Cool But High US Inflation and Tight Labor Market Making No Room For Easing in Fed Monetary Policy

The Lebanese Eurobonds market continues to suffer under full absence of confidence and trades around the 7 cents. The decline is certainly predictable due to the negative sentiment concerning investors’ anticipation for any recovery plan especially after yesterday’s developments. Lebanon has openly entered into the international and regional conflict through potential chaos which is considered a weapon for the corrupted leaders used against its people. Saying that, difficult time seems ahead Lebanon as solution must come through a national pact and an internal agreement between parties, or unfortunately broad based social explosion is at the door.

Given these disruptions, the BLOM Bond Index (BBI) which is BLOMInvest Bank’s market value-weighted index tracking the performance of the Lebanese government Eurobonds’ market (excluding coupon payments), decreased by 0.40% over the week, to stand at 7.38 points by the week ending February 16, 2023 but it increased by 22.39% Year to date (YTD). As for the JP Morgan EMBI, it fell by 1.36% to stand at 778.25 by the week of February 16, 2023 compared to 788.98 by the end the week of February 8, 2023.

Furthermore, the yield on the five years (5Y) Lebanese Eurobonds recorded an uptick of 5 basis points (bps) to stand at 123.95%, while the yield on the ten years (10Y) Lebanese Eurobonds recorded a decrease of 20 basis points (bps) to stand at 97.60% by the week ending February 16, 2023, compared to the previous week.

This week in the U.S, the Treasury Yield inches higher for the second consecutive weeks in light with Fed’s possible case for returning to larger rate hikes. The yields on shorter terms such as one, two and three years rose respectively by 11, 15, and 24 bps to stand at 4.99%, 4.62%, and 4.35% on February 16, 2023 compared to the previous week. Meanwhile, the yields on the 5Y jumped by 21 bps to stand at 4.06%, the highest since 14 November 2022 same for the 10Y yields which recorded an uptick of 19 bps to reach 3.86% the highest since 27 December 2022.

The climb in US yields accelerated after a gauge of producer prices rose more than expected while yearly inflation continued to cool but remained high and labor market is still tight. In details, the producer price index which measures what suppliers are charging businesses increased 6% for the year ending in January and jumped by 0.7% from December 2022, the lowest level since March 2021. Earlier this week, the CPI showed prices increased 0.5% in January from the month before while annual changes ticked down by 0.1% to stand at 6.4% by January 2023.

Meanwhile, initial jobless claims continued to point to extremely low levels of layoffs and a very tight labor market as it stood at 194,000, below the 241,000 in November and remained below the pre-pandemic average of 218,000 in 2019. With growth and tight labor market, we expect the Fed to keep policy rates higher for longer than the market is pricing in as the data indicates just how far we are from an actual easing in monetary policy.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a fall from 12,008 and 9,417 bps to 11,989 and 9,374 bps by the week ending February 16, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank