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Greece, global equity indices, and whether the UK’s MPC expands its asset purchases at next week’s meetings, appear to be the topics everyone in markets are discussing this morning as we end the week and the month.

Greece, US earnings reports and concerns about the economy are driving equity indices. The S&P is in no-man’s land: if the market closes below the 1,080 level, the mood will deteriorate significantly, but it will need to break the 1,100 level to get the mood to improve. Qualcomm, the biggest maker of mobile-phone chips, lowered its sales outlook yesterday and saw its shares fall 14%, souring the mood everywhere. The focus will shift back today, however, to the economy with the release of Q4 real GDP data. The market expects a 4.7% rate, though personal consumption will likely lag, growing at a slower 1.8% rate. The US releases annualised growth rates (so the UK’s equivalent is 0.4%) so the contrast is huge. The nominal growth rate of the US economy will be around 6.5%, and that looks very odd when compared to the 0.25% Fed Funds rate. The question is how long this growth rate can maintain this pace. It is not impossible that we will see a 5% rate in Q4 and in Q1. The second half of the year is a different story, but strong growth today could stabilise equity markets.

The European sovereign creditworthiness story will not go away. I believe Greece will be bailedout if necessary because the implications of not dong so are hard to imagine. But the focus is already shifting to Spain whose deficitreduction plans will be unveiled today. The cost of 5-year default protection on Greece in the CDS market has reached LIBOR +385bp with Spain up to LIBOR +135bp. Contrast that with a 38bp spread for Cadbury’s and you can see how fearful people are at the moment. For the sake of completeness, the UK’s 5-yearr CDS spread is at LIBOR +85bp. It reached a 160bp at the peak of the crisis last February and was under 50bp in October.

The UK MPC meeting is unlikely to see a change in policy rates. Indeed, rates may well still be at current levels at Christmas. The issue is what to do with quantitative easing (QE). Currently, the cap on asset purchases is at £200bn. That programme has sent gilt yields down, tightened corporate bond spreads, weakened sterling and helped the revival in equity and house prices. These effects have helped exporters, homeowners and pension fund managers. They have also caused consumer confidence to recover. Overall, the programme has been a success. It has allowed banks to issue debt and repair broken balance sheets, and it has improved access to the capital markets to anyone selling shares or corporate debt. Without it, Manchester United would have paid much more for its recent bond issue. I sit next to a Manchester City supporter who does not think that is a good thing, but that’s another story! What QE has not done is made it any easier for small companies and individuals to borrow, or reduced the need we all feel to reduce our debt levels. I don’t think extending QE will do that either, however, and I expect the MPC to decide to pause while making it very clear that resuming purchases is a possibility in due course.

Between now and Thursday, much will be written on this subject. I expect to hear speculation that the programme will be extended (largely on the grounds that it does little harm to do so). But most of the arguments for extending asset purchases are really arguments for keeping rates lower for longer. QE has worked insofar as it sent yields down, spreads in, and asset prices up. Stopping it will send Gilt yields higher (I expect 10-year yields to reach 4.5% later this year) but that will not derail the economy. Over time, the end of QE should also be sterling-positive as long as the Gilt yield rise is of the order of 50bp, rather than a 250bp rise and panic about the UK’s sovereign creditworthiness.

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While Obama bashes bankers and the accumulated great and good strut their self-importance in Davos, the FOMC expressed cautious optimism about the economic recovery last night (click here). Rates remain on hold for 'an extended period', but the plans to taper off the central bank's bond purchases remain in place.

The Federal Reserve played a huge role in creating and nurturing the housing and credit bubbles whose deflation has caused so much pain. Cheap money is right up there as a cause of the crisis, along with incompetent regulation, inept credit rating agencies, foolish borrowers, short-termist investors and, of course, bankers. But I side with those who think turfing Ben Bernanke out of his job would be a mistake. Firstly because it would only make recovery harder, but also because, for all the Fed's mistakes going into this crisis, they have done extremely well since the crisis struck. Their reward comes in the form of a very robust rebound in growth around the turn of the year. Doubts about the sustainability of the recovery won't go away but if the first of the January data releases (ISM and payrolls, next week) are robust, we may see equity markets stabilise and the dollar rally further.

The next central bank to review its asset-purchase scheme will be the MPC next week. One MPC member, Andrew Sentance, seemed to indicate an intent to vote against extending quantitative easing (QE) in a speech yesterday (click here). But the head of the Debt Management Office, Robert Stheeman, warned in the FT that ending QE will send Gilt yields higher (click here). And while the US growth rate in Q4 could be 5%, the UK's growth is just a tenth of that rate. I expect they'll have a lively debate on QE and I'm frankly unsure what the outcome will be.

In markets, equities were comforted by the FOMC though Treasury yields rose and the dollar rallied. Greece's woes are still making front-page headlines in the financial press and the euro is still winning the Ugly Currency Contest with ease. But the euro also looks somewhat oversold and while EURUSD may make it to 1.35 in February, I very much doubt it can do so in a straight line.

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Bill Gross, PIMCO Chief Investment Officer, has attracted some attention by describing the UK bond market as a ‘must to avoid’. The press, as is their way, have interpreted the quote as being about the UK in general rather than just the Gilt market. If I lived and worked in Newport Beach California, perhaps I would avoid the UK in January too. The piece the quote comes form is called ‘The Ring of Fire’ (click here). The focus is on the economies where public sector debt and public sector deficits are heading towards really scary levels. Japan, Italy and Greece are already in a very frightening place. France, the USA, Spain, Ireland and the UK are less awful but pretty frightening. Where the UK stands out amongst this latter crowed is that it also has eye-wateringly high levels of private sector debt.

The relative merits of looking at gross and net debt levels and where the surge in lending to the banking sector fits into the equation all needs to be taken into account, but the conclusion is pretty clear. Firstly, the public finances of the ‘developing’ economies are now in much better shape than those of the major developed economies. Secondly, and this is where I agree with Mr Gross 100%, the only reason UK and US bond yields are as low as they are currently is the huge buying of government debt we have seen by the Bank of England and the Federal Reserve. If (when) this ends, yields must go up.

When and whether quantitative easing comes to an end will be the major talking point in markets in February. Already, equity markets are struggling despite good earnings data and the likelihood that the US economy at least will see real GDP growth of over 4% in both Q4 and Q1. That partly reflects the Obama ‘attack’ on banking but it may also mean that the effects of quantitative easing (QE) on asset prices are running out. QE has been a huge success in terms of getting asset prices higher and has paid dividends in terms of boosting economic confidence but the focus is now on when it ends rather than on what it has done.

There are two very different scenarios here. The first is that there is enough growth for an orderly end to QE, allowing bond yields to rise to, say, 4% for 10-year US Treasuries, for example (from 3.6%) and to 4.25% in the UK – without sending the economy into a spin or sending equity prices tumbling down. This scenario would be very positive for the US dollar and pretty encouraging for the pound. The alternative, is that there is a buyers’ strike as QE ends, causing increased fear of a debt crisis (like the one facing Greece) and a run on the currency. This is much easier to imagine for the UK than for the US where fixed exchange rates between the dollar and a host of Asian currencies provide natural buyers of Treasuries whenever the dollar comes under pressure.

The pathetically weak 0.1% increase in UK GDP in Q4 has increased fear that the latter scenario is a realistic one, and no doubt some of the arch-bears who are strutting their stuff in Davos this week will push this theme. For now, the dollar looks the more likely of the two main QE-economies to benefit from talk of QE ending. If the high-profile economic data at the start of February is strong, it could push significantly higher against the euro in particular. As for sterling, much will depend on the next MPC meeting on 4th February. And longer-term, referring back to Mr Gross’ chart, one economy still stands out as needing a monetary solution to its debt crisis: Japan. If you have huge debts, persistent deflation and a strong currency, printing more money makes sense. So far, the BoJ is still resisting the temptation. I can’t begin to understand why.

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The UK recession finally ended in Q4 2009. Not by much though, as the Q4 GDP increase was a mere 0.1%, a good bit lower than the 0.4% expected. The contrast between relatively upbeat surveys and downbeat official data continues to be a puzzle but markets will inevitably focus more on the official numbers. Today’s data will do nothing to reduce the two main risks the markets worry about – that the recovery will be unusually anaemic as the Government tightens fiscal policy and households continue to save rather than spend and that the next government is too weak to really tackle the problems the economy faces.

The ‘noughties’ recession was deeper than anything we have seen in the post-war era. It saw the longest run of negative GDP quarters (six, assuming that Q4 is positive, beating the five we saw from Q1 1980 onwards) and the biggest peak to trough fall in GDP (6%). The only prize it doesn’t win is ‘worst quarter’ which belongs to Q2 1958, the time of the Munich Air Crash, the introduction of automated telephone connection in the UK and the return to power of General de Gaulle in France.

I’m not sure how much we learn from the exit from recession in terms of policy implications. The question of when to start tightening fiscal policy doesn’t get any easier – fear of strangling the recovery before it gets going continues to weigh against the desire to ‘get on’ with debt reduction before the UK loses its triple-A credit rating. A quantitative easing ‘pause’ still seems likely in February, but that is not a certainty. What does seem almost certain is that MPC policy rates will remain at current levels for a lot longer. But that is true of every major central bank. I expect rates to be here until Q4 2010 at least, the same being true in the US and the eurozone. In Japan I can’t even begin to imagine when rates will rise.

The BoJ announced unchanged policy this morning after their policy meeting with a modest upward revision to growth forecasts and no change to their lending or bond-buying policies. The Ministry of Finance is increasingly vocal in trying to push them to act more aggressively. At some point that will result in increased bond buying and a weaker currency. That day clearly isn’t here yet. The announcement by S&P that they were putting Japan’s credit rating on a negative outlook made headlines later in the Asian session but rating agencies’ credibility has been badly damaged and the best the market can do is to ignore them.

The other main Asian news was talk of a further push to tighten policy in China as banks’ reserve requirements were raised (click here). The Chinese are tightening policy slowly and steadily and this is unnerving investors, sending commodities down and adding to the risk that equity markets suffer a deeper correction. My own view of Chinese policy is that given the strength of the economy – with double-digit GDP growth – policy needsto be tightened. But tighter policy doesn’t mean that the Chinese economy will slow dramatically – there is a place between boom and bust. When it becomes clear that the US economic recovery can continue, and when it becomes clear that Chinese growth won’t be derailed by policy tightening, the equity rally can resume.

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The ‘big economic theme’ is still de-coupling between the laggards (G7) and the front-runners (the rest, led by China). The big market theme is the aftermath of Obama’s big idea and the implications for asset markets. The big political theme is the risk (still significant) of a hung parliament in the UK. And the big event of the day, I suppose, is that it is Burn’s Night tonight.

I was struck this morning that Indonesia has had its credit rating upgraded to a decade high of BB+ by Fitch, a single notch below investment grade and its best level since the Asian debt crisis over ten years ago. Just as developed nations’ credit ratings are under downward pressure – courtesy of our own debt crisis – so those who didn’t go into this recession with massive leveraged, ludicrous monetary policy and an absence of bank regulation are thriving in the recovery. The Economist has a decent article on economic de-coupling (click here) and the FT has been covering the BRICs for the last week. The BRIC sobriquet finds critics in financial markets not least because lots of people are jealous of Goldman’s Jim O’Neil for dreaming it up. But for me it simply captures the notion that the time has come for the handover of economic power in the world from us (western industrialised economies) to them (emerging economies with flexible labour markets, a new access to capital and the ability to tap into globalisation in all its forms). The crisis the developed economies are struggling to escape accelerates the out-performance of the BRICs because they are not hampered by the need to rebuild savings and cut debts, which will be a brake on our growth rate in the years ahead.

Obama’s backlash against banking can be seen in this light too: low rates caused excess borrowing (blame central bankers); a regulatory regime encouraged banks to arbitrage credit ratings by investing in highly-rated but illiquid and frankly risky structured credit products (blame the bankers and blame the regulators); and borrowers lost leave of their senses when they piled on huge debts (blame all of us). But the bankers have taken the biscuit when even today the front page of the FT reads ‘Bankers to lobby regulators for softer reforms’ (click here). President Obama seemed to me to have made it very clear that he wanted the industry to work with him in preventing a repeat of the crisis we are trying to escape, rather than either fight him or ignore his call for change. I am convinced that banking will see increased regulation and banks will have to have more equity relative to their size of their assets, and that has been rapidly reflected in valuations. Now the question is whether we have seen enough in the first (sharp) reaction. On a positive note, the weekend press seems to suggest that US Fed President Bernanke will win his bid for a further term (whatever we think about his role in causing the crisis, he gets excellent marks for how he is tackling it), but equity investors remain extremely nervous and the market needs solid corporate earnings and some better economic news to get any lasting stability. The January US jobs report, due in almost two weeks’ time, is already a point of focus.

In the UK, the risk of a hung parliament is apparently increasing. That, at any rate, is the conclusion from RBS whose UK Hung Parliament  Probability Observer (HiPPO) translates a rolling sample of the last 25 opinion polls and assumes these translate into a uniform swing across the UK’s Commons seats. The latest poll sample gives the Conservatives a 36-seat majority, but a 1% swing the other way all but wipes it out and the probability of no party having an outright majority has risen from 8% in early December to 22.6% now. My own view has been (and still is) that a large percentage of undecided voters will not vote and this will help the Conservatives win a workable majority. My thinking has been that the level of disillusion among Labour voters is huge, but switching to the LDP is less likely than in the past. However, this ‘HiPPO’ analysis by RBS is worth keeping an eye on in the weeks to come. Fear of a weak government is clearly behind some of the awful sentiment that surrounds sterling. I think that sentiment is overdone and find the euro significantly uglier. This week’s main economic event in the UK is Q4 GDP tomorrow (look for a 0.4% increase), while the BoJ policy meeting also concludes tomorrow (it may be a month early for them to expand bond-buying). 

Finally, it’s Burn’s Night. For those who indulge, enjoy the haggis, the tatties, the neeps, the cock-a-leekie and the whisky. As for the ‘Address to a Haggis’, click here.

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Maybe in the American Wild West of the cinema the moral of the tale would have been ‘don’t provoke the sheriff’. Sheriff Obama wanted the bankers to eat humble pie, wear sackcloth and ashes and show some humility: restraint on pay and exaggerated efforts to put their houses in order combined with accepting more than their share of the blame for the recession – all of these would have been in order. But when he didn’t get that response, he clearly got riled and has come out looking for a fight. A modern tale – sheriff goes on shooting rampage.

President Obama’s attack on the banking industry is the story of the week and could yet be the story of the year. ‘Proprietary trading’ wasn’t the cause of the banking crisis and is a very small part of most banking revenues, but I’m not sure that’s the point. Banks lost money because they lent too much or because people borrowed too much, and they didn’t distribute enough of that debt in the form of bonds and other products to end investors. And when they did distribute the loans they had originated, they too often did so to investors who in turn borrowed the money to buy the loans from the banks themselves. Policy-makers set interest rates far too low encouraging binge-borrowing; regulators were asleep at the wheel; bankers failed to see the dangers inherent in what they were doing; and borrowers simply borrowed too much. But the end result is clear – borrowers defaulted, banks lost huge amounts of money, the state had to bail them out and there was a crisis.

Stopping ‘prop trading’ would have a limited impact. However, either requiring banks to hold much higher cash reserves against the loans they kept on their balance sheets or reducing their ability to hold those loans at all will have a number of effects. The first will be to reduce the lending capacity of the industry, further delaying recovery in lending. And the second will be to lower the banks’ return on equity. That will lead to a rush by the analysts to downgrade longer-term forecasts for banking sector earnings and, in the nearterm, this has a direct feed through to the value of bank shares. There will be a hue and cry that in a world where the public sector owns shares in the banks, it is cutting off its nose to spite its face. But what this really means is that the upward trend in equity indices has ground to a halt – at least for now.

What does that mean for policy and markets? Interest rates stay lower for longer; and the chances of a near-term reversal of quantitative easing have faded further. Over time, on-going economic recovery and low rates will probably send asset prices higher – and policy-makers still have a shortage of alternatives to asset reflation as a way of boosting growth. But equity indices are likely to get bogged-down. As for currency markets, the first reaction was for all the trends we have seen since the start of the year to be reversed. Currencies which correlate with higher rates or with higher asset prices suffered. So the yen thrived but the Australian dollar and the pound fell. This represents positions being unwound but not the start of new trends. Indeed, until the underlying economic outlook becomes clearer – in other words,  until there is more confidence about what happens after the current policy-induced rebound, major trends in currency markets are unlikely to materialise.

There is only one economic data highlight today: the release of the December retail sales report in the UK. Sales volumes rose a respectable 0.3%, which would be fine normally but the market was looking for a whopping 1% rise. End-year sales need to be looked at as a whole – i.e., taking November, December and January together – because when the sales survey is taken matters enormously and because the timing of the Christmas sales rush is variable. In my experience, people have been leaving Christmas shopping later and later. We have seen December sales fall in December only to bounce in January, in both 2007 and 2008 for example, and indeed, retail sales fell in December in 2004 and 2005 as well.

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‘The outlook remains clouded by uncertainties and the challenge of unwinding the stimulus.’ That’s a description of the global economic outlook from the World Bank’s latest publication which increased its forecast of global growth in 2010 to 2.7% from 2%, but warned of the risk of a double-dip return to weakness in 2011 (though the official forecast is 3.2%). (If you want something long to read, click here!) I’ve written before that I think there’s a chance the global economy will grow at a 4% rate in 2010 so I’m not really on the same page as the World Bank, but I find the report interesting because it captures the mood among economists who can see shadows lurking behind every corner. In China, where growth figures for Q4 of 2010 were released this morning, real GDP growth is running at 10.7% annually – an astonishing pace – so the fear is of ‘bubbles’. In the G7 economies the fear is that without the support of massive fiscal stimulus, growth will collapse like an overcooked soufflé. Are these valid risks? Of course they are but even so, as forecasters acknowledge the recovery is stronger than they expected, so it might be worthwhile to focus more on why they missed the rebound rather than reiterate down-side risks on which they placed too much emphasis the last time around. In a quiet moment while I was taking a sabbatical last Summer, I wrote a letter to the FT (click here for fun; it’s shorter than the World Bank report) berating economic forecasters for a lack of common sense. My main point was that having missed the severity of the downturn, economists would underestimate how long it took for easy policy to kick-start growth, and then underestimate the strength of the recovery. That is what the World Bank seems to be doing.

The sweet-spot for the policy stimulus to help growth, and before the long-term structural constraints on growth come to bear, is probably upon us. The key to an orderly transfer from policy-dependent growth to self-sustaining private sector driven growth is a recovery in employment because without credit growth, and without really strong real wage growth you need jobs to drive spending. Yesterday’s UK labour market data were important in that regard (click here). It was the first fall in unemployment in 18 months. It doesn’t have any real significance for policy since rates will stay on hold for a long time, though Bank of England deputy Governor Paul Tucker is giving a speech this evening in which he may express his thoughts on the pace at which quantitative easing (Bank of England buying of bonds) will end and be reversed. But I do expect most of the upcoming economic data to point to continued economic revival if we can see through the chaos that the weather caused to the figures.

Markets are mixed. The US equity market corrected yesterday but ended reasonably well and that, along with the strong Chinese data, is allowing a positive tone in Europe. I think we will see higher equity prices in the first half of the year. Interest rate markets, by contrast, are stuck in ranges as monetary policy remains on hold. In currency markets, the euro’s decline has been so sharp that some people are looking for a correction, while the focus is switching to the possibility of big ‘technical’ levels being broken by the dollar. Dollar sentiment is improving, more based on the chart patterns than the news flow. However, with the dollar looking well supported at a time when US market interest rates are near the lower end of their ranges, there is a possibility that the dollar could be in for a broader rally. That could take USDJPY higher, in particular.

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There were two market-moving stories in the UK yesterday and one speech from Bank of England Governor Mervyn King in Exeter. To start with the big stories: the first was the decision of the Cadbury management to recommend that shareholders accept the new improved offer from Kraft. This offends all sorts of patriotic heartstrings and the blogosphere is full of affront this morning – other countries don’t let this happen the way the UK does. At an emotional level I definitely agree, and the idea that there will ultimately be job losses at Cadbury’s – a company which is doing fine and making money – is offensive. However, the UK continues to benefit hugely from capital inflows, into housing, in the form of FDI and in the form of equity investment. The pound’s fall in 2008 was triggered by a collapse in capital inflows into the UK in the form of deposits to UK banks and equity inflows. As these inflows resume, they represent a further building-block for sterling’s rehabilitation. The FT’s editorial comment on Cadbury’s is worth reading (click here).

The second piece of news was the December inflation report which saw CPI inflation jump to 2.9% from 1.9%. The Bank of England Governor avoided writing a letter to the Chancellor explaining the inflation overshoot, but only just and only for a few weeks. Inflation will rise above 3% next month as the VAT increase feeds through and will peak in Q2 around 3.5%. The good news is that inflation will fall back to below 2% in early 2011, but the next few months will be tricky. Mervyn King’s speech (click here) reflected this – warning that the UK needs a credible deficit reduction plan quickly. His confidence that the inflation rise is temporary and his positive view of sterling’s fall in 2009 have seen the currency soften and some of the rise in market rates we saw yesterday has been reversed first thing this morning.

The main UK economic event today is the release of unemployment and wage growth data for December. The inflation figures make them all the more important. With wage growth under 2%, inflation really isn‘t a threat. Indeed, as unemployment increases and wages stay low, stagflation is more of a worry. However, as the labour market data improve, the inflation data take on a very different hue. If – and it’s a big IF – the economic data surprises on the upside from here, the fact that headline inflation is so high, albeit temporarily, will definitely make people re-think the timing of the first rate hike. And that would send sterling higher. So, expect the market to respond more to economic data in the coming weeks than usual, adding to volatility in currency and interest rate markets. I don’t expect the MPC to hike any time soon, but I remain bearish of Gilts and at the margin, bullish of the pound.

Outside the UK we saw the S&P close above 1,150 for the first time on the back of good earnings reports. There are a host of banks reporting today and the overall tone of the results seems likely to be friendly. However, monetary tightening in China is causing a correction in Asian equity markets, which in turn gives a softer tone in Europe this morning as well as supporting the US dollar. I expect the S&P to move higher as earnings support, rates stay on hold and eventually Asian markets realise that a little bit of tightening isn’t such a bad thing. Tomorrow sees Q4 Chinese GDP data, expected to post a 10.5% growth rate. A teeny-weeny bit of tightening against such a growth backdrop does make sense, after all.

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Japan Air Lines has filed for bankruptcy, Cadbury is on the point of being sold to Kraft, BA unions are threatening to strike over Easter and the Greek fiscal tragedy continues. The US will return from Martin Luther King day to see Q4 earnings from Citi and from IBM, and in the UK we have seen the release of December infltion data, the annual rate jumping to 2.9% from 1.9%. I'll write more on this tomorrow, but essentially, retailers had such low stock levels that they were not forced to discount as aggressively as expected, and the cost of petrol and insurance jumped.

The biggest story in the markets, behind the day-to-day noise, is the deterioration in Greece’s fiscal position and concern about whether they can sort their finances out unaided. A meeting of the eurozone’s finance ministers concluded that deficit-reduction plans are a step in the right direction but may not be enough. That’s the kind of statement which fuels concern and makes investors continue to shun Greek debt. Analysis of the type we aw in yesterday’s Times (click here) doesn’t help much either. Ms Maddox is right to say that a budget plan to reduce the deficit from 13% GDP to 3% GDP is implausible. But an over-ambitious plan doesn’t imply that disaster is inevitable – any reduction in the deficit would be helpful. However, the mood is dark and the risk that ultimately – for all their denials and talk of creating dangerous precedents – the eurozone will have to engineer a bailout for Greece is growing.

What does it mean for Europe? In a nutshell it means that the ECB will have to keep rates even lower for even longer as these threats strike; it increases concern about the need for tighter fiscal policy across Europe as the fiscal woes of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) are shared by the rest; and it makes the euro the ugliest of the (ugly) major currencies. At that point, I should point out one small caveat from today’s FT. The euro is not actually a currency in its own right – it is an anti-dollar, which goes up when the dollar goes down, whatever we think of the euro (click here). So the euro is not getting sold as aggressively against the dollar as it would – and will – when the current softness of US market interest rates is reversed and if the US Q4 earnings season is upbeat.

The Cadbury/Kraft story has been around for a bit. Mrs Juckes, who feels strongly on the subject of foreign companies taking over British chocolate manufacturers, has only just got over Nestlé’s purchase of Kit Kat and is not impressed at Milk Tray going foreign. The significance is two-fold. Firstly, it adds to the on-going volume of M&A stories in the market which, in turn, stem from the cheapness of debt finance for large-cap companies. And secondly it adds to the sense that there are buyers of sterling out there. The pound is being supplanted as most-hated major currency by the euro.

All of this news is something of a sideshow as the global economy sees better data but markets focus on the longer-term risks. We are not going to learn much on that front for a while and, in particular, not until we see signs of growth in employment in major developed economies. Too many market commentators still seem to believe that the finances of countries operate in the same way as those of an individual, and that skews a lot of the commentary. When I borrow money as an individual I am making a choice about whether to spend the money I earn now or in the future. My borrowing does not affect my potential lifetime earnings. That, however, is not true of an economic system, country or even less of the world economy. And because it isn’t, there is still a chance that monetary reflation will work, going beyond simply delaying an inevitable belt-tightening.

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The US market is off celebrating Martin Luther King Day, so Asia and Europe are left to ponder the aftermath of a 1% fall in US equity indices that followed strong earnings from JP Morgan, the first of the major US banks to announce Q4 results. Partly this is ‘buy the rumour, sell the fact’. But it also reflects disappointment at the scale of consumer lending losses that the banks are still facing. We get Citi tomorrow which has less of the good bits of banking and more of the bad bits. Bank of America is due on Wednesday, while Goldman results on Thursday will show us how much money you can make if you don’t have a consumer franchise – then it’s the Europeans next week. If you want to read about bankers’ bonuses there will be no shortage of opportunities to do so. Equity indices, having had their correction, are still in an upward trend courtesy of super-low rates and I would not be surprised to see new highs by the weekend.

The main focus for currency markets is a deepening pessimism surrounding the euro. The yield on 10-year Greek Bond yields have gone into a vicious spiral. Add in unpopularity for Angela Merkel and you get a situation where it is increasingly clear the ECB will not be increasing rates any time soon – in contrast to the perceived wisdom that their natural hawkishness will make them hike long before the Fed or MPC. The Anglo-Saxon press is busily dusting off all those pieces about how a country leaves – or is expelled – from the eurozone, or what happens if a member defaults on its debt and other Armageddon scenarios. And currency traders apparently have amassed very large short euro positions against, notably, the Swiss franc. My in-box contains recommendations to sell the euro against the Swedish krona (not unusual) and sterling (very unusual indeed in recent months).

What this shift in sentiment towards the euro is doing, is negating the negative impact of falling US bond yields on the dollar. That is significant because US bond yields are closing in on the lower end of their long-term range. The reaction to the first of the US earnings reports, and to recent economic data, has seen 2-year Treasury yields fall to 0.87%. Q4 real GDP growth is set to come in close to 5%, and the first quarter won’t be too shabby either. But the notion that this is all temporary and will be followed by disappointment when temporary stimulus comes to an end is so well understood that short-dated yields are once again pushing the timing of the first Fed rate hike into the future. The problem for bond markets is that we are not in any kind of sustainable equilibrium. Rates at near-zero levels when nominal growth is running at a 6% rate are highly unusual, even if they are appropriate. But rates cannot fall any further and it is only a matter of time until the debate switches again to exit strategies and where Fed policy could end up taking rates. If that happens soon, starting from current currency levels, it will see the dollar break some big psychological levels against the euro and the yen in particular.

In the UK, we’ve had three pieces of ‘news’ over the weekend. Rightmove report that house prices increased 0.4% in January, +4.1% year on year on a shortage of supply (click here). Taylor Wimpey reports an increased order-book to build new homes in the UK – a reminder that the big difference between the UK housing market and the US one is geography (click here). A small crowded island (a lot of which floods increasingly regularly) has a very different housing market from one with huge expanses of land where houses can be built. The ITEM club meanwhile pours cold water on economic optimism with a warning that the UK economy faces a decade of pain to refocus away from debt-financed consumption towards exports (click here). The core premise is right, but the forecast that the UK will struggle to grow at a 1% rate this year seems to me to be far too pessimistic and completely fails to understand how much impact asset reflation can have and for how long. I have a strong emotional bias against economic models of the UK, in part because they failed to see how a credit bubble bursting would wreak as much damage as it did. And I think they fail to see now how big the short-term bounce in the economy can be.

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Looking for investment opportunities in the major developed economies at the moment is a bit like trying to work out which of a gaggle of particularly ugly ducklings might eventually make it into a swan. With plenty of obstacles still in the way of a sustainable economic recovery, many people worry that equities are expensive and only at current levels because of dangerous monetary policies. Bond markets offer derisory yields and you can choose between either taking increased sovereign default risk to buy government bonds (ahead of huge supply pipelines) or plump for corporate debt whose spreads over government bonds have fallen dramatically. Commodities have gone up a long way and property prices need interest rates to stay low.  

In currency markets, the US dollar, the Japanese yen, sterling and the euro all look better suited to duck a l’orange than a future as a beautiful swan. But at the moment, the ugliest of that unappealing quartet is the euro. The latest story to cause consternation is a rumour (denied, and without foundation) that Angela Merkel, the German Chancellor, is going to resign. The rumour emanated from growing signs of discord between the ruling CDU party and their partner in Government, the FDP. The story is told in Time magazine (click here). There’s nothing very new here, but Merkel faces a tough challenge with deteriorating opinion polls, a modest economic recovery and the need for tough policy decisions. It was striking, however, that she seems to be falling back on the age-old ploy of talking down the currency in times of trouble (click here for the Wall Street Journal article). With Greece’s worst still at the forefront of everyone’s minds, being reminded that Europe’s strongest economy isn’t in great shape either just adds to negative sentiment surrounding the euro. It edges the yen in the ugly currency contest, despite Japan’s new Finance Minister increasing pressure on the Bank of Japan to keep monetary policy loose. The US dollar and sterling simply benefit by default. The bad news surrounding both economies isn’t going away but it is well understood. The pound is the most under-owned of the majors and with opinion polls suggesting a hung parliament is less likely, GBP shorts are being squeezed.

The major overnight news (apart from President Obama’s assault on bank bonuses) was excellent results from Intel (click here). Intel makes things in parts of the world where central banks won’t let the currency appreciate relative to the dollar, and as a large-cap company it benefits from lower interest rates without suffering the lack of credit availability afflicting small companies. With labour costs under control as well, their profit margins have surged. And PC sales have bounced – perhaps so that teenagers the world over can download songs onto their iPods after Christmas. This kicks off the earnings season in the US and the talk is of strong figures from JP Morgan later. The S&P is very likely to break through 1,150 and head pretty sharply for 1,200 if that happens, dragging the FTSE up with it.

US data today includes December industrial production and inflation figures. Industrial production is bouncing as inventories are rebuilt and a 0.6% monthly increase will see the annual data improve from -5.1% to -2.2%. CPI inflation will bounce sharply as base effects kick in so that a 0.2% increase sees inflation rise from 1.8% to 2.8%, while core inflation (excluding food and energy) is expected to increase 0.1%, taking the annual rate to 1.8% form 1.7%.

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It’s the first ECB rate meeting of the year and some of the newswires are trying to hype the event up a bit. There are a lot of central bank policy meetings ahead in 2010 and only one story – who will raise rates and when? The answer, for the ECB, Fed, MPC and BoJ could yet be that none of them will hike policy rates at all in 2010. As for today, there really is no chance that the ECB will hike or announce much at all, though there is a press conference for Mr Trichet to be quizzed about the public finances of some of the countries within the eurozone, and how or when the ECB will take back some of its extraordinary policy initiatives.

I confidently expect the ECB to do little and actually say relatively little as well today. A mildly cautious tone relative to what was said last month is warranted by developments in Greece, but the ‘interesting’ policy meeting will be in March. Until then, modest signs of economic revival, continued signs of stress in member states’ public finances and range-bound interest rates will provide a mix which is neutral for the euro and positive for equity markets. The currency market is therefore likely to be driven by events elsewhere, notably in the US.

The US Federal Reserve’s Beige Book was released last night, updating their regional analysis of the economy (click here). This too was dull. It didn’t even warrant a comment on the front page of the FT! Conditions have improved modestly, activity remains at a low level, inventories are low, demand is up a bit, there has been some hiring but labour markets remain weak, loan demand remains weak and price pressures remain subdued. The highlights were that the poor weather is bad for farmers but good for ski resorts, and tourism visits to Hawaii have increased…. At which point my imagination started to wander. Overall, there really is no reason to expect US interest rates to go anywhere for a very long time. And that is the jet-fuel which has driven asset prices higher and given countries which are not ravaged by the credit crunch (China most obviously but Asia in general) inappropriately easy monetary policy.

This recipe leaves me optimistic that as long as growth is recovering (and how strong that recovery is doesn’t matter so much) and inflation isn’t a problem, rates can stay low and asset reflation remain a key investment theme. We’re coming into US equity results season which will drive near-term price action, but overall, when all the numbers have been added up, I expect to see the S&P heading for 1,200 next, and the price of gold to be heading higher. Bond markets look thoroughly range-bound, though I cannot think of a reason to invest in UK Gilts or US Treasuries on yield levels which are historically unattractive. I expect Gilt yields to rise faster than Treasury yields and both will be pretty well anchored by the level of policy rates, but it still seems strange to see investors overweighting bonds in general, relative to stocks.

The big currency movers overnight were the rise of sterling after hawkish comments from Andrew Sentance, and a rally by the Australian dollar where some strong employment data were released overnight. When the English aren’t playing them at cricket or rugby, Australians are wonderful people. And their country is wonderful all the time. The currency is also attractive – even though it has already gone a long way. My inbox has been full this week of ‘sell’ recommendations from investment banks who think it is due a correction. I suspect they are very premature as the country continues to benefit from the Asian economic revival and the commodity boom.

As for sterling, it remains over-hated. There are few reason to like it, but that is also true of the dollar, the yen and the euro too. And the UK does still have the highest government bond yields of that group.

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The Chinese decision to increase reserve requirements for banks – a form of monetary policy tightening – dominates financial press comment and is still having a significant impact on markets. The Telegraph take on it sums up what a lot of people are saying: “China heightens bubble fears as it tightens monetary policy” (click here). So far, the Chinese authorities have tightened policy by raising the rate they pay for three-month Bills, and by increasing the required level of reserves held by banks. They will hike policy rates in due course and eventually they will resume the appreciation of their currency, the RMB. That they have embarked on this course tells us that the PBOC is now confident the economic recovery is strong enough to withstand tighter policy without being de-railed. It also tells us, clearly, that currency revaluation is the last tightening tool they will use, rather than the first or the second. What it doesn’t tell me is that there is an asset bubble in China which is certain to explode and leave the economy in tatters. I cannot help thinking that there is a huge number of people who were oblivious to the bubble Alan Greenspan’s Fed started fuelling in the early part of the ‘noughties’, but who are now able to see bubbles mushrooming up around every corner. The Chinese economy needs some policy tightening – because it isn’t going to get any from the US Federal Reserve where rates are staying low all year. But it will still be an engine of global growth in 2010.

Aside from the Chinese developments, the main news today is an interview of MPC member Andrew Sentance in the Guardian (click here). He says quantitative easing has been a success (I agree, to the extent it has boosted asset prices, though it has done nothing to boost lending) and that interest rates will need to increase in due course (I think that’s a long way away because there is no bank lending, but the hawkish tone tells its own story about the MPC). The pound is benefiting and if the upcoming economic data (starting with industrial production for November, today) is strong, the currency market’s focus may switch away from politics and on to interest rate policy.

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Good morning. I don’t know about the rest of the UK but London is getting back to business with the roads busy for the first time this year. The UK news is also mostly friendly as the signs of a strong Christmas retail season continue. The British Retail Consortium reported that sales were “Stronger than we dared hope” in December (click here). The buoyant mood was confirmed at Tesco which reported a very strong performance for the Christmas and New Year period (click here). I have banged on a fair amount in recent months about the fact that the UK consumer is less ‘down and out’ than some of the press comments would suggest, and it is only fair to observe that VAT increases, weather, higher inflation and higher taxes will all act as a brake to consumer demand in 2010, even if the more recent employment data has been robust. But I do believe that the consensus forecast for UK 2010 growth – at 1.2% – is too low. However, away from all this buoyant news about the retail sector, I was also struck by a report from the British Chamber of Commerce this morning whose Q4 survey was mixed but upbeat on foreign trade in particular (click here). Foreign trade still accounts for 50% of UK GDP and more importantly the UK is a huge recipient of investment from abroad as well as being a major foreign investor. The collapse of world trade that resulted from the blockages in trade finance and the financial system in general hit the UK extremely hard. What the latest data show is further evidence of normalisation in the flow of money and goods around the world. That is not the same as economic recovery but the UK economy has fallen more than most and sterling has been the weakest of the major currencies since this crisis started. A final economic note for today shows that UK house prices rose 0.6% in the year to November according to DCLG, and the November trade deficit shrank to £6.8bn.

The other piece of significant UK news this morning was the release of the latest opinion poll – this one from Populus for the Times. I’ve included a link to the write up from the UK Polling Report, whose analysis I like (click here). Politics is a sensitive subject for a blog but we can’t avoid the concerns in markets about the outcome of this election. The big fear is that neither major party wins outright, and we end up with a hung Parliament. My own take is that this is unlikely because there are far more disenchanted Labour voters around at the moment than disenchanted Conservatives. That means the Labour vote may be weaker than some of the polls suggest and these already give the Conservatives a significant lead.

Outside the UK the news is of a sharp rise in Indian industrial production (+11.7% year on year), some gains in business confidence in Japan (according to the Economic Watchers survey) and also in France (the Banque de France business sentiment survey). There is growing concern about Greece’s finances which are likely to be fodder for the press for some time to come and will hold the euro back. And in the US we have trade data later today which will probably show a deficit in the region of $33-35bn. As the US earnings season gets underway, the S&P index may now pause as it absorbs news and that will keep market interest rates from rising. Currency markets are trapped in tiny ranges since the dollar’s rally was reversed by the US employment data last week.

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I warned on Friday that people were getting overly excited about the exact number of jobs that would be lost, or added, to the US economy in December. And so it proved. Past data were revised so that we now know employment actually increased marginally in November, but December’s decline (of 85,000) was worse than expected and has triggered a torrent of reports about the recovery losing momentum and so on. This is all, to my thinking, gibberish.

Looking at smoothed data, the three-month average decline in payrolls is now 69,333, an improvement from 703,000 in February and from 87,333 in November. The trend is still improving in other words and will continue to do so in the coming months. Friday also saw the release of November wholesale inventory data which posted a 1.5% increase and, while that is not high profile, it will feed through to Q4 GDP data where the consensus forecast is now 4.2% and a 5% increase is not inconceivable. None of this resolves the uncertainties surrounding how strong the recovery will be in the longer term (and that’s where I have serious doubts. For differing views, here are links to the ever-gloomy Evans-Pritchard at the Telegraph (click here) and the US-optimist Kaletsky at the Times (click here)) but I remain optimistic about what growth will look like for both Q4 and Q1.

The employment report was followed by some very strong export and import data from China over the weekend, which has further increased talk of a boom in China and pressure to revalue the renminbi. China has overtaken the US as the world’s biggest exporter (click here). Combine strong Chinese data with reassurance from the US data that rates are staying low and you get a heady mix for risk assets. The Asian (ex-yen) currencies are likely to do well this week, as is gold and similarly equities and corporate bonds. The dollar is likely to remain on the back foot until we get stronger economic data and sterling will likely be afflicted by the weather (and the implications for near-term growth), by low rates and by politics. There was little news on this front over the weekend but the same concerns which have hurt the pound since the start of the year remain in place.

Finally, here’s another excellent piece from the Economist, where the Buttonwood column is one of my favourites (click here). The bottom line is that the decision on sovereign default is more often than not a political decision as opposed to an economic one. Ratings agencies don’t seem to understand this and like to take a formulaic approach to sovereign ratings as if they were companies. That’s why Japan lost is triple-A rating despite being possibly the most creditworthy of the major economies.

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Good morning. Amid the ice and snow of the UK’s deep freeze, I am getting a picture of how people are spending the time. Many spent yesterday transfixed by cricket as England clung on for a draw in South Africa. Many more have spent the first few days of the year at John Lewis, who report ‘a phenomenal first week to Clearance’ (click here). There is a lot of gloom surrounding the weather, the political outlook and the public finances. But the cricket and the High Street are in better health.

Today’s highlight is the release of the US employment report for December. I can seldom remember a more hyped report. The market is looking for a flat outcome with the unemployment rate steady at 10%, and the press is therefore contemplating the possibility of the first increase in employment since December 2007. The hype is overdone, if only because the volatility of this series means that a forecasting ‘miss’ of under 100,000 is statistically insignificant. In other words, if we expect a flat outcome that means we should not be surprised by any outcome within a +/- 100,000 range. All we can really say is that the three-month average decline is now 87,000, where a year ago it was half a million. And on that basis, the average Q1 figure should be positive and the unemployment rate should peak in Q2. Still no doubt the markets will react to which side of zero we end up.

The bottom line, however, is that the US (and the UK and the global) economic outlook is improving. There is a world of difference between stability and a return to trend growth, but in the first few quarters of a return to growth we are likely to see some pretty good figures. At the same time, policymakers will talk a lot about future tightening in monetary policy while doing nothing, and politicians will argue about how and when to tackle their vast debt burdens. And will probably be slow to act. This mix of brighter news, led by the US, is good for equities and the S&P moved higher again yesterday. It is good for credit spreads which continue to tighten. In currency markets, it is slowly becoming dollar-positive again and if we get good US data today we will see further broad-based dollar gains, with the yen the major currency most likely to weaken.

I have posted some thoughts for 2010 in words and pictures on the research section of the website (click here) for those who are interested in our views of 2010 as a whole.

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Good morning. Politics remains to the fore in the UK (click here for an FT article) and you could be excused for thinking Gordon Brown looks a bit like a lame duck sitting on a frozen pond. I’m not sure I can imagine David Cameron as a fox however. The upshot of this is that the market is fearful of both a hung parliament and a change of government which brings with it more fiscal tightening, and sterling has started the year very poorly. Against that, yesterday’s services PMI, at 56.8, provides a composite reading for the two (services and manufacturing PMI) that is consistent with a 4% growth rate in the private sector economy. There is absolutely no chance that the Q4 GDP release will be anywhere near 1%, but the underlying trend is clearly improving. Today sees upbeat sales from Sainsbury’s (click here). Halifax has announced a 1% gain in house prices in December, maintaining its trend, and on a day when nobody expects any policy change from the MPC, this acts as further evidence that even if the MPC’s quantitative easing policy is not helping get bank lending to grow, it is having a strong positive impact on asset prices. The Times take on the MPC is worth reading (click here).

Away from the UK there were three pieces of significant news. The first was that the new Japanese Finance Minister, Naoto Kan, is already arguing in favour of a softer yen (click here). Japan is mired in deflation and my bet is still that they have the strongest case for accommodative policies of all the G4 central banks. The government is increasing pressure on the Bank of Japan to act. The yen remains my pick as weakest currency in 2010.

The second is the release of the FOMC minutes in the US from the December meeting of the Federal Reserve (click here). The short summary is: Economic recovery remains on track but risks still abound. Low rates for a very long time are still an appropriate policy. The consensus view is still to taper off asset purchases by the central bank as planned, but they will review and there could be a case to do more. This is a dovish set of minutes. Rates will not go up any time soon, quite possibly not in 2010. Quantitative easing may yet be extended. Yet the economic data remains broadly upbeat. That is a recipe for equity markets to push higher and for credit spreads, which are back at levels last seen in 2007, to grind even tighter.

The final piece of overnight news to mention was the decision by the PBOC, China’s central bank, to allow bill yields to move higher for the first time in 19 weeks. The rate on 3-month Bills is up 4bp to 1.3684%, so it’s not a huge move but it is taken as a signal of tightening liquidity. The Asian equity rally stalled briefly as a result. The contrast between attempts to tighten in China and elsewhere outside the G4 currencies, and the prospect of near-zero rates remaining in place in the UK/US/eurozone and Japan, could not be more striking.

Markets are in suspense today ahead of tomorrow’s US payroll report. Some profit-taking in equities is possible, but if we get solid economic data against backdrop of low rates, asset reflation will remain the dominant theme going forwards. I haven’t mentioned gold yet this year, and must confess I expected the pull-back to continue into January, but the news flow so far has been very supportive.

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Sentiment towards sterling remains incredibly negative at the start of 2010. Alistair Darling’s pronouncement in Parliament yesterday – that “one of the reasons we’re supporting the economy now is because we’re not yet out of recession” – didn’t do anything to improve the mood. A huge amount of publicity for Pimco’s decision to cut back on holdings of UK Gilts and US Treasuries hasn’t helped either (click here for the Pimco piece).

I’ve written a few times about my concerns that Gilt yields will prove unsustainably low as soon as the pace of Bank of England buying slows. The same could be said in the US too. It is worth pointing out, however, that 10-year Gilt yields are 70bp higher today then they were in early October and over 1% higher than they were back in March 2009. Policy rates have not changed over that period. I still think there is upside risk to Gilt yields and I wouldn’t want to have my life-savings in them right now. But, for a supposed superstar bond fund to turn bearish after a sharp rise in yields seems a bit odd. There will be a time this year when they are a ‘buy’. Secondly, if the argument is that Gilt yields will rise because quantitative easing (QE) ends, then that supposes the economy is in a fit state for QE to end. That would be a good outcome. I don’t buy into the idea that we get higher Gilt yields amid a currency crisis because QE is forced to end despite the weakness of the economy at all. So, if Gilt yields do rise a lot further it is a sign that things are improving and the higher Gilt yields will be a signal of sterling strength.

Two points to add on this score. Firstly, I am more bearish on Gilts on a relative rather than outright basis. The potential rise in Gilt yields as QE ends is greater than in the USA or in the eurozone. And I do detect some resistance to extending QE from the MPC. Secondly, QE has helped the UK economy more than others and certainly more than the US. It has done so because rising asset prices are incredibly helpful to this economy, which remains heavily geared to housing. The US economy has historically been more sensitive to equities. However, the US also has a more intractable housing problem than the UK because there was so much excess supply which will go on acting as a drag on prices. The New York Times carries a fascinating piece on the risk of a major pick-up in foreclosures which makes scary reading at a time when the vast majority of economic indicators are looking reasonable robust (click here).

Returning to the negative sentiment surrounding sterling. I played a game of golf with three people I know vaguely at the weekend and they were unanimous in their negative view, which is shared across financial markets. I think this mood is overdone. The UK could lose its triple-A credit rating, as could the US, France and Germany. Japan already has and since losing it, has enjoyed the lowest bond yields and strongest currency amongst the major nations. The prospect of a general election is causing concern and the risk of a hung parliament in particular, but polls still point to the current government losing the election and history doesn’t easily support the idea that you can mess up the economy this much and survive in power. None of the G7 currencies look very enticing and this morning’s warnings from the ECB’s Juergen Stark (click here) that markets can’t assume the rest of the European Union will rescue Greece, don’t enamour investors to the euro. The dollar’s long-term woes remain, and the reasons for potential yen weakness are legion. Overall, I fancy the yen to be the weakest of the G7 currencies in 2010. I suspect that by the end of the year, the UK will have the highest G7 government bond yields and that is not usually compatible with a weak currency.

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The first trading day of 2010 saw investors ‘trying out’ a variety of themes. Chief amongst these is the notion that this will be an excellent year for Asian and other emerging economy growth, for commodities and for commodity-linked currencies and equities. So, January has started very well for gold (up 2.5%) and Asian currencies (Korean won, Australian dollar, New Zealand dollar), as well as Asian stocks.

This feels like a durable theme for much of the year. As long as the Chinese economy is growing fast and the Chinese authorities are resistant to appreciation by the renminbi, the greater risk is still of bubble-like economic conditions emerging in Asia. Strong Chinese growth adds to demand for raw materials and commodities in general, while supply considerations simply determine which ones do best. So with food supply affected in several parts of the world by weather, politics and the growth of bio-fuels, we are seeing prices rise. That increases concern about inflation and therefore about the flexibility of G7 central banks to hold their current accommodative course. But what it really does is to reinforce the shift in the global balance of power towards the producers of commodities and raw materials. It is hard not to see the AUD as the pick of the G20 currencies and the CAD as the pick of the G7 currencies, for now.

The second major theme to emerge is economic optimism. The US ISM data for December, released yesterday, posted the strongest outturn since mid-2006. Could this signal that Q4 and Q1 will see US real GDP growth in excess of 4%? The IMF has responded by saying it will revise (upwards) its global growth forecast, in a piece on its website (click here). The ‘old’ forecast looks for world GDP growth this year of 3.1%. I expect that to be beaten by over a percentage point, most of it coming from non-G7 countries.

Away from the US ISM data, we saw a 36.5% year over year leap in Japanese car sales in December as their version of cash for clunkers took effect; a small fall in German unemployment in December, and a small rise in the UK PMI for construction to 47.1 from 47.0. Interestingly though, all these stronger figures were ignored by the bond markets where the sharp rise in yields during December is being partly reversed. That is why the dollar and sterling are the two weakest currencies in the first days of 2010. This trend bears watching, particularly for the dollar. Friday’s employment report will dictate trends in January, but if December’s run up in yields was a seasonal move – and not the start of a more durable trend – the dollar is going to run out of steam even earlier in 2010 than we expect.

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