Economic Lessons From 2023

Economic

Summary:

U.S. real personal consumption has held up well in the face of higher interest rates because jobs kept growing. Inflation has receded in virtually every category, although shelter is coming down more slowly due to the confusing and lagged calculation of owners' equivalent rent.

We entered 2023 with a pessimistic consensus outlook for U.S. economic performance and for how rapidly inflation might recede. As it happened, there was no recession, and personal consumption posted sustained strength. Inflation, except shelter, declined dramatically from its 2022 peak.

The big economic driver in 2023 was job growth. Jobs had recovered all their pandemic losses by mid-2022 and continued to post strong growth in 2023, partly due to many people returning to the labor force.

When the economy is adding jobs, people are willing to spend money. The key for real GDP in 2023 was the strong job growth that led to robust personal consumption spending. For 2024, labor force growth and job growth are anticipated by many to slow down from the unexpectedly strong pace of 2023, leading to slower real GDP growth in 2024.

And there is still plenty of debate about whether a slowdown in 2024 could turn into a recession. Followers of the inverted yield curve will point out that it was only in Q4 2023 that the yield curve decisively inverted (meaning short-term rates are higher than long-term yields). It is often cited that it takes 12 to 18 months after a yield curve inversion for a recession to commence. Using that math, Q2 2024 would be the time for economic weakness to appear based on this theory. Only time will tell.

The rapid pace of inflation receding in the first half of 2023 was a very pleasant surprise. Indeed, inflation is coming under control by virtually every measure except one: shelter. The calculation of shelter inflation is highly controversial for its use of owners' equivalent rent, which assumes the homeowner rents his house to himself and receives the income. This is an economic fiction that many argue dramatically distorts headline CPI, given that owners' equivalent rent is 25% of the price index.

Once one removes owners' equivalent rent from the inflation calculation, inflation is only 2%, and one can better appreciate why the Federal Reserve has chosen to pause its rate hikes, even as it keeps its options open to raise rates if inflation were to unexpectedly rise again.

The bottom line is that monetary policy reached a restrictive stance in late 2022 and was tightened a little more in 2023. For a data dependent Fed, inflation and jobs data for 2024 will guide us as to what might happen next. Good numbers on inflation or a recession might mean rate cuts. Otherwise, the Fed might just keep rates higher for longer.

Source: CME Group

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Glendon

Economic

U.S. furniture company head Jordan England thinks his firm's Chinese suppliers are among the best in the game, but geopolitics and a slowing economy have pushed him to source more products from Southeast Asia, Eastern Europe and Mexico.

"I'm looking to move away from it (China)," said England, CEO and co-founder of Florida-based Industry West.

"It was always 'China plus one,'" he said, referring to the diversification strategy many businesses began implementing after Washington imposed trade tariffs on Beijing in 2018 to ensure they were not wholly dependent on Chinese suppliers.

Now "it's like 'plus-10' and then China," he added, with the latter down to providing half of Industry West's products and being trimmed more.

Foreign investors have been sour on China for most of this year, but data released over the past month has provided clear evidence of the negative impact de-risking strategies are having on the world's second-largest economy.

Activity surveys showed manufacturing unexpectedly contracted in October, while exports accelerated their decline. China recorded its first-ever quarterly deficit in foreign direct investment in July-September, suggesting capital outflow pressure.

West's De-Risking Starts to Bite China's Prospects_1

Nicholas Lardy, senior researcher at the Peterson Institute for International Economics, said in a note the new data imply that foreign firms are not only declining to reinvest earnings, but are selling existing investments and repatriating funds.

This trend could further weaken the yuan and clip China's economic growth potential, he added.

"In recent years, the scale, proportion and growth rate of foreign investment absorbed by China have all remained at a relatively high level," He Yadong, a Chinese commerce ministry spokesperson, said in response to a question from Reuters.

LONG-TERM PROSPECTS

Businesses have longstanding worries about geopolitics, tightening regulations and a more favourable playing field for state-owned companies. But for the first time in the four decades since China opened up to foreign investments, executives are now also concerned about long-term growth prospects.

A survey released last week by The Conference Board, a think tank, showed more than two-thirds of the CEOs who responded said China's demand has not returned to pre-COVID levels, with 40% expecting a decrease in capital investments in the country over the next six months and a similar proportion expecting to cut jobs.

China is outwardly confident about growth despite a global economic slowdown, with policy advisers favouring a target of about a 5% expansion of gross domestic product in 2024 and the country aiming to double the economy's size by 2035.

But England said he is concerned about how his Chinese suppliers that also produce for the domestic market will cope with the country's severe property market downturn.

"I'm worried about these factories going from 500 workers to 200, to 100," he said.

OPEN FOR BUSINESS?

Premier Li Qiang's overtures declaring China open for business to foreign investors after the pandemic have been greeted with scepticism in some Western boardrooms in light of a broader anti-espionage law, raids on consultancies and due diligence firms and exit bans, trade bodies say.

Li is expected to make a similar call on Tuesday at the country's inaugural China International Supply Chain Expo, which it is expected to use to tout its supply chain advantages.

"Foreign business executives here are eager to continue in China," AmCham President Michael Hart said. "But boards back in the U.S. are wary."

European firms have raised fair competition concerns about state-directed lending to Chinese manufacturers, while Noah Fraser, managing director of the Canada China Business Council, said "bad blood" remains over the detention of two Canadians from 2018 to 2021.

West's De-Risking Starts to Bite China's Prospects_2

In private equity, while Asia-focused funds have allocated capital to China, data from Preqin shows that as of Nov. 24, no China-focused buyout fund had been raised in 2023 in any currency, compared with $210 million in 2022 and $13.2 billion in 2019, before the pandemic.

Primavera Capital founder Fred Hu cites mounting macroeconomic uncertainty, a "murky capital market outlook," and lingering concerns over past regulatory crackdowns on high-growth industries such as technology and education.

"Tech firms and other private enterprises must be able to tap public markets for financing and liquidity, so the current market conditions in China do considerable harm to the real economy," said Hu, adding China-focused private equity firms were diverting capital to Southeast Asia, Australia and Europe.

Despite the challenges, foreign investment flows are not unidirectional. Many firms, especially in the retail sector, still target China's giant market. McDonald's said last week it had struck a deal to boost its stake in its China business.

An executive at a European hotel chain, who spoke on condition of anonymity due to the topic's sensitivity, said his firm was happy to reinvest profits in China for now.

"We know what's going on politically and yes, economically," he said, adding the latest data "was nothing to be proud of."

"It's slow, but only warrants taking a 'wait and see approach.'"

Source: REUTERS

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Justin

Central Bank

Forex

Two weeks left for the last ECB meeting for 2023

With the Thanksgiving holiday break behind us, we are on the homestretch now for 2023. The market is counting down to the last round of central bank meetings starting with the RBNZ this week and concluding with the BoJ meeting on December 19. The ECB gathering is scheduled for December 14 and the market would be very interested in any rhetoric change by President Lagarde.

Ahead of this busy period, ECB members have been flooding the airwaves with their comments. They have been trying hard to convince the market that (1) rate hikes are not completely off the table, (2) rates will probably stay at the current levels for a while and it is too early to talk about rate cuts, (3) the current weak growth patch is expected to continue in 2024 but they do not expect a recession and (4) inflation is expected to edge a bit higher over the coming months.

At the end of the day though, their approach is data dependent. Since the October ECB meeting, euro area economic data prints have been mostly mixed. The weak preliminary GDP for the third quarter of 2023 has been followed by subdued retail sales, revealing the impact of a rather long period of continued price increases. Inflationary pressures have been abating but core inflation remains stubbornly high, complicating the outlook. At least, PMI surveys have been picking up pace, although the German PMI manufacturing survey is stuck at an extremely low level.

Has Inflation Fire Been Extinguished by ECB?_1

November inflation report in focus

Τhis week we will get the preliminary inflation report for November. On Wednesday, the various German states will publish their figures with the German national figures expected after 13.00 GMT. The annual German inflation figure has been on an aggressive downward trend since the November 2022 peak of 8.8% with forecasts revolving around another deceleration to 3.5%.

The euro area aggregate print is expected on Thursday. With the headline indicator gravely affected by the weaker energy prices and thus seen recording a 2.8% YoY change, the core indicator is bound to get more attention. The core index, excluding energy, food, alcohol and tobacco, has been falling from the March 2023 peak of 5.7% and it is forecast to fall below the 4% level for the first time since July 2022.

However, it remains at an elevated level, and above the headline figure. ECB members are worried that the supply issues and stronger wage increases across the euro area are potentially supporting the stickiness of core inflation.

With the market fixated with rate cuts – the first 25bps rate cut is fully priced in by June 2024 – a possibly strong inflation report is unlikely to affect market expectations. In fact, only a combination of stronger growth indicators such the PMI surveys and repeatedly stronger inflation prints could convince the market that rate cuts are probably not around the corner at this stage.

Euro in danger of losing its recent hard-earned gains

The euro has been outperforming the pound since late August, but these hard-earned gains could be under threat now. Last week’s UK Autumn Statement appears to have invigorated the pound bulls but the next leg in the euro-pound pair will probably depend on this week’s data calendar, and predominantly the November inflation report.

A strong set of data this week could help the euro-pound pair climb above the August 23 ascending trendline and potentially open the door for a move towards the 0.8794-0.8815 area. On the flip side, weak data results and dovish rhetoric from ECB officials could mean the current correction might have legs, with 0.8635 being the next credible target.

Has Inflation Fire Been Extinguished by ECB?_2

Source:XM

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Devin

Economic

Gulf countries must focus on building resilience against impending threats to economic stability and growth as the risk of regional conflict rises following heightened geopolitical tensions in the Middle East, experts told Arabian Business.

Geopolitics can have a "direct, obvious impact on economies," according to Abishur Prakash, founder of geopolitical consultancy The Geopolitical Business.

Economic shifts can have far-reaching consequences such as China's foreign direct investment going negative for the first time since record-keeping began in 1998 or the "brain drain" taking place in Russia as technology talent leaves.

"Globally, we are going through a period of elevated geopolitical risk from the war in Ukraine and Russia's challenge to the global economic order to deteriorating relations between China and the US," said Nemr Kanafani, Senior Economist at the Conference Board.

He added that they both point to "the possible retreat of globalisation and international cooperation at a time when that is needed most of all, not least to address the challenges of limiting global warming."

Threats stem from both within the region and escalating global tensions. "The risk remains relatively contained for the GCC given that the conflict has not yet spread beyond Israel and the Occupied Territories," said Kanafani. However, should Iran enter the Gaza-Israel conflict directly or indirectly through its proxies in Lebanon or elsewhere, "the risks could rise for the GCC."

For the Gulf in particular, Kanafani noted that conflicts endangering vital oil routes through the Strait of Hormuz or a broad regional war enveloping Iran would pose some serious economic harm.

Slowing Chinese consumption paired with difficulties maintaining production cuts also jeopardises Gulf budgets, he said, as oil income underpins state spending and living standards across the region. A faltering global or domestic economy adds strain.

But beyond a regional war, economist Omar Al Ubaydli, director at Bahrain-based thinktank DERASAT, believes "the biggest risk" for the Gulf is a sharp decline in oil prices which would generate "considerable economic and social stresses" for the hydrocarbon-reliant region.

To strengthen resilience against these mounting pressures, the experts unanimously stressed the need for Gulf states to continue to diversify their economies, safeguard fiscal sustainability and deepen regional coordination.

Currently, GCC countries possess fiscal cushions and security cooperation insulating against localised violence. But the three experts concurred greater fortification is imperative against broadsides.

Diversifying non-oil industries remains a core defensive tactic. "Most shocks either adversely impact oil prices, or adversely affect their ability to export oil, both of which negatively impact their economy," Al Ubaydli told Arabian Business. Transitioning away from over-reliance on the energy sector through economic visions like Saudi's Vision 2030 remains paramount.

Yet he advocates "allocating greater resources to diversification research", recognising uncharted terrain requires adaptive strategies.

"The Gulf countries have significant room for improvement when it comes to dealing with geopolitical shocks," he said, as most shocks either negatively impact oil prices or the nation's ability to export oil – adversely impacting the economy. GCC members are aware of this, which is why they continue to diversify their economies and international partnerships simultaneously, to limit the negative impact of global shocks.

However, Prakash cautioned that diversification alone is insufficient without supporting reforms and robust macroeconomic policy.

Fortifying public finances also absorbs blows. "Sustainable debt levels and healthy non-oil government revenues are some of the policy objectives that we see in the GCC that ensure resilience," added Kanafani.

Regional collaboration likewise reinforces defenses by pooling capabilities and risks. With rising geopolitical polarisation fracturing global cooperation, Prakash advocates a "bloc-based approach, not global." Revitalising initiatives such as the India-GCC economic corridor could help diffuse external pressures.

As uncertainty mounts, Gulf states face growing urgency to fortify their economies. By doubling down on diversification, maintaining fiscal discipline, and deepening regional alliances, experts argue the region can strengthen its resilience against escalating global instability and conflicts close to home. The costs of inaction could be severe as geopolitical headwinds batter global growth.

Threats to Gulf economic resilience

However, according to Prakash, "several big threats could spell disaster for the global economy." This includes a massive state-driven cyberattack that shuts down key sectors of a major economy.

He also said that a permanent deterioration of US-China ties "could spill over into a crisis over Taiwan or a new economic war between the West and Beijing."

Additionally, the new era of "nuclear chess" is underway, as nations move nuclear weapons a tipping point could emerge where the placement of nuclear weapons begins to affect economic integration and flows.

Lastly, the AI threat. "As AI advances, the propensity for deepfakes to sow chaos in societies is high. When the Ukraine war began, the EU warned that disinformation could cause a run on the banks," added Prakash, who believes the next economic crisis could be started by AI-driven disinformation.

Steady fortification from various angles can better garrison Gulf economies against surging global volatility. Diversification, fiscal prudence and regional solidarity construct resilience for navigating turbulence ahead. With diligence, GCC nations can reinforce defenses against coming geopolitical storms.

"Resilience is connected to fallout," said geopolitical analyst Prakash.

"A geopolitical event can take place in one part of the world, but if the "effects" of that event do not make it beyond an initial radius, then most countries and companies do not need to be resilient."

Source: Arabian Business

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Kevin Du

Energy

"For however the fortune of war shall go, may it not so end that much that was fair and wonderful shall pass for ever?" King Theoden in The Lord of the Rings laments the end of the Ents, magical tree-herders.

Even if we tackle climate change successfully, some beauty and marvels of the nature and human worlds will be lost to us. Our children and grandchildren may never know polar bears, unspoilt coral reefs, the Piazza San Marco in Venice, a verdant Amazon rainforest, or the Anse Source d'Argent beach in the Seychelles. If we are from parched, semi-arid, or low-lying coastal countries, our children and grandchildren may not know our land at all – they may be fated to be refugees from climatic catastrophes and conflict.

But this is not another despair-inducing screed about climate doom. The climate summit Cop28 opens in Dubai on Thursday. And like Cop, this article is about where we are now, where we will soon be, and what to do about it.

This year is set to be the hottest on record. October was 1.7 degrees hotter than pre-industrial levels. The El Nino effect in the eastern Pacific, after an unusually extended period of its colder opposite La Nina, brings hotter global weather in general.

Cleaning up pollution from sulphur-containing fuels in ships, following regulation in 2020, is good for human health, but the white "aerosol" particles had a helpful side-effect in reflecting some of the sun's heat back into space. The reduction in sulphate pollution has warmed the busy shipping lanes of the North Atlantic in particular.

And in January 2022, the submarine volcano Hunga Tonga-Hunga Ha'apai erupted. Tropical eruptions can sometimes release huge amounts of sulphate particles, with a similar cooling effect to that of the shipping pollution. But Hunga instead injected huge volumes of water into the stratosphere, and water vapour is itself a strong greenhouse gas.

As El Nino's full effects take time, next year is likely to be hotter still. But the biggest culprit is not cyclical variations, volcanic eruptions or cleaner ships, but the ever-increasing volume of greenhouse gases we are adding to the atmosphere. The Paris Agreement of 2015 was intended to limit warming to no more than 1.5°C above pre-industrial levels by 2100. A single hot year does not invalidate that aim, but on current trends, it will be breached regularly by the 2030s.

If all countries meet the goals they set themselves in their Paris-related commitments, global emissions will remain roughly flat by 2030 at around 55 billion tonnes of carbon dioxide and other greenhouse gases per year. That would still be a major achievement – in 2010, it looked as though we were heading for 65 billion tonnes or more.

Yet, to be on target to limit warming to 2°C – the original Paris goal, and still dangerously hot – emissions could be about 41 billion tonnes. For the 1.5°C goal, emissions should be no more than about 33 billion tonnes.

This leads to four important conclusions.

The recognition at Paris of the need to reach net-zero carbon – not just lower emissions – was crucial. Carbon dioxide lingers in the atmosphere for thousands of years. So, the climate will keep getting hotter as long as carbon dioxide emissions continue faster than they can be removed.

Reaching net zero at some date – whether 2050, like the target of the UAE, UK and US, the 2060 of Saudi Arabia and China, or India's 2070 – is good but not enough. The amount of global warming depends on cumulative emissions, not on the precise date of net zero. It's far better to get on a path to rapid reductions now, than to imagine we can leave all the hard work to the 2040s, like a student pulling an all-nighter on a final essay.

Second, it's increasingly unlikely that, whatever our efforts and the successful agreements at Cop28, we will stay below 1.5°C of warming. That isn't a counsel of despair – it's a vital recognition of reality that clears the mind for what to do next.

Third, every fraction of a degree matters. We can't precisely ascribe tenths of a degree to differences in emissions, but we do know that 1.6°C is better than 1.7°C, which is better than 1.8°C.

Fourth, we have no more opportunity for half-measures, for ideological fetters. We have to be absolutely clear about the task at hand. The goal of climate policy is not to overthrow global capitalism, punish the greedy carbon-spewing rich, end the use of fossil fuels, revive the Western working class, introduce a more just social order, right historic injustices, or rebalance geopolitics.

It is to cut net emissions as fast as possible and cope with the inevitable damaging consequences of a hotter world. Of course, we should seize positive social, environmental and economic opportunities where they arise, and at least not make things worse.

As wartime leader Winston Churchill said, "It is not enough that we do our best; sometimes we must do what is required."

Cop28 will call for a tripling of renewable energy capacity – which we're probably close to on-track for – and a doubling of energy efficiency, which we are not. The era of burning fossil fuels and spewing the exhaust into the atmosphere has to end very soon. But that favourite environmental approach is not the wrong answer, but an incomplete one.

The odd hostility in the environmental and much of the journalistic community towards nuclear power and carbon capture needs to reverse – every serious scientific climate scenario has them also playing important parts in Plan A. Plan B includes quicker, cleaner and cheaper ways to remove atmospheric carbon dioxide – not as an alternative to urgent emissions cuts today, but as an essential complement.

And given the increasingly obvious and damaging effects of even 1.5°C of warming, we need Plan C too – cleaner, controlled ways to replicate the cooling effect of those polluting ships and sulphur-bearing volcanoes. Those who dismiss this as dangerous geo-engineering should acknowledge we've been running a much larger, unplanned experiment on the Earth's climate since James Watt's steam engine in 1765.

We need to advance Plans B and C, not because we've given up on Plan A, but because we take every tonne of carbon and every tenth of a degree of warming with the ultimate seriousness. That is because every tree, every rare creature, every great monument of human culture and every child saved from the ravages of a burning, melting planet is one less tragedy.

Source: The National News

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Forex

Energy

OPEC meeting -->WTI

The OPEC meeting was scheduled for November 26th but has been postponed to this Thursday. This suggests deepening alliance disagreements over whether to curtail production, according to investors. Saudi Arabia, which wants to keep prices from falling, will likely reach a deal. However, even if that is the true and OPEC+ provides a plan to tighten supply over the coming months, Saudi Arabia will probably not get as much reduction as it wanted. Any additional cuts beyond those announced on Thursday are likely off the agenda.

Technically, WTI crude oil futures confirmed a bearish bias in the short-term after the rejection of jumping above the negative cross within the 20- and the 200-day simple moving averages (SMAs). More losses could drive the market towards the 72.30 support before meeting the lower boundary of the descending channel near 68.20. However, any jumps above the 200-day SMA could send the price towards the 80.00 round number.

US Core PCE index --> USD/JPY

The upcoming focal point will be the US dataset scheduled on Thursday, encompassing personal income and expenditure, alongside the core PCE price index. It is anticipated that both personal income and consumption experienced moderation in October. The core PCE inflation measure, which holds significant importance, is expected to have decelerated from 3.7% to 3.5% y/y in the month of October.

In FX markets, USD/JPY has been stubbornly pushing for some recovery without success lately. The pair is still developing beneath the near-term SMAs, holding near the 149.00 area. In case of more declines, they could open the way for a test of the 147.10 and 145.80 barriers. Only a fall beneath the 200-day SMA at 141.85 could endorse the negative structure. On the other hand, a jump above the 13-month high of 151.90 could brighten the bullish outlook again.

Eurozone flash CPI --> EUR/USD

The preliminary measurements of inflation for November for the Eurozone will also be released on Thursday. It is anticipated that the Harmonized Index of Consumer Prices (HICP) will drop from 2.9% to 2.8% in November, marking the lowest level in almost two years. It is anticipated that the core measure, which excludes all volatile items, will come in at 4.0%, down from 4.2% in October.

EUR/USD is failing to surpass the more-than-three-month high of 1.0965. A climb above this region could a be a big achievement in the short-term timeframe, sending prices to the 1.1065 and 1.1150 resistance levels. Alternatively, a drop lower could challenge the 1.0850 support before resting near the 200-day SMA at 1.0810.

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Thomas

Palestinian-Israeli conflict

Whether the ongoing ceasefire between Israel and Hamas can be extended beyond the agreed period will depend on the level of trust on both sides, experts told CNA on Monday (Nov 27).

The truce entered its fourth and final day on Monday, with a series of hostage-prisoner swaps taking place in the first three days.

"Hope? Definitely. Confidence? I'll be more cautious," said Dr. Jean-Loup Samaan, senior research fellow at the National University of Singapore's Middle East Institute of the possible extension.

On Sunday, Hamas freed 17 hostages held in Gaza, including a four-year-old American girl, who were part of a larger group captured when Hamas fighters attacked Israel on Oct 7. In return, Israel freed 39 Palestinians, all of whom are teenagers, according to local media.

Hamas said it wanted to extend the truce if serious efforts were made to increase the number of Palestinian detainees released by Israel, while United States President Joe Biden also said he hoped the pause in fighting can go on as long as hostages are getting released.

"From the beginning of the truce, the idea was that this would be a day-by-day process that it is about building trust on both sides, that this exchange of hostages and prisoners can work," Dr. Samaan told CNA938.

He noted, however, that the Israeli government is still indicating that it is ready to continue with military operations in Gaza.

"I assume that even if it is extended, that will be just for a few more days. We won't have at this stage, any scenarios such as to have a permanent ceasefire," said Dr. Samaan.

While there have been some disagreements over the selection of hostages to be released on both sides, they are just "minor details", he said, adding that the arrangement has gone well overall.

There has not been a major breach of the terms of the ceasefire in the past few days, giving hope for a potential extension, said Dr. Samaan.

Hamas Regroup

Dr. Anas Iqtait, lecturer of economics and political economy of the Middle East at the Australian National University, told CNA's Asia First on Monday that the pause in fighting will give Hamas a chance to regroup.

The Gaza Strip has seen an extensive level of damage, and the truce would allow Hamas to reorganise itself.

"It's important to mention that the Gaza Strip's governance system is run by Hamas, and this includes things such as healthcare, education – which has been suspended since the beginning of the war – and other municipal services and the like," he noted.

From a governance and humanitarian point of view, the truce has brought some much needed respite for the Palestinians amid the extensive bombardment, which has destroyed a vast majority of infrastructure and displaced much of the population in the north of Gaza.

Meanwhile, the total number of Palestinian prisoners in Israel is unconfirmed, said Dr. Iqtait.

More than 2,000 people have been imprisoned across the West Bank since Oct 7, when Hamas launched a surprise attack on Israel, Palestinian Prisoners' Club director Qadura Fares had told the Associated Press.

Dr. Iqtait explained that the vast majority of Palestinian prisoners are tried in Israeli military courts, including the chilDr.en, and they are held under different pretexts, including stone-throwing, illegal demonstrations, protesting and resisting arrest.

"The context is extremely important here. The West Bank and the Gaza Strip obviously are under Israeli military occupation, and (for) the Palestinians (the) rules they live under are the Israeli military rules, including their imprisonment," he said.

He noted that Israeli military courts have a high conviction rate of more than 97 per cent, and when faced with accusations, those accused are being prevented from properly defending themselves and do not go through a fair court system.

Foreign Hostages

The foreign hostages caught up in the mix also add another layer of complexity to the war, said Dr. Iqtait.

Qatari officials believe that 40 of its nationals – all women and chilDr.en – are being held in Gaza by gangs. They are among the civilians who have been captured by militant groups that do not belong to Hamas.

"So one of the objectives of the ceasefire was for Hamas to be able to identify and count and locate the total number of Israelis who have been held captive and who are being held captive inside of the Gaza Strip," said Dr. Iqtait.

"The fact that Hamas doesn't really have a complete picture of how many Israelis are inside of the Gaza Strip, makes it that more complicated for the continuation of the ceasefire, and also for a peaceful resolution for the release of these captives."

Dr. Samaan noted that hostage release is a tactic being employed by Hamas, and is a "continuation of the war by other means".

The group will try as much as possible to extend the ceasefire by slowing down the release of hostages, including withholding the U.S. hostages and Israeli military officers it had captured, he added.

"This is also one of the reasons why eventually, this could unravel and we could see a return to the military operations," he said.

If Hamas sees that the military operation will ultimately continue, it will probably keep the hostages and possibly use them as human shields from Israeli strikes, said Dr. Samaan.

He noted the significance of the U.S. involvement in the deal. The U.S., along with Egypt and Qatar, had played a decisive role in facilitating the arrangement between Hamas and Israel.

The U.S. government is directly involved as there are a number of U.S. citizens among the hostages held by Hamas, said Dr. Samaan.

"In addition to that, there is a clear hope on the U.S. side from the Biden administration that what we see with this truce is the possible de-escalation (of the conflict)," he said.

"There's a desire very clearly from the White House to reduce the level of the military operations that we've seen over the last week."