For a more comprehensive round up of the week, listen to Stephen’s full report here.

Risk assets were mostly stronger in December, especially after the US Federal Reserve’s (Fed) last policy meeting of the year where it decided to start reducing purchases of assets by $US10 billion to $US75 billion a month. Market concerns about the potential negative impact of Fed asset purchase tapering on risk assets proved to be unfounded mostly because of positive offsets from a stronger turn in US economic numbers, reassurances from Fed officials that official short-term interest rates would stay very low and only a relatively modest lift in longer-term interest rates. Major equity markets in the United States, Europe and Asia strengthened in December with gains ranging from 0.7% for the Eurostoxx 50 to 4.0% for Japan’s Nikkei. After a weak start to the month, the Australian equity market recovered ground, particularly in the run up to Christmas and New Year and finished the month up 0.6%.

Credit markets were mostly softer through the first half of the month, but recovered ground later in December finishing the month almost unchanged. Longer term interest rates rose during the month including in the period after the Fed policy meeting. US 10 year and 30 year treasury yields finished December at respectively 3.03% and 3.97%, 29 basis points (bp) and 16bp higher than at the end of November. The Australian 10 year bond yield, in contrast, rose by only 1bp, finishing December at 4.23%, a solid performance given that comments by senior RBA officials watered down further any likelihood of further cash rate cuts and Treasurer, Joe Hockey, announced in the Mid-Year Economic and Financial Outlook that the pre-election forecast of a $A30 billion budget deficit in 2013-14 was revised up to $A47 billion with the likelihood that deficits would persist for the next decade.

On the economic data front, US indicators were on balance stronger than expected in December. One highlight was US Q3 GDP growth which on revisions was progressively raised from 2.8% annualized growth when first announced to 3.6% on first revision and 4.1% on second revision. US housing, retail sales, industrial production and employment readings were also firm pointing to strong US growth persisting in Q4. Economic readings in China released through December were mostly firm and consistent with annual GDP growth close to 8.0% in Q4. European readings were consistent with slow growth. Australian Q3 GDP growth was a touch disappointing, up 0.6% quarter-on-quarter and showing below long-term trend annual growth of 2.3%. Housing, retail spending and exports were strong in October, but employment growth in November, although better than expected at +21,000, was insufficient to prevent the unemployment rate drifting up one notch to 5.8%.

Looking ahead, global economic growth appears to be gathering pace early in 2014, notably so in the United States, Japan, Germany and the United Kingdom. Our view is that these signs of improvement will extend by mid-year and include China and in its wake Australia. By mid-year we expect some upgrades to official forecasts of Australian economic growth. We see the RBA holding the cash rate unchanged at 2.50% through the first half of 2014, but the beginning of a modest rate increasing cycle starting in Q3 2014.