Stocks have bounced back from their third significant correction since the lows almost a year ago. The tailwind from monetary policy will likely continue for several more quarters as flagging consumer confidence and extremely weak housing data in January highlight that consumer deleveraging will persist and employment will remain weak. Past history of Fed behavior makes it clear that it does not tighten (particularly in an election year) until unemployment starts falling significantly. Therefore while, we should expect more tough talk from the Fed, significant tightening action for some months is not on the horizon. The bull market is intact, but it does depend on continuing government intervention to compensate for weak consumption and deleveraging. However, gains in 2010 will be much harder to come by than last year.

Government bond yields have nowhere to go but up, and a sharp rise later in 2010 is possible if the Fed is determined to shrink its balance sheet. At present that is not in the cards but conditions could change in the 2nd half of the year. The compression of corporate yield spreads has been played out (Chart 1). The juicy returns seen in this sector in 2009 won't be repeated until the next cycle.

Gold has lost momentum. The one & three month moving averages have turned negative (Chart 10). From a technical perspective, gold is currently trading in a downward?sloping channel and we expect this trend to continue. We believe that gold has reached its peak in this cycle, even considering the sovereign debt drama now playing out. Inflation remains tame and U.S. monetary authorities still seem to have enough room to maneuver in the short term to avoid the type of dollar collapse gold bugs have been fantasizing about. The risks in the longer term, however, are still present.

David Fuller's view There is endless and largely pointless speculation about when the Fed will raise short-term interest rates. For genuine insight, watch the unemployment figures because the Fed has a dual mandate: The Pursuit of Price Stability and Full Employment. Price stability should be assured for a while longer, due to slack in the US and global economy. Therefore the Fed is under no real pressure to pre-empt a decline in unemployment data. Ideally, the Fed would like to see unemployment decline over a few months, to be certain that the trend had changed. If bond yields do not back up - a big if - the Fed should have that luxury.

Tony Boeckh says "government bond yields have nowhere to go but up". That is a bold forecast because markets can do almost anything. However he should be right over the longer term, provided the Fed has ensured that the US economy has escaped a lengthy Japan-style deflation. In the short to medium term, QE can still squeeze bond vigilantes who have shorted Treasury futures.

Tony Boeckh also thinks that "gold has reached its peak in this cycle". I doubt it, at least while gold remains above a rising 200-day MA. A gold bull market, priced in US dollars, is not dependent on a collapsing greenback. However it may require a softer US currency than we have seen since December and this outcome is distinctly possible, as I discussed on Tuesday (see Email 1). A growing realisation that fiat currencies do not maintain their purchasing power is the main driver behind gold's secular bull market over the last decade and counting. Today, the price of gold in most currencies, not least the euro, remains generally firm (see Relative Charts section in the Library for many more examples).