the Budget. We also adjusted assumptions such as the oil price, to reflect shifts in global markets. The overall result of these changes is a marginally lower inflation outlook, with headline now projected at 3.6% this year and 4.5% next year. This is mainly due to the better fuel-price projections. It also reflects a more benign path for administered prices, given the lower electricity tariffs announced by NERSA in February. These factors offset pressure from the proposed VAT increases, which we think will add about 0.2 percentage points to baseline inflation – Statement of the Monetary Policy Committee March 2025. Statement of the Monetary Policy Committee March 2025 While there is uncertainty regarding the fiscal announcement, our analysis suggests that it is unlikely to materially deteriorate the inflation outlook. Our lower-than-consensus baseline scenario suggests both a VAT increase and/or some currency weakness would still lead inflation to remain below the 4.5% midpoint by year-end. If the VAT is raised by +0.75% effective in April and USDZAR remains steady at 18.4, we would expect inflation to average 3.9% YoY in 4Q25. If the original +2% increase proposed by FinMin Godongwana is implemented, inflation would reach 4.4% by 4Q25. If no measures to curb the deficit are taken, the currency would need to depreciate way past its all-time high to generate enough inflationary pressures so that inflation converges to target by year-end. Our benign inflation outlook remains consistent with additional SARB cuts. The budget next week should provide additional clarity on the CPI path ahead. Disclaimer: This document does not constitute a communication that is an invitation or inducement to engage in investment activity (or financial promotion). It is intended for viewing by clients of Bevon Thomas that are reasonably believed o be eligible counterparties or professional clients under the Securities Act of 1933, the Securities Act of 1934, the Spanish securities market law or the French monetary and financial code. Persons not falling within the above descriptions must not act upon or rely on the contents of this document. The contents of this document are for informational purposes only and do not constitute investment advice nor an inducement to trade. Read our Terms of Use by clicking here Visit our website: www.bevonthomas.com