US recession, as early as June 2023?

02/03/202323/02/2023 ChangeYear to Date
BLOM Bond Index (BBI)7.197.26-1.03%19.22%
Weighted Yield          161.23%158.14%1.96%83.59%
Weighted Spread15621153231.94%78.00%

02/03/202323/02/2023 Change
JP Morgan EMBI767.69776.38-1.12%
5Y LEB128.20%126.75%145
10Y LEB99.94%99.20%74
5Y US4.32%4.09%23
10Y US4.08%3.88%20
5Y SPREAD                   12,388                     12,266122
10Y SPREAD                      9,586                        9,53254

This week, the government announced that supermarkets will start pricing goods in US dollars instead of in local currency. In fact, Lebanon, a country heavily reliant on imports, has been moving towards a cash-based and dollarized economy given further restrictions by banks on transactions. As such, businesses are pricing their items in dollars in order to avoid the fluctuation of the Lebanese pound, allowing their customers to pay either in dollars or in Lebanese pounds, but only on the basis of the daily parallel/black market rate. The phenomenon of “dollarization”, whereby every good and service is priced in dollars rather than Lebanese pound, has been a long time coming; however, is seems both beneficial and detrimental.

Furthermore, this week Lebanese policymakers tripled the tariffs on imports in local currency. In fact, customs fees will now be calculated at a dollar exchange rate of LBP 45,000 per USD instead of LBP 15,000 per USD. The irony is that the state seeks to boost its revenues amid a worsening economic crisis and a continued hyperinflation for the 31st consecutive month, with no incentive to put in place a recovery plan. Meanwhile, parliamentary blocs are yet to agree on the election of a new Lebanese president and warned against the dangers created by the presidential vacuum. Indeed, mismanagement and corruption remain at the centre of the Lebanese political system and no hope is in sight for Lebanese citizens.

As such, 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), continues to suffer and decreased further this week by 1.03% over the week, to stand at 7.19 points by the week ending March 2nd, 2023. However, it increased by 19.22% Year to date (YTD). As for the JP Morgan EMBI, it declined remarkably by 1.12% to stand at 767.69 by the week of March 2nd, 2023 compared to 776.38 by the end the week of February 23rd, 2023.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds jumped by 145 and 74 basis points (bps) to stand at 128.2% and 99.94% respectively by the week ending March 2nd, 2023, compared to the previous week.

This week in the U.S, the Treasury Yield curve shifted higher and suggested that the US economy will enter a recession as early as June. In fact, the spread between 3-month and 30-year yields continues to widen as it reached 88 bps by March 2nd, versus a spread of 105 bps by the end of January. This is a warning sign because inverted yield curves precedes recessions, but it’s the steepening that signals the downturn is going to hit sooner rather than later. Interestingly, the rise in long-term yields is particularly troublesome because it suggests the bond market is beginning to price in structurally high inflation.

US Jobless claims continue to defy predictions of labor-market softening. A drop in both initial and continuing filings reflects employers’ resistance to letting workers go. In more details, applications for US unemployment benefits eased by 2,000 for the week ending February 25, remaining at a historically low level of 190,000 and below the pre-pandemic average of 218k from 2019. Although, the week included President’s day and jobless claims figures tend to be more volatile around holidays. Moreover, continuing claims or the number of people who have already filed an initial application and are now claiming unemployment benefits declined by 5k to 1.66 M in the week ending February 18, hovering below their pre-pandemic average of 1.69M.

The figures underscore the enduring strength of the labor market and the reluctance of many businesses to dismiss workers. While a number of high-profile firms, predominantly in technology and finance, have announced job cuts in recent months. Nevertheless, economists continue to anticipate that layoffs will rise and that unemployment rate will tick up to 4.5% by the end of 2023, especially that tight monetary policy operate with a lag. That said, economists and investors are watching the claims data closely for any sign that the labor market is starting to crack under the weight of still-rapid inflation, high labor costs and interest-rate hikes by the Federal Reserve.

On another note, US mortgage rates increased last week to the highest level since mid-November, pushing down home purchases to the lowest level in nearly three decades. In fact, the contract rate on a 30-year fixed mortgage rose by 9 basis points to 6.71%, as per the Mortgage Bankers Association. Accordingly, home Purchases were down by 5.6% this week, prior to a fall of 18.1% in prior week.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an increase from 12,266 and 9,532 bps to 12,388 and 9,586 bps respectively by the week ending March 2nd, 2023.

5Y Credit Default Swaps (CDS)
Lebanon . .
 Source: Bloomberg


Weekly Change of Lebanese Eurobonds Prices 

Maturity Coupon in %02/03/202323/02/2023Change 02/03/202323/02/2023Change bps

Source: BLOMInvest Bank

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