Ground Floor:The prospects for interest rates continue to remain a focus for many market participants (and for anyone who just wants to know how the cost of borrowing might pan out).
All the major economic zones have been involved in tightening cycles and the question on most people's minds is whether it will continue.
It certainly seems as though the European Central Bank (ECB) will pull the upward trigger again this quarter - Bundesbank president Axel Weber came out with optimistic comments regarding Germany's economic prospects as well as sounding upbeat about the euro zone as a whole, setting the stage for a further increase.
In October last year Weber expressed concerns about providing too much stimulation to economies in growth mode and suggested that measures might be taken this year to keep inflation in check.
The ECB is concerned about wage inflation and Weber said higher wages were probably the greatest risk to inflationary targets, adding that their effects "must be nipped in the bud".
All of this is indicates that there is a greater probability of an increase at the March ECB policy meeting. ECB president Jean-Claude Trichet indicated this month that a February hike is unlikely, but in saying that policy is "accommodative" while being concerned about inflationary risks, March is a probable option.
In Britain, a housing market that still looks perky despite previous hikes means the Bank of England is also keeping its eye on the possibility of further rate increases. The bank's chief economist, Charles Bean, was concerned they were overshooting their inflationary target and that house prices were adding to price pressures.
British prices have risen by 13.5 per cent since last year. With the buoyant property market and strong retail sales figures for December, the Bank of England is getting antsy about inflation, so it too might be prepared to increase the cost of borrowing.
Despite being close to the end of a long-term tightening cycle, the US may not have decided to do an interest-rate U-turn just yet. The last hike was six months ago, and while many commentators are doubtful about further increases, some think the Federal Reserve won't start cutting rates any time soon.
According to San Francisco Fed president Janet Yellen, the labour market is "going gangbusters". Consumer prices (excluding food and energy) rose by 2.6 per cent last year, which is higher than the Fed's target. Rates will probably remain unchanged at the Fed committee's January meeting.
Nevertheless, markets remain cheerful. Larry Summers, the former US treasury secretary, had some reflective thoughts for everyone at the World Economic Forum in Davos this week when he said it was worth remembering that markets were upbeat in the early summer of 1914. And that wasn't a year that ended well.
Presumably Summers wasn't trying to tell participants that the third world war was about to break out, but he was warning against complacency.
Despite occasional setbacks, markets have turned into a one-way bet, with property and equities providing returns that gladden the hearts of investors everywhere. But while this is popular with the masses, it can frustrate those concerned about long-term economic health.
The result of this one-way thought process has been that people have become more comfortable with taking on risk to increase their rewards. US hedge funds are at their most leveraged levels in nine years and concerns about a sudden crash in equity prices are at 13-year lows. Tighter interest rates usually reduce people's appetite for risk but despite the moves of the Fed, the ECB and the Bank of England, this hasn't really happened yet.
Some economists think the market's assessment of current risk is "ludicrously underpriced". But regardless of risks such as terrorism or a resurgent oil price, most people simply aren't worried enough to take their money out, which is possibly why Summers is berating everyone for being too confident. Writing in the Financial Times last month, he said the biggest liquidity problems always followed periods of great confidence and, from his perspective, the markets were pricing in "an expectation of tranquillity as far as the eye can see".
The world economy has grown more during the past five years than in any five-year period since the second World War, spurred on not only by the usual suspects but also by newcomers China and India.
Economists, those practitioners of the so-called dismal science, are uncomfortable with untrammelled growth. They prefer a bit of doom and gloom, just to keep everyone on edge. But the problem with doom and gloom is that when you predict it too soon and it doesn't happen, people are likely to be twice as cheerful afterwards.
There's some gloom, however, for investors in the Goldman Sachs Commodity Index, which bucked the trend and fell by 15 per cent in the past year. Part of the problem stemmed from recent declines in energy prices, which had been a one-way bet for much of 2006. Goldman has suggested it wasn't intrinsically wrong in its call and wants investors to stick with it. Prices will go higher. The 15 per cent decline was just a correction.
Sometimes it's painful being gloomy too early.
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