Jihad Azour, a former finance minister and regional director at the International Monetary Fund, has emerged this week as the favored candidate for Lebanon’s vacant presidency. Supported by key Christian parties and a coalition of independent MPs, Azour’s nomination strategically aims to counter the candidate backed by Hezbollah, Suleiman Frangieh, who lacks broad support within Lebanon’s Christian community. Indeed, Azour, renowned for his financial expertise, has been nominated at a time when Lebanon is in negotiations with the IMF to secure a $3 billion bailout package. The IMF on Thursday announced that Mr Azour was to take a leave of absence in order to avoid any perception of conflict of interest.

However, Lebanon still faces significant challenges despite repeated pleas from the IMF. The country lacks essential capital control legislation, remains embroiled in an unresolved banking crisis, and suffers from inconsistent exchange rates for the Lebanese pound, which has significantly depreciated. The failure to address these urgent issues not only creates uncertainty regarding economic stability but also obstructs efforts to restore order to the financial landscape. The United States has made it clear to Lebanese authorities that securing a deal with the IMF is the only viable option for the country.

Consequently, the Lebanese Eurobonds market is still recording an all-time worst performance below the 6 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 0.49% to stand at 5.68 points by the week ending June 8, 2023. As for the JP Morgan EMBI, it rose by 0.55% to stand at 787.51 by the week of June 8^th, 2023 compared to 783.2 by the end the week of June 1st, 2023.

Furthermore, the yield on the five years (5Y) Lebanese Eurobonds increased by 20 bps to stand at 147.9%, meanwhile the yield on the ten years (10Y) Lebanese Eurobonds fell by 10 bps to stand at 116.7% by the week ending june 8, 2023 compared to the previous week.

Applications for US unemployment benefits jumped last week to the highest level since October 2021, suggesting mounting layoff announcements may be starting to translate into job cuts. Initial jobless claims rose by 28,000 to 261,000 in the week ending June 3, which included the Memorial Day holiday, as per the Labor Department report. The increase was the biggest since July 2021 and exceeded all forecasts in a Bloomberg survey of economists. Continuing claims, which include people who have received unemployment benefits for a week or more and are a good indicator of how hard it is for people to find work after losing their jobs, fell to 1.76 million in the week ending May 27, the lowest level since mid-February. The data can be unreliable from week to week, especially around major holidays. As such, the labor market, while largely resilient, may be starting to show signs of cooling. In fact, US companies have announced more layoffs in the first five months of 2023 than in all of last year, noting that job cuts have mostly been contained to technology and banking sectors.

Moreover, US unemployment rate jumped to 3.7% by end of May 2023, compared to a lower level of 3.4% in the previous month. Indeed, it’s increasingly possible for the unemployment rate to reach the median FOMC 4.5% projection by year-end, according to Bloomberg Economics. On another note, the Biden administration is proposing to allies that they extend a coordinated freeze on new digital services taxes.

US investors reassessed Federal Reserve policy trajectory following unexpected interest-rate rises by central banks in Australia and Canada. Indeed, Two and three-year Treasury yields both increased by 19 bps on Thursday, June 8, to stand respectively at 4.52% and 4.17, amid renewed concerns that the Federal Reserve may keep interest rates higher for longer. In fact, The Bank of Canada move reminded investors that even if the Fed pauses its tightening cycle after its policy meeting next week, it may still need to resume raising interest rates should inflation not decline quick enough from the current 4.9% to its 2% target.

Consequently, markets are pricing in a 72.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% after its meeting on June 14. However, the chance of an additional 25-basis-point rate increase in July has risen to nearly 50%, up from just 10% a month ago. And whereas a few months ago the Fed was expected to have begun cutting rates from current levels by this fall, the market is now pricing in no such reduction until next year.

The odds of a US downturn are rising because the Federal Reserve has already pushed interest rates high enough to stall the economy, according to Campbell Harvey, director of research at Research Affiliates. Harvey’s research on the yield curve showed that US recessions have for decades been preceded by an inverted yield curve in which 3-month Treasury rates exceeded 10-year ones. It’s had an eight-out-of-eight track record going back to 1968. And the current inversion is a warning to businesses and consumers that a downturn is likely ahead. Yet the US economy has shown surprising resilience in the face of the Fed’s aggressive rate hikes, defying periodic forecasts of an imminent downturn.

Harvey at the beginning of 2023 made the case that dodging a recession was possible, though he now says the central bank’s failure to pause rate hikes after waiting too long to start raising them doesn’t portend a good outcome for the economy. In fact, The magnitude of the inversion has been so steep that it has put pressure on the banking system, with lenders squeezed by higher borrowing costs and deep losses on long-term loans extended when interest rates were far lower. Indeed, the inversion itself can act as a self-fulfilling prophecy due to its successful track record of acting as a recession warning signal. For instance, companies and businesses might start to pull back or spend less on major projects or purchases.

In turn, the 5Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a slight rise from 14,400 to 14,403, meanwhile the 10Y spread between the yield on Lebanese Eurobonds and their US comparable dropped from 11,319 to 11,297 by the week ending June 8, 2023.

 Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank