Market Insights

May 2019

Global Economyo The pace of global growth is slowing amid uncertainty regarding trade tensions, Brexit uncertainty and

geopolitical risks. The IMF downgraded global growth in 2019 for the second time this year from 3.5% to 3.3%

o However, the accommodative financial conditions, courtesy of the central banks’ reaction to the financial

turmoil late last year and the decisive actions of policy makers in China, might cushion the downturn

o The US Shale Revolution is changing the international oil and gas industry and has profound geopolitical and

economic implications. The Trump administration’s willingness to impose sanctions on Iran and Venezuela and

the reduction in the US trade deficit are a living proof to this revolution

o The dovish stance of central banks all over the world continues to support all risk assets except emerging

markets’ currencies. A strong US dollar, worries about growth, weak levels of foreign investments and current

account flows are the main reasons responsible for creating this divergence

o As opposed to investors’ expectation for the US dollar devaluation amid the Fed’s abandoning plans for further

interest-rate hikes this year, the dollar index continued to appreciate. Strong US economic indicators and

current account deficit contraction are the main reasons

United Stateso The US economy endures the global slowdown relatively well as Q1 GDP expanded at a 3.2% annualized rate, above

market expectations. Increase in inventory and a boost from trade were the main engines that offset a slowdown in

consumer spending and business investment

o However, recent reports and leading economic indicators show mixed signs as retail sales rebound, consumer

sentiment improves, job reports are positive but the housing market is still struggling back and ISM’s and PMI’s

indexes moderated more than expected

o Labor market shows solid numbers relieving concerns about a cooling economy. Payrolls rose by 263K and

unemployment decreased to 3.6%, close to all time lows. Average annual wage gains stabilized at 3.2%, suggesting

labor market can improve further without creating wage pressures and consequently inflation

o The key measures of US inflation rose less than the forecast, leaving the Fed with more room to maneuver in the

coming months as the local economy produces good results but not too good to create price pressures

o American oil export increased last year to more than 2M barrels a day and it is expected to jump to 5M by late 2020.

The US will become the world’s second-largest exporter of crude and refined products by 2024. This revolution will

undoubtedly increase further its geopolitical and economic strength and influence

Core Economic IndicatorUSA

Economic Indicator Latest Figure Reference Period

Growth Rate (Annualized) 3.2% Q1-2019

Unemployment Rate 3.6% April-2019

Inflation Rate (Core, YoY) 1.6% April-19

Fed Funds Target Range 2.50%-2.25% March-2019

10 Year Treasury 2.51% April-2019

Ratio of Surplus in Current Account to GDP 2.34%- Q4-2018

Ratio of Public Debt to GDP 104.14% July-2018

Economic GrowthGDP (Annualized)

-4.4

-0.6

1.5

4.5

1.5

3.7

3

2

-1

2.9

-0.1

4.7

3.2

1.7

0.5 0.5

3.6

0.5

3.2 3.2

-1

5.1 4.9

1.9

3.3 3.3

1

0.4

1.5

2.31.9 1.8 1.8

3 2.82.3 2.2

4.2

3.4

2.2

3.2

00

-9.0

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Economic SentimentManufacturing and Non-Manufacturing ISM

30

35

40

45

50

55

60

65

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Manufacturing Non- Manufacturing

Labor MarketUnemployment Rate (Left) and Under Unemployment Rate, U6 (Right)

6

8

10

12

14

16

18

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

6-09 12-09 6-10 12-10 6-11 12-11 6-12 12-12 6-13 12-13 6-14 12-14 6-15 12-15 6-16 12-16 6-17 12-17 6-18 12-18

Unemployment U6- Unemployment

Labor MarketJolts: Job Openings

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

9,000.0

12-07 06-08 12-08 06-09 12-09 06-10 12-10 06-11 12-11 06-12 12-12 06-13 12-13 06-14 12-14 06-15 12-15 06-16 12-16 06-17 12-17 06-18 12-18

Job Openings

InflationCore PCE (YoY) and 5Y Inflation Forecast

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

12-07 06-08 12-08 06-09 12-09 06-10 12-10 06-11 12-11 06-12 12-12 06-13 12-13 06-14 12-14 06-15 12-15 06-16 12-16 06-17 12-17 06-18 12-18

US Breakeven 5 Year Inflation Core PCE Rate (YoY)

Fed Inflation Target

10YR Treasury Yield to Maturity

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

12-08 06-09 12-09 06-10 12-10 06-11 12-11 06-12 12-12 06-13 12-13 06-14 12-14 06-15 12-15 06-16 12-16 06-17 12-17 06-18 12-18

US Treasury Yield Curve

0

0.5

1

1.5

2

2.5

3

3.5

0Y 2Y 4Y 6Y 8Y 10Y

Current 3-Months Ago 6-Months Ago

Chicago Feds National Financial (NFCI) Condition Index

The NFCI provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets and the traditional and “shadow” banking systems. Negative values have been historically associated with looser-than-average financial conditions

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

12-08 06-09 12-09 06-10 12-10 06-11 12-11 06-12 12-12 06-13 12-13 06-14 12-14 06-15 12-15 06-16 12-16 06-17 12-17 06-18 12-18

US Dollar Index (DXY)

75.0

80.0

85.0

90.0

95.0

100.0

105.0

12-13 06-14 12-14 06-15 12-15 06-16 12-16 06-17 12-17 06-18 12-18

Citi Economic Surprise

-100

-80

-60

-40

-20

0

20

40

60

80

100

12-13 03-14 06-14 09-14 12-14 03-15 06-15 09-15 12-15 03-16 06-16 09-16 12-16 03-17 06-17 09-17 12-17 03-18 06-18 09-18 12-18 03-19

USA Crude Oil Total ProductionThousand Barrels per Day

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Eurozoneo Slowing global momentum and concerns over Brexit and trade disputes take a heavy toll on the Eurozone

economy. Despite the flattening out of some economic indicators, it seems like the economy lacks the powerto realize its potential and is expected to expand only by 1% in 2019

o The manufacturing sector continues to be the weakest link as leading indicators, such as the PMI, plummetedin March after factory orders plunged during February and industrial sentiment lost more ground

o The German economy exhibits lackluster performance that places it with Italy as Europe’s underperformers. TheGerman government downgraded its growth forecast for 2019 to 0.5%, the lowest level in six years

o After a gradual improvement in consumer sentiment during the last few months, April’s numbers showed some lossof ground. However, the strong labor market and accommodative financial conditions are expected to support thelocal demand and offset some of the deterioration of external demand

o Euro area annual core inflation climbed by 0.4% to 1.2%, above market expectation. The rebound in inflation wasattributed to the Easter holiday and the jump will most probably prove temporary

o The ECB decided to keep interest rates unchanged and expects them to remain at current levels at leastthrough the end of 2019, as slower growth momentum extended into 2019 and may extend further to the endof the year due to global headwinds, geopolitical factors, protectionism and EM vulnerabilities

o The Brexit saga continues as the EU approved a delay until October. Negotiations for a new Brexit deal that willget the UK out of the EU are conducted ponderously as uncertainty takes a heavy toll on both sides

Core Economic IndicatorEurozone

Economic Indicator Latest Figure Reference Period

Growth Rate (Annualized) 1.5% Q1-2019

Unemployment Rate 7.7% March-2019

Inflation Rate (Core, YoY) 1.2% April-2019

Central Bank deposit rate 0.00% March-2019

10 Year Government Bond Yield (Germany) 0.013% April-2019

Ratio of Surplus in Current Account to GDP 2.95% Q4-2018

Ratio of Public Debt to GDP 85.20% Q4-2018

Economic GrowthGDP (Annualized)

-11.4

-0.9

1.3

2.21.7

3.7

1.92.5

3.2

0.1 0

-1.2-0.6

-1.3

-0.6

-1.7-1.4

21.4

1

1.9

0.8

1.62

3

1.7 1.51.9

2.8

1.11.4

3.12.7 2.7 2.7 2.8

1.5 1.7

0.60.9

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

1.5

Economic SentimentManufacturing and Non-Manufacturing PMI

47.0

49.0

51.0

53.0

55.0

57.0

59.0

61.0

09-15 12-15 03-16 06-16 09-16 12-16 03-17 06-17 09-17 12-17 03-18 06-18 09-18 12-18 03-19

Manufacturing Non-Manufacturing

Labor MarketUnemployment Rate

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

12/07 6/08 12/08 6/09 12/09 6/10 12/10 6/11 12/11 6/12 12/12 6/13 12/13 6/14 12/14 6/15 12/15 6/16 12/16 6/17 12/17 6/18 12/18

InflationCPI and Core CPI (YoY)

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 12/18

CORE PCI PCI

Money Supply and CreditGrowth in Money Supply, Loans to Real Sector

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

09/12 03/13 09/13 03/14 09/14 03/15 09/15 03/16 09/16 03/17 09/17 03/18 09/18 03/19

Change in Lending to Non Financial Institutions Change in Lending to Households M3 Money Supply Growth

10YR Government Bond Yield

-0.5

0.5

1.5

2.5

3.5

4.5

12-13 03-14 06-14 09-14 12-14 03-15 06-15 09-15 12-15 03-16 06-16 09-16 12-16 03-17 06-17 09-17 12-17 03-18 06-18 09-18 12-18 03-19

Germany Italy France Spain

Exchange RateEUR Index (Left) EURUSD (Right)

1

1.05

1.1

1.15

1.2

1.25

1.3

1.35

1.4

1.45

75

80

85

90

95

100

01/2013 07/2013 01/2014 07/2014 01/2015 07/2015 01/2016 07/2016 01/2017 07/2017 01/2018 07/2018 01/2019

EUR Index EURUSD

Citi Economic Surprise

להעריך את הקו הירוק

-150

-100

-50

0

50

100

12-13 03-14 06-14 09-14 12-14 03-15 06-15 09-15 12-15 03-16 06-16 09-16 12-16 03-17 06-17 09-17 12-17 03-18 06-18 09-18 12-18 03-19

Israelo A relatively strong growth is expected in Q1 due to an increase in automobile sales amid changes in the green tax

reform. However, the local economy is expected to weaken in 2019 amid global economic slowdown as the BOI slashed

its growth forecast for 2019 by 0.2% to 3.2% and IMF cuts growth forecast to 3.3%.

o Uncertainty regarding the ability of the new government to make fiscal adjustments as government deficit increased

already to 3.4% from GDP, above the 2.9% fiscal target

o Despite a decline in unemployment rate to 3.9%, there are signs of weakness in the labor market as the percentage of

open jobs decreased in Q1 to 3.52% the lowest level since 2015

o Headline inflation increased by 0.5% in March and YOY inflation edged up to 1.4% and continued to stabilize above the

lower end of the inflation target (1%-3%). Although prices accelerated in the last few months, they are expected to stay

at current levels in the months ahead due to base affects and the Shekel’s strength

o After consolidating during February and March, the Shekel appreciated during April against most currencies, forcing the

BOI to signal that the option of intervention in the currency market is still on the table

o In respond to the strong Shekel, the BOI governor, Amir Yaron, said that “the maneuvering room for increasing the

interest rate in Israel, without narrowing the interest rate gap that opened in recent years, will decrease to some extent”

Core Economic IndicatorIsrael

Economic Indicator Latest Figure Reference Period

Growth Rate (Annualized) 3.1% Q4-2018

Unemployment Rate 3.9% March-2019

Inflation Rate (YoY) 1.4% March-2019

Central Bank Interest Rate 0.25% March-2019

10 Year Government Bond Yield 1.83% April-2019

Ratio of Surplus in Current Account to GDP 2.98% Q4-2018

Ratio of Public Debt to GDP 61% Q4-2017

Economic Growth GDP (Annualized)

0.3

3.4

4.8

5.96.1 6

3.9

6.2

7

4.3

7.7

2

-0.5-0.1

4.34.1

4.3

7.2

4

2

4 4.1

2.5

6.2

1.5

0.6

1.1

4

4.7

5.3

4.64.2

1.1

3.6

4.64.2

4.4

0.7

2.83.1

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

03-09 09-09 03-10 09-10 03-11 09-11 03-12 09-12 03-13 09-13 03-14 09-14 03-15 09-15 03-16 09-16 03-17 09-17 03-18 09-18 03-19

Labor MarketUnemployment Rate

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

2012 2013 2014 2015 2016 2017 2018 2019

InflationCPI (YoY)

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

10YR Government Bond Yield

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

04-11 07-11 10-11 01-12 04-12 07-12 10-12 01-13 04-13 07-13 10-13 01-14 04-14 07-14 10-14 01-15 04-15 07-15 10-15 01-16 04-16 07-16 10-16 01-17 04-17 07-17 10-17 01-18 04-18 07-18 10-18 01-19 04-19

Government Bond Yield Curve

0

0.5

1

1.5

2

2.5

0Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

Current 3-Months Ago 6-Months Ago

Hedging CostsUSDILS 1YR Forward Premium

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

Exchange RateUSDILS (Left) BoI Nominal Effective Rate (Right)

75

80

85

90

95

100

105

12-13 06-14 12-14 06-15 12-15 06-16 12-16 06-17 12-17 06-18 12-18

3

3.2

3.4

3.6

3.8

4

4.2

USDILS BoI Nominal Effective Exchange Rate