Five things to think about this week:

APPETITE TO CHASE? 
- Equity bulls have managed to retain the upper hand so far and the MSCI world index is up almost 50 percent from its March lows. However, earnings may need to show signs of rebounding for the rally's momentum to be sustained. Even those looking for further equity gains think the rise in stock prices will lag that in earnings once the earnings recovery gets underway, as was the case in past cycles. The symmetry/asymmetry of market reaction to data this week -- as much from China as from the major developed economies -- will show how much appetite there is to keep chasing the rally higher. 

TAKING CONSUMERS' PULSE 
- A better picture of the health of the consumer will emerge this week as U.S. retailers' earnings coincides with the release of U.S. July retail sales data and the UK BRC retail survey comes out on the other side of the Atlantic. With joblessness still rising, the reports will show how willing households are to spend and whether deep discounts, which eat into retailers' profit margins, are the only thing that will tempt them to shop -- both key issues for the macroeconomic and corporate outlook. 

CENTRAL BANK WATCH 
- After last week's Bank of England surprise, all eyes turn to what sort of signals the U.S. Federal Reserve and Bank of Japan will send on the outlook for their respective economies and QE programmes. After the BOE's expansion of its QE programme the short sterling strip repriced how soon UK rates would rise. But the broader trend recently in the U.S., euro zone and the UK has been to discount rate rises in 2010 -- and possibly as soon as this year in Australia. Benchmark interbank euro rates have risen for the first time in two months, and central bankers everywhere, including China, face the delicate balancing act of managing monetary tightening expectations in the months ahead. 

PRICE PROTECTION
-This week's inflation data (from Germany, France, Italy, euro zone, U.S.) is unlikely to contain any nasty surprises. But the U.S. Treasury's willingness to consider bringing back the 30-year TIPS suggests that enough investors and reserve managers are looking beyond current subdued price data to future inflation risks from QE programmes, etc. That will ensure a close eye is kept on breakevens and whether the main issuers of inflation-linked products in the euro zone are inclined to increase issuance of such products.

TRADE 
- Official resistance to currency appreciation has been evident in some developed countries (Switzerland, RBA, RBNZ, among others) and there are suspicions that some Asian central banks may also be inclined to check such trends given the fierce competition among the world's exporters to grab what orders there are. Trade data this week will show how trade flows are faringand the extent to which Chinese economic activity is driving them.

Five things to think about this week: 

RESULTS RUSH 
- The early wave of Q2 earnings last week prevented any major risk shakeout but there are plenty more results this week, including from banking, technology (Apple, Microsoft), and other sectors (Lockheed Martin, Coke, McDonalds). Investors with bullish inclinations will be looking for the VIX to stay subdued after it fell last week to lows last seen in September 2008, especially if more pent up cash is to be released from money market funds. Bears will be thinking that what might be the S&P's best weekly performance since mid-March could be setting the market up to be more sensitive to bad news.

BANKS - IS THE BEST PAST? 
-  It is hard to see how bank results this week can top the boost which Goldman and JPM gave stocks last week. More of a mixed bag is likely with the U.S. slate including Bank of New York Mellon, Morgan Stanley, Wells Fargo, Capital One, and American Express while Credit Suisse will be the first major European bank to report. Defaults and delinquencies will be in focus for banks more exposed to the retail sector -- both for what it means for their outlook and for what it bodes for household solvency and spending. 

DRILLING DOWN 
-  The breakdown of company results this week (ABB, Texas Instruments, Caterpillar, DuPont, Boeing, 3M) will show the extent to which the inventory rebuilding story, which has helped lift world equities almost 40 percent from their March lows, can offer more sustainable support to stocks in the weeks and months ahead. Earnings this week will be closely scanned to see how inventories are stacking up verus orders. How deeply firms are cutting into costs to defend profit margins, as well as their business investment plans, will be key for unemployment and other macroeconomic data.

FLASH IN THE PAN? 
- Flash PMIs will show whether the positive surprise of the German orders and output data was a flash in the pan for the euro zone, and whether Chinese growth is generating orders in key euro zone countries. British Q2 GDP -- the first out of any G7 country -- will show the relative strengths and weaknesses of domestic demand, exports and inventory components and it will be particularly interesting in the UK's case to see just how supportive sterling's past slide has proved for net trade. 

QE STEER 
-  Minutes from the Bank of England's last policy meeting and congressional testimony from Federal Reserve Chairman Ben Bernanke should give a clearer steer on where quantitative easing programmes are heading. Key questions investors want answered are why the BoE deferred making a firm decision on whether to extend QE beyond August, and whether the Fed will increase its bond purchases. Government bond markets will be particularly sensitive and signs that central bank appetite for buying government debt is cooling -- perhaps because of concern over long-term inflation -- could trigger heavy selling, particularly in an climate of strong U.S. bank earnings and rebounding equities.

Dallas Federal Reserve President Richard Fisher at first voted against the Fed’s Dec. 16 decision to aggressively chop benchmark interest rates to near zero, but reversed his decision during a lunch break shortly afterward, a book about the Fed slated for August publication reveals.

“I felt after going for a walk down the hall that I didn’t want to pull the legs out from under Ben, and I didn’t want to be perceived as not being a team player,” Fisher says in David Wessel’s “In Fed We Trust,” an inside look at the Fed’s reaction to the financial crisis that exploded in the summer of 2007.

The Fed’s policy-setting Federal Open Market Committee decided to cut rates by almost a full percentage point, an unusually large cut, to fight back hard against a darkening outlook for the economy, which was in desperate condition after the Lehman Brothers failure and the spreading contagion of soured credits.  Fisher, who had dissented four times that year (including once when he thought the Fed should raise rates to quell inflation worries), at first felt that another move down wouldn’t help the economy and would in fact hurt struggling banks’ profits and people who lived on interest from their savings, and voted against the rate cut before changing his mind.

Ironically, Bernanke had been more worried that another Fed official — the reliably hawkish Philadelphia Fed President Charles Plosser — would dissent, and lobbied him before and during the meeting, arguing the Fed needed to maintain a united front during a time of crisis. Plosser backed the rate cut too.

(Photo of Richard Fisher delivering a lecture at Harvard University, Feb. 23. Reuters/Brian Snyder)

Economist James Hamilton was pretty offended by the rough treatment of Federal Reserve Chairman Ben Bernanke last week at the hands of some U.S. politicians. But when he put up a defense of the Fed chief on his blog, he got an earful from readers who were critical of the U.S. central bank and suspicious over its role in the financial crisis and last year’s bank bailouts.

Some members of the House of Representatives Oversight Committee quizzing Bernanke last week voiced outrage over the Fed’s role in Bank of America’s takeover of Merrill Lynch. They claim the Fed covered up pressure on BofA to swallow massive Merrill losses in order to protect the wider economy.

Hamilton said they were trying to turn Bernanke into a scapegoat.

“These interrogations reveal more about those doing the grilling than they reveal about Bernanke,” Hamilton, an economics professor at the University of California, San Diego, wrote on his blog. “I see this as pure political theater, and I don’t like it.”

But some of his readers reckoned that the Fed chief, a former economics professor with whom Hamilton had corresponded in the past, is getting what he deserves.

“The question is not if the man is a good man. The question is, did he participate in a crime, the crime of knowingly help screw BOA shareholders out of millions?” argued one commentator. “I think he’d look good in orange. He can help the other inmates with their financial planning.”

What’s your take? Is Congress disrespecting Bernanke or did he have it coming?

Five things to think about this week:

STALLING RALLY
- The global equity market rally has stalled in June and is threatening to go into reverse. With this week effectively the last full week of the second quarter, the temptation for many funds to book profits on such a lucrative quarter will be high. Any knock on boost to volatility would pose more risks for some of the trades that looked the most attractive in a lower volatility environment, such as cyclical versus defensives plays, emerging markets, and foreign exchange carry trades.

POLICY, SUPPLY RISKS FOR BONDS
- How the U.S. Federal Reserve will respond to the interest rate market gyrations of the past month has been a key market talking point. Questions centre on whether it will expand the size of buybacks, whether there will be any change in the length of time the buyback programme lasts, whether the central bank makes any effort to unwind the rise in bond yields seen in the past months, and whether there will be any talk of an exit strategy. Another risk to the front end will be the Treasury refinancing, which resumes after a week of no supply and will be concentrating on the shorter end.

WHAT COLOUR ARE THE SHOOTS
- This week's data will show both whether the inventory rebuilding that was priced in over recent months is actually materialising and whether there are any other drivers of economic activity out there. The flash PMI in Europe and sentiment indicators will be particularly relevant in deciding on the latter issue, with consumer and income data out from both sides of the Atlantic providing an additional window on how domestic demand is shaping up.

CENTRAL BANK CASH
- There is potential for significant take up at the ECB's first one-year tender this week and some are speculating that the injection of large amounts of money into the market could drive down short end rates sharply. Most recent anecdotal evidence suggests firms are still facing tight credit conditions but confidence in financial stabilisation is a pre-requisite if banks are to lend on. This is leading to speculation of where else the money might be parked in the interest rate or fixed income universe. There are also question marks over whether any of the money might leak outside the euro zone -- and what, if any, are the potential FX implications of such seepage.

EMERGING MARKET RISKS
- Higher volatility spells underperformance in the emerging market universe and has raised questions over the risks in individual countries -- e.g. Turkey's IMF deal; Latvia's political difficulties in winning acceptance for budget cuts; the possibility of the Iranian domestic upheaval gaining market attention; and ructions within the Saudi banking sector. The shifting sentiment suggests potential hurdles for heavy third quarter corporate and government refinancing needs, especially in central and eastern Europe, not least given that the heavy issuance plans of better-rated developed market sovereigns pose crowding out risks.

This sounds awfully familiar. Oil prices have risen sharply from a March trough, while the U.S. dollar has fallen 10 percent against a basket of currencies. A bad 2008 flashback? Not quite.   

Riccardo Barbieri, head of international economics at Banc of America Securities-Merrill Lynch, says oil merits close watching to make sure it does not rise too far, too fast. For now, it does not pose an imminent threat to U.S. or global economic recovery.

 ”Our economists around the world feel that as long as oil prices did not rise significantly above $80 per barrel, that would not prevent an economic recovery in the second half of the year,” he wrote in a note to clients. “A further rise in oil prices would act as a tax on importing nations, and we would worry in particular about the U.S. consumer.”

A jump in oil prices would also be a headache for central bankers in the rich world because it would bring an unwelcome dose of inflation when the economy is too weak to handle an interest rate rise. If emerging markets stage a strong recovery, driving up oil demand and prices, the U.S. Federal Reserve and other central banks “may have to accommodate a rise in headline inflation, lest the economy fall into a dangerous double dip,” Barbieri said.

Former Fed Chairman Alan Greenspan isn't getting the respect he used to.

Greenspan's op-ed in the Wall Street Journal drew withering criticism from High Frequency Economics' Ian Shepherdson, who was unimpressed with the Maestro's denial of any Fed contribution to the country' worst financial crisis since the Great Depression.

Greenspan: "Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have 'prevented' the housing bubble."

Shepherdson: "We were appalled and outraged by Alan Greenspan's self-serving it-wasn't-my-fault op-ed... If Mr. Greenspan can say with a straight face that this was not a consequence of the Fed's excessively easy stance then either he is delusional or a very talented poker player."

Greenspan said his preferred appraisal of the Fed's track record during his tenure as chief of the U.S. monetary policy temple is Milton Friedman's: "'There is no other period of comparable length in which the Federal Reserve system has performed so well. It is more than a difference of degree; it approaches a difference of kind.'"

Shepherdson, a Briton who was chief economist for HSBC Securities in New York before joining High Frequency Economics, had a different assessment:

"Greenspan ought to have used the pages of the Journal to apologize to the nation. Instead, his piece will stand as a testament to his hubris, or perhaps his delusions. History will not be kind to him."

 REUTERS/Kevin Lamarque  (Greenspan testifies before the House Oversight committee in October)

The U.S. Federal Reserve’s Beige Book survey of economic conditions is always chock full of goodies for the econ wonks among us. Today’s installment is a recession-era opus, chronicling in amazing detail just how sharply the economy is falling. Allow us to present a top 10 list of interesting observations:

10. Across the country, demand for professional services was down. “However, Dallas noted a modest increase, albeit less-than-expected, in demand for legal services due to increased bankruptcy proceedings.”

9. In New York City, revenues per hotel room were reported down a record 30 percent in January from a year earlier. Some 13 Broadway shows closed in January.

8. These intriguing comments come from bankers in the Philadelphia district: “The weakness in lending is on the demand side,” one banker noted, and another said, “The news coverage has the public convinced that banks aren’t lending, but we’re looking for business.”

7. Also in the Philly region, real estate agents said a number of would-be home sellers “have preferred to offer them for rent rather than accept low offers.”

6. A hospital administrator in central North Carolina noted that demand for surgeries had fallen as local layoffs continued.

5. A job service center in Montana reported seeing many more people per day in January than in the past, and job seekers were less selective about job openings.

4. In Baltimore, Maryland, a real estate agent said landlords were making more concessions on rents, and there was “no point asking what the face rent is — it’s all about what tenants can afford.”

3. In the Chicago region, a manufacturer said more overseas customers were not accepting delivery on shipments of heavy machinery because financing was falling through.

2. Retailers in the St. Louis region weren’t feeling too good about March and April sales. About 72 percent of retailers said they expected sales to be down from comparable 2008 levels. It was a similar story among auto dealers — 62 percent predicted lower year-over-year sales for March and April, and 48 percent reported more rejections of finance applications.

1. And finally, this gem from the Boston district: “Several contacts have also frozen wages or eliminated bonuses or retirement contributions, and note that employees have taken the news of these freezes and job cuts ‘remarkably well.’”

The U.S. Federal Reserve seems to be growing gloomier each month. Sure, they’re not the only group whose economic forecasts have been a moving target of late, but check out how their staff view of the U.S. economy has changed in the past few months.

Back in 2007, the hope was that the housing market “correction” would taper off and 2008 would bring healthier growth. Then the best guess was that the economy would regain its footing in the second half of 2008. Now, the horizon is moving into 2010.

According to newly released minutes from the central bank’s December meeting, when it pushed short-term interest rates down to a range of zero to 0.25 percent, Fed staff now think the world’s biggest economy may be a year away from returning to normal growth.

Take a look at how the Fed’s thinking changed between a mid-September meeting of its rate-setting Federal Open Market Committee and the Dec. 16-17 gathering.

Fed staff forecast from the September meeting:

“The staff continued to expect that real GDP would advance slowly in the fourth quarter of 2008 and at a faster rate in 2009, but still less than that of its potential.”

Fed staff forecast from the October meeting:

“The staff expected that real GDP would continue to contract somewhat in the first half of 2009 and then rise in the second half, with the result that real GDP would be about unchanged for the year.”

Fed staff forecast from the December meeting:

“All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010.”

So tell us what you think. Did they get it right this time?

OK, so we’re a little geeky around here, but we just couldn’t resist sharing some of the juicy tidbits in the Federal Reserve’s Beige Book summary of economic activity.

We knew the economy was in bad shape, but thanks to the good people at the regional Fed banks we have now learned:

1. New York’s Broadway theaters saw a drop-off in demand starting in mid-October.

2. People who had lost their health insurance following a job loss were cutting back on visits to primary-care doctors. Health care executives said they were worried about that leading to sicker people showing up in emergency rooms with no way to pay.

3. A furniture maker in North Carolina said business had “frozen shut” across the country and across all of his furniture lines.

4. Cotton farmers in the Atlanta Fed’s district reported price declines despite the smallest regional crop in 25 years because of falling global demand.

5. In the Chicago region, milk, hog and cattle prices moved lower, and there were concerns about bankruptcies in the livestock industry.

6. In South Dakota, hunting reserves reported cancellations.

7. Restaurants in the Kansas City region said senior citizens were cutting back, and pointed to losses in retirement income.

8. Legal firms in the Dallas region reported that receivables were slowing and getting more difficult to collect.

9. In Southern California, there were more reports of companies canceling meetings, and tourism and spending dropped sharply in Hawaii.

10. And in Boston, a commercial real estate executive called the credit squeeze “murderous.”

Not all was doom and gloom. A ski resort in Virginia said reservations for Thanksgiving and Christmas holidays were somewhat stronger, and in Washington, they’re expecting a record-large flood of tourists for Barack Obama’s January inauguration.

Thanks Beige Book!