French prosecutors have issued an arrest warrant for Lebanon’s central bank governor Riad Salameh. The warrant was issued after Salameh failed to attend a hearing in Paris where prosecutors had been expected to press preliminary fraud and money laundering charges against him. However, Salameh said in a statement that he would appeal against the warrant and accused the French investigative judge Aude Buresi of taking a decision based on “presumptuous ideas”.

Consequently, the Lebanese Eurobonds market is still recording an all-time worst performance below the 7 cents during the course of the week. 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), fell this week by 2.10% to stand at 6.07 points by the week ending May 18, 2023. As for the JP Morgan EMBI, it dropped by 1.54% to stand at 779.92 by the week of May 18, 2023 compared to 792.12 by the end the week of May 11, 2023.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds rose respectively by 260 and 245 basis points to stand at 147.8% and 117.1% by the week ending May 18, 2023, compared to the previous week.

US yield curve shifted higher this week as one, five and ten year yields rose respectively by 32 bps, 33 bps and 26 bps to stand at 5.02%, 3.69% and 3.65% on Thursday May 18. Moreover, the U.S. Treasury yield curve entered an unprecedented state, with one-month yield rising above three-month yield, due to investors’ mounting concern about the U.S. debt ceiling situation.  In fact, one month yield reached the highest figure of 5.59% on May 18, thus many investors believe the economy is now destined for a recession.

Economists have greatly underestimated the strength of the US labor market. That’s the takeaway from Thursday’s sharp reversal in what turned out to be a fraudulent jump in initial jobless claims earlier in the month. The latest claims data showed that US jobless claims fell by 22,000 to stand at 242,000 in the week ending May 13, thus validating the view that the previous week’s uptick was due mostly to fraud in Massachusetts. Continuing claims, a measure of how hard it is to find new work, fell to 1.8 million in the week ending May 6, the lowest since the week of March 3. As such, the labor market is still holding firm despite growing concerns about the strength of the economy.  Employers continue to add jobs at a steady pace and the unemployment rate fell back to 3.4% a multi-decade low in April 2023. Consequently, the labor market has proved more durable than many people thought. However, if the job market continues to hang tough, that could have positive implications for consumer spending, housing and corporate earnings, feeding a virtuous cycle.

Federal Reserve officials are increasingly split over whether to raise interest rates at their meeting next month or pause their credit tightening campaign as inflation remains well above their 2% target and unemployment of 3.4% is the lowest in a generation. Some have suggested a compromise: a skip, thus putting off a rate increase at their June’s meeting, only to raise again the issue at their July meeting. In contrasting remarks, Governor Philip Jefferson outlined on May 18, the dovish case for patience while Dallas Fed chief Lorie Logan suggested that she’s not ready to call a halt to the Fed’s tightening campaign.  The data in coming weeks could yet show that it is appropriate to skip a meeting. Nonetheless, Jefferson, nominated by President Joe Biden as Fed vice chair, said that the full effects of past tightening have probably not yet been felt by the economy. On another note, lawmakers are currently negotiating with the White House to raise the US borrowing limit ahead of a June 1 deadline or risk a catastrophic debt default.

In turn, the 5Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an increase from 14,184 and 11,126 bps to 14,411 and 11,345 respectively by the week ending May 18, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank