The move came less than an hour before the European Central Bank decided to leave rates unchanged at 3.5 percent. ECB President Jean-Claude Trichet gave a clear indication at his ensuing press conference that the ECB would wait until March before increasing rates from the current 3.5 percent. He did not use the code words that bank watchers have come to expect - vigilance and strong vigilance - when a move was imminent. In fact, Trichet pointed out at his press conference that he was not using these words when describing the bank's current monitoring of price developments.

Inflation remains a concern for the ECB as the economy expands. The ECB has increased rates six times since December 2005. Analysts said that an improving European economic environment was likely to increase the pressure on the ECB to raise rates and make sure inflation remains under control. The Bank has a 2 percent inflation ceiling. The most recent harmonized index of consumer prices reading was below 2 percent for the fourth month in December.

Despite the European Central Bank's decision to hold rates, a rise in expectations for eurozone real rates, which remain too low given Germany's recovery, remains investors' best interest rate bet. But the odds are also now quite high that the Bank of England will act decisively to eliminate any risk of substantially overshooting its inflation target for the first time since independence.

Stocks mixed on the week amid choppy trading
Stocks were mixed last week as investors remained cautious in the New Year. However, all indexes followed here were up for the week with the exception of the Nikkei, Hang Seng and STI. The Hang Seng was the big loser, sinking by 3 percent. Nasdaq, the bigger winner, was up 2.8 percent.

Global Stock Market Recap

Europe and the UK
The CAC and DAX were up again last week especially after ECB President Jean Claude Trichet signaled that he is in no hurry to increase interest rates. Analysts reacted favorably to Trichet's post-meeting press conference comments that appeared to put off an interest rate increase at least until March. This was considered a plus especially for merger-and-acquisition activity. Companies that are among the most sensitive to interest rate fluctuations such as banks and insurers like Credit Agricole SA and Aegon NV paced gains. In London, the FTSE gyrated on the news of the Bank of England's unanticipated rate increase. The FTSE was up prior to the announcement and dropped in the immediate aftermath. However it quickly regained its balance and turned in January's second biggest daily gain. Basic resources stocks, which led declines in the previous week, advanced after the prices of copper and gold in London rebounded.

Asia/Pacific
Asian/Pacific stocks were volatile last week - three indexes followed here were up while three lost ground. Only the Nikkei has lost ground so far in January. Both the Nikkei and Topix were weak 2006 performers, gaining 6.9 percent and 1.9 percent respectively, and analysts expect more of the same this year thanks to slower profits growth. However, on Friday, stocks jumped as the yen sank to its lowest in over a year against the dollar. And this invigorated exporters' shares.

Net purchases by foreign investors fell to ¥4,084 billion from ¥10,322 billion as disappointment grew about the macroeconomic outlook as high hopes have been dashed that Japan is emerging from years of deflation. Market expectations of strong profit growth were at the same time confounded by cautious forecasts from Japanese companies.

Currencies
Both the euro and yen were down last week as the dollar rallied on favorable economic news. But the dollar dropped from a seven-week high against the euro because, according to traders, central banks were buying euros. Recently rumors that various central banks including those of oil producing countries were diversifying their holdings have caught traders' attention. According to the Bank of International Settlements, the proportion of currency deposits held by OPEC members sank to a two-year low of 65 percent in the second quarter, from 67 percent the prior quarter.

The dollar hit a 13-month peak against the yen on Friday as analysts downplayed the attractiveness of the yen as a funding vehicle should the Bank of Japan increase rates this week. Analysts were split on the probabilities of an increase. The dollar rose to a peak of ¥120.73 against the yen, its highest level since December 2005, before easing back. The yen lost ground against the euro and the dollar after Japan's leading indicator index dropped to 20 in November from 54.5 in October. This was the fourth month in six that the reading has been below the breakeven level of 50.

Indicator scoreboard
EMU - Revised third quarter gross domestic product was up 0.5 percent and 2.7 percent when compared with the same quarter a year ago. Growth diverged among member countries with third quarter growth up 0.9 percent and 3.8 percent in Spain and unchanged on the quarter and up 1.9 percent in France. Germany's GDP was up 0.6 percent and 2.8 percent on the year while Italy edged up 0.3 percent and 1.7 percent on the year. Private consumption was up 0.7 percent and 1.8 percent on the year, while gross fixed capital formation was up 0.6 percent and 4.6 percent on the year.

Germany - November total retail sales were up 0.4 percent and 0.9 percent when compared with last year. Excluding autos and gasoline stations, retail sales were down 0.3 percent. The report is based on data from six German states, which account for about 74 percent of overall retail sales. The data are subject to large revisions. Sales of household appliances and building materials jumped 7.4 percent on the year while at the same time, grocery, beverage and tobacco sales plunged 3.3 percent.

November manufacturing orders were up 1.5 percent and 6.1 percent when compared with the same month a year ago. Domestic orders were up 0.6 percent while foreign orders soared by 2.3 percent thanks to above average bulk orders, especially for autos. These orders were the result of advance purchases of big-ticket items by consumers looking to beat the VAT increase that took effect on January 1. Capital orders were up 1.8 percent while consumer goods orders jumped 2.7 percent and intermediate goods orders increased 0.8 percent.

November seasonally adjusted industrial production (excluding construction) was up 1.5 percent and 6.7 percent when compared with last year. Manufacturing output was up chiefly due to increases in production of automotive goods along with data processing equipment and office machines.

November seasonally adjusted merchandise trade surplus climbed to €19.3 billion from €17.3 billion in October. Exports were down 0.5 percent but imports sank much more and were down 3.8 percent.

France - November industrial output excluding construction, Eurostat's preferred measure, was down 0.2 percent and dropped 1.1 percent when compared with the same month a year ago. Manufacturing output was down 0.2 percent both on the month and on the year. Autos declined by 3.2 percent while capital goods dropped 0.7 percent and consumer goods were down 0.4 percent. Agricultural output declined 1.2 percent.

November merchandise trade deficit increased slightly to €2.834 billion from €2.794 billion. Both exports and imports were up 1.9 percent. Exports were bolstered by Airbus plane sales. There were gains for machine tool and agriculture exports along with pharmaceuticals. Imports of oil products along with semi-finished and consumer goods contributed to the gains in imports.

Britain - November merchandise trade deficit soared to £7.2 billion from £6.6 billion in the previous month. Exports were up 1 percent but imports soared by 3.1 percent. The main reason for the sharp widening was a larger goods trade deficit with non-European Union countries. The surplus on services trade was £2.5 billion, the same level as the month before. The total trade deficit was £4.7 billion compared with £4.1 billion in October.

November industrial production was up 0.5 percent and 0.8 percent when compared with the same month a year ago. Manufacturing output also improved. It was up 0.3 percent on the month and 2.4 percent on the year. Seven of 13 manufacturing sectors were up on the month while four were down and two were unchanged.

Asia
Australia - November retail sales edged up 0.2 percent and were up 6.7 percent when compared with last year. Clothing sales were down 1.7 percent while restaurant spending was down 0.2 percent. However, furniture and appliance sales were up 1.7 percent while spending on toys and cameras climbed by 1 percent.

November merchandise trade deficit narrowed to A$843 million from a revised deficit of A$1.51 billion in October. Exports were up 2.9 percent while imports were up 0.6 percent. Total farm exports rose 2 percent. Shipments of non-rural goods, which include minerals, increased 0.3 percent. Coal exports climbed 5 percent. The worst drought in a century cut grain exports by 7 percent, but meat exports were up by 4 percent.

December employment increased by 44,600 jobs. Full time employment was up by 17,700 while part time employment increased by 26,900 jobs. Although unemployment was up by 2,300, the unemployment rate remained at 4.6 percent for the third month. The participation rate was 64.9 percent, up from 64.7 percent in the previous month.

Americas
Canada - November merchandise trade surplus climbed to C$4.67 billion (US$3.97 billion), the highest since March and up from a revised C$3.76 billion in October. Exports were up 2.8 percent, gaining at the fastest pace since August 2005. They were led by vehicle sales and record levels of industrial goods such as metals and alloys. Imports edged up 0.4 percent after three straight months of declines. Export volumes were up 2.0 percent but imports were down 0.8 percent. Canada's trade surplus with the U.S. widened to C$7.34 billion from C$6.65 billion as exports rose 3.6 percent, outpacing a 1.6 percent increase in imports. The U.S. accounted for 77 percent of Canada's exports, down from 82 percent a year ago.

Bottom line
This past week was highlighted by policy meetings of the Bank of England and the European Central Bank. No one expected a policy change but the Bank of England shocked market players. Both the euro and yen were down while stocks were mixed on the week.

Speculation continues to climb about the Bank of Japan's policy. The Bank of Japan ended its zero interest rate policy last March and has been waiting for an opportunity to up rates again. Higher rates would probably strengthen the yen, which would be bad news for exporters such as Sony and Toyota which depend on the U.S. for a significant proportion of their revenues. Personal consumption has not recovered because higher corporate profits are not feeding through to wages.

The Bank of Canada also meets this week. Its policy interest rate is expected to remain at 4.25 percent. Western Canada with its rich mineral resources is growing rapidly but the old manufacturing provinces of Ontario and Quebec are struggling because the high value of the Canadian dollar is making their products less competitive abroad.

Looking Ahead: January 15 through January 19, 2007