The financial markets remain torn between their concerns over “black swans” (exogenous shocks from oil prices, food prices, and the Japanese earthquake) and the improving state of the global economy. 
This week, the latter have had the better of the debate, and global equities have recovered most of their recent losses. Bond prices fell as markets became more concerned about the end of QE2 in the US, and a possible rise in interest rates at the ECB meeting on April 7. There will be much more focus on central banks tightening next week, when several hawkish members of the Fed’s policy committee are scheduled to speak, and strong data are likely to be published from the US labour market and manufacturing sector on Friday. The consensus forecast is that non-farm payrolls rose by 195,000 in March, the best figure so far in the recovery.
This week, the following developments are worth noting:
1. The Fed is debating the end of QE2
In the past week, we have heard several hawkish noises from FOMC members such as Charles Plosser, who were always sceptical about QE2, and who are now preparing for the debate on the exit strategy which will take place at the FOMC meeting on April 26/27. Mr Plosser argued in an important speech that it would soon be time to start withdrawing monetary stimulus, and proposed a plan under which the Fed would simultaneously raise interest rates by 25 basis points at a time, and also sell $125bn of Fed assets each time rates were increased. Mr Plosser is clearly at the hawkish end of the FOMC spectrum, but this is a much earlier and tougher exit programme than anyone had previously discussed in open debate.
Several other FOMC members who are thought to be near the centre of the FOMC, including Messrs Kocherlakota, Lockhart, Evans and Bullard, also made hawkish-sounding noises this week. 
James Bullard is particularly interesting. He was seriously concerned about deflation last year, and was one of the earliest on the FOMC to contemplate QE2. Now, he says that the Fed should be debating whether to end QE2 earlier than the end of June, and he says that this applies “particularly” to the meeting in April. Mr Bullard has always believed in taking small and frequent steps on QE in both directions, but this does indicate the looming importance of the April meeting. With Mr Bernanke scheduled to give the first of his scheduled press conferences on April 27, the next month is going to be a vintage time for Fed watchers.
What will the outcome be? It is far too early to feel confident about this, but remember that we have not heard recently from any of the prominent doves who have previously had the ear of chairman Bernanke. My current guess would be that they are still broadly in control, and they probably hold a much more cautious view about the exit strategy than Mr Plosser (who says he has not got the “foggiest idea” whether his plan will win support). The most likely scenario is that QE2 ends in June, but that there are no early moves to raise rates or sell Fed assets. Even so, markets will have to cope with the ending of Fed asset purchases – something which they could not cope with last year.
2. The ECB is still on course to raise rates on April 7
When the ECB announced that it was adopting “strong vigilance” on the inflation outlook after its March council meeting, some commentators thought that it was doing little more than sending a message to politicians about the reforms it wished to see implemented at the heads of government meeting on March 24. If so, the ploy did not work. The not-so-grand bargain which was agreed last week does give the EU sufficient firepower to handle more liquidity crises among the troubled peripheral economies, but it has not, to my mind, really solved the sovereign debt problem. The transfer of fiscal resources from the strong to the weak has been very minor, which still leaves open the question of whether Greece, Ireland and Portugal are solvent.
Portugal is of course the current focus of market attention, with more downgrades by rating agencies last week, and rumours of significant upward revisions to debt forecasts by the EU this week. 
However, while the markets have been concerned about Portugal itself, they have become much more relaxed about Spain, so the “domino theory” has for the moment been broken. The markets have always believed that a Portuguese bail-out could be afforded, while a Spanish bail-out could not be.
This leaves the ECB in an unsatisfactory position. It is having to contemplate a tightening in monetary policy without having off-loaded responsibility for liquidity support operations to the fiscal authorities, which is where the ECB wants them to be. However, there are no signs from ECB spokespersons that this will lead them to rethink their stance on interest rate policy. I have counted five council members saying in the past few days that “strong vigilance” remains in place, and that the oil and earthquake shocks have had no impact on their thinking. It therefore seems that the EMU zone is about to embark on a new experiment, which is to tighten monetary policy before sorting out the fiscal mess in several countries. Good luck!
3. The global economic upswing
I spent a day as guest editor of the FT’s Alphaville this week, which was illuminating – those people are good! I posted two blogs which are relevant to the global upswing vs black swan debate. This one reviews recent activity data from the big economies, and names three early warning indicators which are always worth watching when assessing the direction of the world economy. They are currently suggesting that there has been a minor slowdown in China, other brics and Asia more generally, but no slowdown yet in the developed world. This second blog reviews the technical indicators which we use at Fulcrum to separate asset prices into three camps – the good, the bad and the ugly. At present, most global equity markets are still in “good” territory, especially after the rally in the past few days. At present, the black swans seem to be losing the battle. But the central banks are about to have their say.
