The current outlook in US is optimistic for a soft landing scenario, given decisive progress in managing inflation

07/12/202330/11/2023ChangeYear to Date
BLOM Bond Index (BBI)5.765.563.60%-4.54%
Weighted Yield223.54%225.87%-1.03%154.54%
Weighted Spread21,81222,044-1.05%148.54%
07/12/202330/11/2023 Change
JP Morgan EMBI823.40809.661.70%
5Y LEB161.80%165.20%-340
10Y LEB115.80%119.30%-350
5Y US4.11%4.31%-20
10Y US4.14%4.37%-23
5Y SPREAD                   15,769                     16,089-320
10Y SPREAD                   11,166                     11,493-327


During the weeks leading up to Christmas and the Holidays, Lebanon saw an improvement in its economy, though it was still far from stabilizing. The market experienced increased business activities, especially in retail, due to festive shopping, which positively impacted the overall economic situation. However, the economic boost remains reliant on consumer confidence and external factors like conflicts in the South of Lebanon and broader regional issues. Despite efforts to maintain a sense of normalcy, Lebanon’s economy continues to struggle amid financial, political, and presidential election concerns, adding to the wider geopolitical tensions in the region.

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), improved remarkably throughout the course of this week, by 3.6% to stand at 5.76 points by December 7, 2023. As for the JP Morgan EMBI, it added 1.7% to stand at 823.4 by the week of December 7, 2023 compared to 809.66 in the previous week.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds dropped respectively by 340 and 350 bps to stand at 161.8% and 115.8%, by the week ending December 7, 2023 compared to the previous week.

US yield curve shifted lower over the course of the week as one, five and ten years yields fell respectively by 11, 20 and 23 bps to stand at 5.05%, 4.11% and 4.14% by December 7, 2023 compared to the previous week, making the yield curve close to being flat.

The prevailing belief among many investors is that inflation has been effectively managed, showcasing confidence that the Federal Reserve achieved progress toward its 2% inflation target. Consequently, investors have amplified their expectations that the central bank will initiate interest rate cuts by spring to avert a recession. This anticipated action would signal the conclusion of an inflation-tackling campaign that has unsettled markets since early 2022. Nonetheless, inflation persists at an elevated rate of 3.2%, causing concern among some investors and leaving bonds susceptible to a downturn.

Initially, there were concerns that high inflation couldn’t be reduced without inducing a recession. However, the current outlook is optimistic for a soft landing scenario, given decisive progress in managing inflation. Many investors believe the Fed may soon execute rate cuts to engineer this soft landing. Although there’s confidence that rate hikes might have concluded, however several experts caution that markets may be underestimating the potential duration of the Fed maintaining rates at their current levels. The economy has cooled somewhat, yet indicators such as job openings remaining above pre-pandemic levels and sustained elevated wage growth suggest that further moderation is required to fully address inflation concerns.

On another note, many analysts believe that the Fed’s interest-rate hikes are still working their way through the economy. Higher rates are meant to curb inflation by making borrowing more expensive. That in turn is supposed to reduce spending by households and businesses and lead to slower wage growth, as employers cut back on hiring. Despite a surge in the third quarter, the economy has generally expanded more slowly since the Fed started raising rates than it did before the pandemic.

In order to understand this inflationary trend, several factors may have contributed to it. Indeed, the pandemic induced a surge in spending patterns, initially on goods as people stayed home and received government-stimulus money. Later on, as Covid fears diminished, consumers shifted their spending onto services such as travelling and dining out. Another consequence of the pandemic was that many older workers left their jobs and were replaced by less-experienced employees. That was one factor that dragged on productivity- a measure of output per hours worked- and made it even harder for businesses to meet demand, pushing up prices further. It also might have driven up wages since employers were fighting over qualified workers. However, productivity has since normalized.

US jobless claims ticked up by 1000 to reach 220,000 in the week ending December 2, according to Labor Department data. That was in line with estimates in a Bloomberg survey of economists. Additionally, continuing applications for US jobless benefits fell by the most since July in a holiday week after climbing for the past two months. Recurring jobless claims, a proxy for the number of people continuously receiving unemployment benefits, decreased by 64,000 to 1.86 million in the week ending November 25. That marked only the second drop since early September and followed a surge in the prior week. The four-week moving average of continuing claims, which smooths out some of that volatility, is running at the highest level in two years. Despite the decline, continuing claims are still elevated amid growing evidence of a cooling labor market. Indeed, while job creation remains mostly healthy, employers are increasingly hitting the brakes on hiring, unemployment is rising and wage gains are losing steam.

Authorities hope for a gradual slowdown in the labor market, ideally achieved by a reduced demand for workers rather than outright job losses. This strategy has, to a large extent, has been effective as job vacancies have decreased from a peak of 12 million last year, and although the unemployment rate has slightly risen in recent months, it remains historically low at 3.9%.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded a downturn from 16,089 and 11,493 bps to 15,769 and 11,166 bps respectively by the week ending December 7, 2023.

5Y Credit Default Swaps (CDS)
 Source: Bloomberg


Weekly Change of Lebanese Eurobonds Prices 

Maturity Coupon in %07/12/202330/11/2023Change 07/12/202330/11/2023Change bps

Source: BLOMInvest Bank

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