The situation in Lebanon remains complex in the wake of the conflicts between Hamas and Israel.  Indeed, the situation on the Israeli-Lebanese border is volatile leading to deadly clashes between Israeli troops and Iran-backed Hezbollah fighters. 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), deteriorated rapidly since the start of the conflict in Palestine and dropped further this week by 2.4% to stand at 5.81 points by November 16^th, 2023. As for the JP Morgan EMBI, it added 1.1% to stand at 790.98 by the week of November 16^th, 2023 compared to 782.41 in the previous week.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds increased respectively by 250 and 225 bps to stand at 159.5% and 114.95%, by the week ending November 16^th, 2023 compared to the previous week.

US jobless claims jumped by 13,000 to 231,000 for the week ending November 11, that was the highest since August according to Labor Department data. The reading was above the consensus of 220k and Bloomberg estimate of 221k. Continuing applications for US unemployment benefits rose to the highest level in almost two years, underscoring the increasing challenges unemployed workers are facing in finding new jobs. While a resilient labor market has been supporting economic growth this year, many economists expect it to lose steam under the weight of higher borrowing costs. Companies are now adding jobs at a slower pace, unemployment is rising and wage growth has decelerated, leading to some pullback in spending ahead of the holiday season.  As such, the jump in initial claims, combined with the persistent rise in continuing claims, is translating to a durable softening in the labor market. The report signals the unemployment rate is likely to edge higher in November from 3.9% in October, thus signaling that the Fed is probably done with increasing interest rates this year.

This week, new data from the Labor Department shows that US inflation eased in October standing at 3.2% down from 3.7% a month earlier. Although, housing costs continued to climb, overall price pressures were milder than analysts had expected. , suggesting the country’s fight against inflation may nearly be over. Hopefully the Fed will get started on lowering rates sooner rather than later in 2024, as expected by lower five and ten years Treasury Bonds.

This week, Moody’s announced a shift in its outlook on U.S. debt from “stable” to “negative”, coinciding closely with the looming threat of a U.S. government shutdown. Moody’s rationale for lowering the U.S. debt outlook highlighted the large fiscal deficits and the decline in debt affordability, a move that drew immediate criticism from President Joe Biden’s administration. Despite this, any potential credit rating downgrade by Moody’s may not significantly impact the markets, considering the historical desensitization to such warnings and downgrades. Indeed, reflecting on past instances like the 2011 warning and subsequent downgrade by S&P, and Fitch’s actions in 2023, it seems the markets have become less responsive to such events. While a downgrade by Moody’s may not stir the markets, there remains a silver lining—the potential for leveraging mechanisms to alleviate U.S. debt concerns. Mostly, adjusting interest rates appears to be a swifter and more immediately effective lever compared to reducing the budget deficit, which often requires prolonged cooperation among U.S. lawmakers. As the Fed’s actions may carry more immediate impact, the hope is for an expedited initiation of rate adjustments in 2024 to tackle the situation.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded an upturn from 15,235 and 10,808 bps to 15,507 and 11,050 bps respectively by the week ending November 16^th, 2023.

 Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank