The Fed's balance sheet's size remains relatively stable, and the rolling off of items such as term auction credit and extraordinary funding facilities have been able to compensate, to some extent, ongoing purchases of MBS securities. Treasury purchases have ceased without any major disruption to yields, with the latest yield moves more likely the result of better data rather than supply concerns. Fed officials reiterate that timing is the question, not whether or not the Fed can drain excess liquidity.

A key question is whether the Fed would be willing to withdrawal liquidity when unemployment is still at unacceptable levels (higher than 9%). This would bring the central bank head on with the Obama Administration, which is already trying to bring a new 'jobs stimulus' plan to the top of the legislative agenda. We believe a lot will depend on the inflation situation, which is benign at the current juncture. On another view, US person's are experiencing inflation in relation to purchasing power outside the contiguous states. The cost of travel and imports can be excruciating for the consumer. Take a trip to London or Paris and let me know how it goes. I'd rather a ski holiday in Aspen or Whistler. By the way, I will be the color analyst for the Olympic bobsledding events on Canadian television this February. So use your fancy reception devices (which i don't own, cuz they can waste time. besides, i've never been able to figure out the remote control and the surround sound) and tune me in.

When we looked back are previous Fed rate hikes, the early 1980s recession was the only period where the Fed was forced to hike aggressively despite clear gains in unemployment. Through all other cycles, the Fed was only comfortable to hike rates when unemployment was clearly trending down. The recent payrolls number will probably be acknowledged by the FOMC, but one data point does not make a trend. As such, it is possible that the Fed will be forced to delay its profile if the labour market turns south once again, unless inflation becomes a problem. I also sense that the BLS is in cooperation and fudging the employment numbers to assist in justifying any FED action.
The dollar weakened with the follow-through of the Dubai news, where Abu Dhabi gave $10bn to Dubai to help repay a maturing bond. There were no data releases in the US as the 2y yield widened to 0.8548%, equities closed modestly positive and oil and gold are $69.71 and $1124.30, respectively, at the time of writing. EURUSD traded 1.4599-1.4689 and USDJPY 89.34-88.33.

Eurozone industrial production was slightly weaker at -0.6% m/m versus consensus -0.7% m/m and the annualized growth rate was weaker at -11.1% y/y.. Eurozone employment fell by 0.5% on the quarter and 2.1% annualized. The German and Eurozone ZEW economic sentiment surveys are both expected to decrease slightly. But the German ZEW survey on current conditions is expected to improve.

UBS has a 1m EURCHF 1.52 forecast and will keep an eye on the ECB's final 12m refinancing operation. Although the SNB has been forced to intervene in EURCHF on the occasion of previous long term operations, a decline in tender participation this time around may limit the need for aggressive official action in the cross. But an increased participation rate could heighten banking sector concerns.
The RBA's December minutes are due following the latest cash rate increase to 3.75%. We look for the RBA to complete a move away from the previous 'emergency' 3.0% cash rate to a more 'normal' 4.25% by Q1 2010. But, while stabilisation of the data now highlight the risk of staying too stimulatory for too long, they certainly don't argue for the RBA to be rushing to 'neutral', widely thought to be about 5¾%. With the consumer likely to slow from here, and investment & exports to still be soft for a while, the RBA is likely to pause after reaching 4.25%.

Source: UBS, Bloomberg

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