• The ECB is ready to announce how its exit strategy will look like. So far, we only know that the December 12-month LTRO will be the last one. We expect – and we explain why – a surge in the allotment from the September's EUR 72bn. Moreover, we think the ECB will drop the 1M and 6M LTROs at the beginning of next year and will retain full allotment for the weekly MROs. If we are right, the EONIA should trade around current levels until (at least) July 2010.

    • A strong IP performance pulled the eurozone out of the recession in the third quarter. We expect 3Q GDP to be reported up by at least 0.5% qoq, with net exports and inventories marking the largest positive contributions. Most likely, the expansion continued also in 4Q, though probably at a slower pace.

    • Private consumption likely disappointed in 3Q, but the worst should be over. Next year, a slowly improving employment outlook, moderate CPI pressures and a slight easing in the saving rate will provide some relief, though we expect a sustainable return to positive consumption growth only in 2H 2010. A more genuine recovery is to take place in 2011.

    • Consumer confidence displays a close correlation with private consumption, and is therefore a helpful guide to assess the outlook for household spending. In particular, trends in "major purchases at present" vs. "major purchases over the next 12 months" are useful to gauge whether a genuine pick up in consumption is starting to materialize.

    • The recent substantial decline of financing costs is an important step in the right direction to provide relief to firms and households. While lower financing costs undoubtedly reflect the adequacy of the policy response, and compensate (at least partially) for still weak demand, we warn that we are not out of the woods yet. In this context, it is crucial that financing costs remain low; an earlier and abrupt pick-up could severely hamper the dawn of a sustainable economic recovery.

    • The time of negative inflation rates is over. In November, CPI growth will turn clearly positive, with a further acceleration expected at year-end, when the inflation rate should settle at around 1%. However, this is almost entirely an energy story. Continued lack of firms’ pricing power is consistent with our view that core inflation will decelerate also next year. Moreover, leading indicators for food inflation keep signaling no tangible pressures for at least the next three-six months.

    • With still high uncertainty on the sustainability of the recovery, demand for bonds should remain sustained till year-end. The front end will remain bid due to investors’ liquidity parking needs. However, with 2Y yields extremely low, we see the case for a 2/5 year spread flattening. In the UK, we regard the 2/10Y spread as too steep to be sustainable.

    • Both the euro and the US dollar appear overstretched, but more EUR-USD strength slightly above 1.55 is likely to emerge before the G20 will try to save the greenback. In any case, a complete trend reversal is quite unlikely: the US twin deficits should work as a structural drag for the US dollar even when the Fed starts its tightening cycle in 2H 2010.