For nearly nine months, Lebanon has been facing a significant leadership vacuum with no president in place. As a result, the nation has been grappling with multiple challenges, including uncontrollable inflation, a failing energy sector, and a lack of accountability for the tragic Beirut port explosion that claimed the lives of over 200 people. The absence of a functional government has hindered necessary reforms to address one of the worst economic crises in the country’s history.

As the Members of Parliament continue their negotiations behind closed doors to elect a new president, Lebanon is currently under the caretaker leadership of Prime Minister Najib Mikati and his 24-member cabinet. However, his government has encountered resistance from rivals who claim that he is exceeding his authority by holding cabinet sessions, signing decrees, and expressing readiness to engage in border delineation with Israel, which would typically fall under the president’s purview.

In parallel, this week more and more armed people are recovering their deposits by holding up banks.  Such bank heists have become common in Lebanon as Lebanon’s commercial banks have severely limited withdrawals and locked many out of their savings.

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), increased this week by 0.32% to stand at 6.52 points by the week ending July 20, 2023. As for the JP Morgan EMBI, it rose by 0.08% to stand at 805.86 by the week of July 20, 2023 compared to 805.21 by July 13, 2023.

Furthermore, the yield on the five years (5Y) Lebanese Eurobonds dropped by 30 bps to stand at 138.8%, meanwhile  the yield on the ten years (10Y) Lebanese Eurobonds rose by 90 bps to stand at 103.1% by the week ending July 20, 2023 compared to the previous week.

US yield curve shifted higher on July 20^th, 2023; moreover six months treasury yield reached the highest figure of 5.52%, thus still indicating an inverted yield curve. Indeed, the US bond market faced renewed pressure due to emerging indications of labor market strength, leading traders to factor in a higher probability of an additional Federal Reserve interest rate hike later in the year.

The American labor market has demonstrated remarkable resilience recently, with a decline in the number of jobless claims, even amid higher interest rates aimed at controlling hiring. The Labor Department reported that U.S. applications for jobless benefits dropped by 9,000 to 228,000 for the week ending July 15, 2023, down from 237,000 in the previous week.  Despite the overall healthy labor market, the technology sector has experienced several high-profile layoffs, with many companies citing overhiring during the pandemic. While these layoffs have garnered attention, they appear to be more of an isolated occurrence rather than indicative of broader labor market trends.

Looking back, in the wake of the COVID-19 pandemic’s devastating impact on the economy, more than 20 million jobs vanished in the spring of 2020. Since then, the U.S. labor market has made a remarkable recovery, witnessing a blistering pace of job creation, often surpassing forecasts. Over the past few weeks, the number of jobless claims initially appeared to reach a sustained higher level above 260,000, causing concerns. However, in the subsequent four weeks, claims have retreated, reaffirming the labor market’s overall health.

Despite the Federal Reserve’s implementation of the fastest interest rate hikes since 1989, the unemployment rate has barely budged, remaining historically low at 3.6%. This figure is significantly below the Fed’s target of 4% or higher, which officials believe is necessary to counter inflationary pressures effectively. However, recent reports indicate that consumer prices fell to 3% in June, the lowest level since early 2021 and much closer to the Fed’s inflation target of 2%. This suggests that the current rate-hiking campaign may be having a favorable impact on inflation control without substantially impacting the job market.

In turn, the 5Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a drop from 13,517 to 13,472 bps; meanwhile the 10Y spread between the yield on Lebanese Eurobonds and their US comparable increased from 9,844 to 9,952 bps by the week ending July 20, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank