Market Insights

December 2019

Global Economy o More than a decade since the Great Financial Crisis, despite unprecedented central bank policies, inflation and growth remained

persistently low, but debt levels and asset prices peaked, as excess liquidity appears to be going into financial assets and not

the real economy. Now that central banks are left with no real tools, the only option to bail out the global economy from a

standstill is to adopt an expansionary fiscal policy, but increasing the possibility of another debt crisis

o Despite being at the end of a business cycle, asset prices are reach as investors price in a recovery of the global economy,

continued support from central banks, increase in corporate profits and resolution of trade disputes. Certainly, this situation

reflects investor complacency

o The phenomenon of negative yielding debt continues, courtesy of the central banks' ultra-accommodative policy. With 17

trillion $ of debt “under water” and failures in the money markets (repo market), the global financial system is far more

vulnerable than it seems

o Moderation is the name of the game in the Chinese economy as investment, industrial production and retail sales have slowed

and it seems the economy has not met the bottom yet as further weakness lurks ahead. Moreover, the fact that much of the

weakness is attributed to local factors implies that even a trade agreement will not change the picture from the ground up

o As trade talks continue, the details of the potential agreement (phase one) is not clear, but it appears to include bilateral

purchases commitments. These managed trade agreements are expected to have a major impact on other countries and

economic regions such as the European Union and South East Asia. Scenario in which the U.S. and China will not consider the

agreement implications on third parties may have adverse consequences for the global economy as a whole and for some

economic areas in particular

Global GDP

4

2.6

3.6

4.8

2.5

3

4.3

5.4

4.9

5.5 5.6

3

-0.1

5.4

4.3

3.5 3.5 3.6

3.5 3.4

3.8 3.6

3

-1

0

1

2

3

4

5

6

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Average growth before 2008

financial crisis: 4.2% Average growth after 2008 financial

crisis: 3.375%

Global CPI

5.9

7.3

5.1 4.9

4 4.1

3.7

4.1 4

3.9

5.3

4.7

3.1

4.3

4.7

4

3.3

2.9 2.9 3

3.3

3.6 3.5

0

1

2

3

4

5

6

7

8

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Average CPI before 2008 financial crisis:

4.75%

Average CPI after 2008 financial crisis:

3.6%

Global PMI

48

49

50

51

52

53

54

55

56

11/2016 02/2017 05/2017 08/2017 11/2017 02/2018 05/2018 08/2018 11/2018 02/2019 05/2019 08/2019 11/2019

Composite Services Manufacturing

United States o Q3 economic growth revised up to 2.1%, as the record-breaking expansion in the U.S. economy continues (11 yr.). The consumer

continues to show strength, being supported by the strong labor market and the easing monetary conditions, while the

manufacturing sector and business investment continues to lag behind, affected by the trade war and the slowdown in the global

economy

o Inflation environment has not changed recently as Inflation pressures remain stubbornly muted. The increase in wages and the

rise in tariffs on Chinese goods as part of the trade war are not yet reflected in inflation, which rose by 1.8% in the past year.

Excluding food and energy, the core index rose by 2.3%, below expectations. The core PCE index, which is the preferred gouge of

the Fed, gained 1.6% YOY, still below the 2% inflation target

o Despite the uncertainty associated with trade wars, the GM strike which shed 41,600 payrolls, the weakness in the manufacturing

sector and in investments, labor market data indicate resilience . October payrolls increased 128K, above market expectation.

Unemployment edged up 0.1% to 3.6%, still near historic lows and average hourly earnings climbed at a respectable 3% pace

o U.S. President Donald Trump has continued to undermine the central bank's credibility by accusing him of the economic

slowdown. He said the U.S. interest rate should have been much lower, with the Fed's unwillingness to align with the world's low

interest rates, leaving the U.S. at a competitive disadvantage

o In a speech before congress, Fed Chair Powell said that politics played no role whatsoever in the Fed’s policy decisions and that

based on the available data, assuming that growth outlook will not weaken, interest rates are likely to remain in place

Core Economic Indicator USA

Economic Indicator Latest Figure Reference Period

Growth Rate (Annualized) 2.1% Q3-2019

Unemployment Rate 3.6% October-2019

Inflation Rate (Core PCE, YoY) 1.6% September-2019

Central Bank Interest Rate 1.5%-1.75% November-2019

10 Years Yield 1.78% November-2019

Ratio of Surplus in Current Account to GDP (2.50%) Q2-2019

Ratio of Public Debt to GDP 103.20% April-2019

Economic Growth GDP (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

-1.1

5.5 5

2.3

3.2 3

1.3

0.1

2 1.9 2.2

2 2.3 2.2

3.2 3.5

2.5

3.5

2.9

1.1

3.1

2 2.1

-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 Sentiment Manufacturing 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 Market Unemployment Rate (Left) and Under Unemployment Rate, U6 (Right)

6

8

10

12

14

16

18

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

10-09 4-10 10-10 4-11 10-11 4-12 10-12 4-13 10-13 4-14 10-14 4-15 10-15 4-16 10-16 4-17 10-17 4-18 10-18 4-19 10-19

Unemployment U6- Unemployment

Labor Market Job Openings

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

09-08 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 09-19

Inflation Core PCE (YoY) and 5Y Inflation Forecast

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

09-08 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 09-19

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

11-09 05-10 11-10 05-11 11-11 05-12 11-12 05-13 11-13 05-14 11-14 05-15 11-15 05-16 11-16 05-17 11-17 05-18 11-18 05-19 11-19

US Treasury Yield Curve

0

0.5

1

1.5

2

2.5

3

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

Current 3-Months Ago 6-Months Ago

Chicago Feds National Financial Condition Index (NFCI)

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

-1.3

-1.1

-0.9

-0.7

-0.5

-0.3

-0.1

0.1

0.3

0.5

11

-09

05

-10

11

-10

05

-11

11

-11

05

-12

11

-12

05

-13

11

-13

05

-14

11

-14

05

-15

11

-15

05

-16

11

-16

05

-17

11

-17

05

-18

11

-18

05

-19

11

-19

US Dollar Index (DXY)

80.0

85.0

90.0

95.0

100.0

105.0

11-14 05-15 11-15 05-16 11-16 05-17 11-17 05-18 11-18 05-19 11-19

Citi Economic Surprise

-100

-80

-60

-40

-20

0

20

40

60

80

100

11-14 02-15 05-15 08-15 11-15 02-16 05-16 08-16 11-16 02-17 05-17 08-17 11-17 02-18 05-18 08-18 11-18 02-19 05-19 08-19 11-19

Eurozone o Economic activity in the Euro area is stabilizing at a low level. The manufacturing sector shows signs of life that are

reflected in the manufacturing PMI’s indices, which are still at a level lower than 50, indicating a contraction, but slower. In contrast, the services sector has weakened slightly but is still expanding, so the situation is not clear

o Regionally, the picture is uneven, with Germany and Italy demonstrating relative weakness, while France and Spain are performing better. France stands out favorably as reflected in the consumer confidence index which has risen to its highest level since 2007. In Italy, however, the situation continues to be dismal, as consumer confidence plummets to a two-year low. Germany has been able to provide slightly better data recently, but is still flirting with a recession

o Minutes from the last ECB meeting show that the council members are aware of their limited ability to support the economy through monetary means, as they call on other policy makers, especially governments with fiscal space, to contribute more decisively to supporting the Euro area economy. However, due to their concern about the region lackluster economy, they pledge to continue the unconventional policy until inflation converges back to its target level just below 2%

o The ECB warns that its unprecedented ultra accommodative monetary policy supports the economy, but at the same time increases the vulnerability to financial systems as a result of erosion of banks profits, assets mispricing, increase in debt burden and increased risk taking in non-bank financial sector. The ECB also signaled that asset mispricing increase the possibility of future correction, or in other wards crashes in the bonds and equity markets

o The December 12 election in the UK that was supposed to resolve the Brexit disputes becomes crucial on two other issues, the independence of Scotland and Northern Ireland, resulting in an unclear picture of Britain's future image. Meanwhile, hard to predict voting patterns, make it harder for the candidates to get overall majority and control of Parliament

Core Economic Indicator Eurozone

Economic Indicator Latest Figure Reference Period

Growth Rate 0.90% Q3-2019

Unemployment Rate 7.5% September-2019

Inflation Rate (Core, YoY) 1.1% October-2019

Central Bank Interest Rate 0.00% October-2019

10 Years Yield (Germany) (0.38%) November-2019

Ratio of Surplus in Current Account to

GDP 2.68% Q2-2019

Ratio of Public Debt to GDP 86.40% Q2-2019

Economic Growth GDP (Annualized)

-12

-0.1

1.5

2.1

1.5

4

1.8

2.5

3.4

0 0.4

-1.4 -0.9

-1.3

-0.4

-1.7 -1.6

2.2

1.3 1

1.9

0.7

1.9 1.7

3

1.6 1.9 1.7

2.4

1.1

1.8

3.1 2.7 2.9

3.2 3.2

1.1 1.5

0.8

1.4 1.7

0.8 0.9

-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

Economic Sentiment Manufacturing and Non-Manufacturing PMI

45.0

47.0

49.0

51.0

53.0

55.0

57.0

59.0

61.0

63.0

10-16 01-17 04-17 07-17 10-17 01-18 04-18 07-18 10-18 01-19 04-19 07-19 10-19

Manufacturing Non-Manufacturing

Labor Market Unemployment 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

9/08 3/09 9/09 3/10 9/10 3/11 9/11 3/12 9/12 3/13 9/13 3/14 9/14 3/15 9/15 3/16 9/16 3/17 9/17 3/18 9/18 3/19 9/19

Inflation CPI and Core CPI (YoY)

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

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 09/19

CORE CPI CPI

Money Supply and Credit Growth in Money Supply, Loans to Real Sector

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

08/13 02/14 08/14 02/15 08/15 02/16 08/16 02/17 08/17 02/18 08/18 02/19 08/19

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

10YR Government Bond Yield

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

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 06-19 09-19

Germany Italy France Spain

Exchange Rate EUR 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

09/2013 03/2014 09/2014 03/2015 09/2015 03/2016 09/2016 03/2017 09/2017 03/2018 09/2018 03/2019 09/2019

EUR Index EURUSD

Citi Economic Surprise

-150

-100

-50

0

50

100

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 06-19 09-19

Israel o The deadlock in the political system continues and the possibility of a third elections become imminent. Now that both

parties failed to reach an agreement and an indictment was filed against the prime minister, the political paralysis is

expected to continue. Meanwhile, investors stay calm, assuming that the economy is strong enough to absorb

uncertainty, and that the next government will stick to the principle of budgetary discipline

o The economy grew by 4.1% in Q3 (annually). The numbers seem to indicate robust growth but much of it is the result of

inventory growth, vehicle purchases and public consumption. Weakness in the main growth engines of the economy,

privet consumption and export, is evident

o The OECD downwards Israel economy's growth projections to 2.9% in 2020-2021. The slowdown in the global economy is

expected to weaken exports, and the cooling of the labor market will reduce private consumption

o The Shekel continued to appreciate in the past month as it is one of the best performing currencies against the Dollar

since the beginning of the year. In response, the Bank of Israel (“BOI”) had to buy $ 314 million during October, the first

real intervention since early 2018 and a signal for additional foreign exchange purchases he plans to make

o Despite the fall in the inflation rate to 0.4%, lower than the bottom of the inflation target range (1% -3%), the BOI decided

not to reduce interest rate. However, the appreciation of the shekel, and the possibility of a further decline in inflation, led

the BOI to back the interest rate decision with massive USD purchases, while leaving the door open for interest reduction

later

Core Economic Indicator Israel

Economic Indicator Latest

Figure Reference Period

Growth Rate 4.1% Q3-2019

Unemployment Rate 3.4% October-2019

Inflation Rate (YoY) 0.4% October-2019

Central Bank Interest Rate 0.25% November-2019

10 Years Yield 0.82% November-2019

Ratio of Surplus in Current

Account to GDP 3.38% Q2-2019

Ratio of Public Debt to GDP 61.00% Q4-2017

Economic Growth GDP (Annualized)

4

5.4 5.7 5.6

4.6

5.8

5

3.7

7.6

2.3

0.5

-0.8

4

3

4.7

7.2

4.1

2.4

4.4 4.2

1.8

6.3

1.2

0.4 0.8

3.6 3.8

6.6

4.9

3.8

0.7

4.4

5

4.5 4.3

1.3

2.9

4

4.5

0.8

4.1

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

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 09-19

Labor Market Unemployment 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

Inflation CPI (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

0.7

1.2

1.7

2.2

2.7

3.2

3.7

4.2

4.7

11-11 05-12 11-12 05-13 11-13 05-14 11-14 05-15 11-15 05-16 11-16 05-17 11-17 05-18 11-18 05-19 11-19

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 Costs USDILS 1YR Forward Premium

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

Exchange Rate USDILS (Left) BOI Nominal Effective Rate (Right)

70

75

80

85

90

95

100

105

11-13 05-14 11-14 05-15 11-15 05-16 11-16 05-17 11-17 05-18 11-18 05-19 11-19

3

3.2

3.4

3.6

3.8

4

4.2

USDILS BoI Nominal Effective Exchange Rate