Without question the number one policy issue in China at present is the rapid acceleration in inflation, which triggered another 25bp increase in benchmark interest rates on Christmas Day. The one-year deposit rate is now 2.75%, still well below the recent peak of 4.14% in 2008. Inflation soared last year, from 2.0% to 5.1% by year end; back in early 2008, inflation was almost 9%. Food prices, which represent around a third of the CPI basket in China, have made a major contribution to the quicker pace of prices growth - fruit prices rose 28% YoY in November, while the price of vegetables jumped 21% over the same period. The acceleration in inflation has multiple causes. Firstly, domestic demand growth remains exceptionally strong - by some estimates, retail sales rose by almost 20% in the year ended November. China is such a huge presence in terms of demand for agricultural and non-agricultural commodities these days that they are placing enormous upward pressure on prices. Secondly, China's workforce is having greater success in obtaining higher wage settlements as the demand for many forms of skilled labour outstrips the supply. Thirdly, China is awash with liquidity, a product of the lending binge which Chinese financial institutions were instructed to participate in during 2009. Credit growth surged by one third in 2009 and by a further 19% last year. The PBOC has been desperately attempting to rein in runaway credit growth over recent months through the implementation of increasingly onerous reserve requirements (now as high as 18.5% for the major banks). In real terms, Chinese benchmark interest rates remain far too low to make any real impression on inflation. Policy officials are being advised to consider allowing the currency to appreciate further in order to take some of the pressure off monetary policy (note yuan 1% firmer vs. USD through December). The difficulty with this suggestion, however, is that China's terms-of-trade has been deteriorating over recent months, which partially explains why Beijing has been so reluctant to allow the renminbi to move higher more quickly. In 2011, we can expect a lot more rate hikes from China but, interestingly probably very little in terms of additional yuan appreciation.

More rate rises throughout Asia. The Taiwan central bank raised the discount rate on 10-day loans to banks by a further 0.125% on December 30th to 1.625%, together with a further increase in the reserve requirement on some local-currency deposits by foreigners to as much as 90%. The latter is designed to further discourage capital inflow, which Taiwan has been fighting against over recent months. Elsewhere in Asia, other central banks continue to tighten monetary policy as well, including South Korea, India and Thailand. Asian central banks are increasingly concerned by both accelerating asset prices and consumer prices.

Bank of America resolves mortgage dispute. There is a sense of relief that Bank of America has settled with the US mortgage giants Fannie Mae and Freddie Mac for USD 2.8bn over mortgage loan disputes. Yes, it's a huge amount, but not as large as feared, hence the sharp rise in Bank of America shares. The importance of the settlement is that it puts some numbers around the huge amount of loans under dispute, be it for lack of sufficient ownership documents or other deficient data.

Commodity prices end 2010 on a high. Last year was another stellar one for commodity prices, aided very much by surging demand from China specifically and Asia more generally. Copper prices recorded a third consecutive record high on the final day of 2010, up more than 30% for the year, cotton prices rose 92% in 2010, and silver prices jumped 82%.

Swiss franc and Kiwi dollar shine into year end. In fx markets it was the Swiss franc and the Kiwi dollar that impressed over the festive season. The Swissie climbed a further 3% against the dollar in the week to New Year's eve, registering a new record low of 0.9338. In the month of December, the Swiss franc recorded an extraordinary gain of more than 7% against the dollar, 8% against the pound and more than 4% vs the euro. Both the Swiss franc and gold are beneficiaries of a global impulse by investors to attempt to shield their wealth at a time when other major currencies are either being deliberately debased or are under a serious cloud because of unsustainable debt positions. The gold price ended 2010 above $1,400 an ounce, up more than $300 in the calendar year and the 10th consecutive annual gain. Interestingly, the renminbi also enjoyed a healthy gain in the final week of the year - it fell to 6.59 at one stage on the last day of the year, its lowest level for 17 years. The dollar faded in the final few days of 2010, with the dollar index falling to 79.0, and USD/JPY declining to 81.30. The single currency had a better time near year end, with EUR/GBP reaching 0.8640, up from 0.84 at the start of December.

US economy continues to look healthier. According to a report prepared by MasterCard Advisors, US retail sales excluding vehicles rose by 5.5% in the period from Thanksgiving (November 5th) to December 24th. This was the most rapid growth for five years. Initial claims fell to a two-year low of 388K in the week ended December 25th in a further sign that the labour market is perking up. Pending home sales rose in November for the fourth time in five months.