Lebanon’s caretaker Prime Minister Najib Mikati expressed concern about the ongoing influx of thousands of Syrian refugees into the country, warning that it could threaten Lebanon’s independence and demographic balance. The Lebanese army recently prevented 1,200 Syrians from entering the country. In addition to this issue, the caretaker cabinet approved the replacement of Banque du Liban’s Savrafa exchange rate platform with a new system operated by Bloomberg. They also discussed the 2024 draft budget, which includes a proposed VAT increase, a reduced deficit, and an incremental salary increase for public servants. However, many in the public sector find the salary increase insufficient given the high inflation. The cabinet plans to hold another session to deliberate on budget amendments, which will then be submitted to parliament for voting. It’s worth noting that budget approvals in Lebanon have been consistently delayed, with the 2023 budget being over eight months overdue.

In this context, 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 remarkably by 2.13% to stand at 7.76 points by the end of the week of September 14^th, 2023. As for the JP Morgan EMBI, it rose by 2.13% to stand at 793.81 by the week of September 15^th, 2023 compared to 791.75 by September 14th, 2023.

US treasury yield curve shifted higher this week, as five and ten years yield increased respectively by 0.04 and 0.02 bps to stand at 4.42% and 4.29%. Moreover, three months (3M) yield reached the highest figure of 5.55% as of September 14^th, 2023. As such the yield curve is still inverted.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds dropped respectively by 130 and 90 bps to stand at 130% and 89.2, by the week ending September 15, 2023 compared to the previous week.

US inflation for the month August rose to 3.7% annually compared to a lower figure of 3.2% in the previous month. Traders concerned about the potential impact of rising inflation on Federal Reserve policy found some relief in the fact that the recent surge in prices was mainly attributed to fuel costs. The Federal Reserve typically pays less attention to gas prices and instead focuses on labor market conditions.

Over the past year, job gains have been gradually slowing down as the Federal Reserve has been cautiously raising interest rates. Payroll employment data for the three months leading up to August indicated an average increase of 150,000 jobs per month. While this is significantly lower than earlier in the pandemic recovery, it has not slowed enough to bring inflation back in line with the Fed’s 2% target. Indeed, recent data shows an increase in applications for U.S. unemployment benefits, with jobless claims rising by 4,000 to 220,000 for the week ending September 9, as reported by the Labor Department.

The consistent and gradual nature of this slowdown in job gains is considered necessary to reduce excessive demand for workers, ultimately helping to achieve sustainable 2% inflation. However, despite the progress already made, further slowing is required. According to updated assessments from Bloomberg Economics, the neutral pace of job gains is estimated at 34,000 per month, which is barely revised from a year ago and significantly lower than the recent average of 150,000.

In comparison, during the earlier stages of the recovery from the COVID-19 shutdown in 2021, job gains exceeding 600,000 per month were common. Even just a year ago, the three-month average job gain was around 430,000. Therefore, the recent three-month average of 150,000 jobs in August 2022 represents a significant step toward reaching the 34,000 target but is still some distance away.

It’s important to note that there is considerable uncertainty surrounding the estimated neutral pace of job gains, with a plausible range extending from -16,000 to 84,000. Bloomberg Economics’ outlook suggests that the U.S. economy may enter a mild recession in the fourth quarter, which could expedite the necessary slowdown in job gains more abruptly than the gradual softening observed in the past two years.

Despite the Fed’s aim for a smoother transition to a soft landing, workers are already expressing heightened job security concerns compared to a year or two ago. They are quitting their current jobs at a rate similar to pre-pandemic levels, which is significantly lower than early 2022. As the Fed maintains a tight monetary policy to combat inflation, worker nervousness about job security is likely to intensify, creating a less comfortable economic environment than the one experienced in previous years.

In turn, the 5Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a downturn from 12,692 and 8,583 to 12,558 and 8,491 bps respectively by the week ending September 14, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank