Interest Rate & Market Commentary for Week Ending 16th January 2026
Weekly Overview
2025 Calendar Year Review
Global markets rallied in 2025, led by South Korea’s triple-digit surge. While US equities posted double-digit gains, they trailed the ACWI by 4.7 percentage points, their widest underperformance gap since 2008. In Europe, southern markets like Spain (+81.5%) and Italy (+54.1%) significantly outpaced their western peers. Conversely, Denmark, Argentina, Indonesia, and the Philippines lagged as the year’s worst performers. Market breadth remains exceptionally strong, with over 95% of global indexes trading above their 200-day moving averages. For most of the second half, this indicator held above 90%, signalling a robust AI-driven bull market that effectively neutralized headwinds from Trump’s tariff policies.
All 11 S&P sectors rose in 2025, led by Tech (+24.7%) and Communication Services (+32.5%), fuelled by mega-cap stocks. This raised concerns about concentration. YieldReport tracks the top 10 firms’ share of S&P 500 market cap and net income. While their market share has surged, earnings have also grown, especially the big techs, now generating nearly 40% of S&P 500 profits, up from 20% pre-COVID, supported by major acquisitions.
The DXY Index dropped over 9% in 2025, its steepest annual decline since 2017, triggering rallies in major peers, led by a 42.8% surge in the Russian Ruble. The euro and Swiss franc outperformed as central banks paused rate cuts mid-year, with the franc further boosted by rising gold prices. Meanwhile, the yen rose just 0.26% despite two rate hikes, weighed down by heavy bond issuance and fiscal concerns. In emerging markets like India and the Philippines, currency depreciation acted as a “performance tax,” offsetting strong equity gains
Oil remains weak this year as sluggish demand in the US and Europe collides with ample supply from record non-OPEC production. Stable Middle East geopolitics and a shift in investor appetite toward equities and gold have further suppressed prices. Strong Performance in Precious Metals, especially Silver: Silver is outperforming due to a retreating dollar, lower real yields, and a persistent five-year structural deficit. This rally is driven by robust industrial demand from AI, EVs, and solar sectors, exacerbated by China’s export controls and limited new mining output.
The bond market finally caught a break in 2025. The Fed cut rates three times, and soft US labour data drove 10-year Treasury yields briefly below 4%, ending the year down 44 bps. High yield and emerging market bond yields continued to decline, signalling a risk-on tone with stable private sector debt levels. In contrast, government bond yields rose in Europe and Japan due to looser fiscal policy and central bank shifts—ECB paused cuts, while the BOJ hiked 50 bps. Australia signalled rate hikes in 2026, driving yields higher there as well.
The crypto market remained volatile in 2025. While OKB and Binance Coin saw gains, most cryptocurrencies, including Bitcoin, declined. This diverged sharply from the performance of equities and precious metals. According to MacroMicro data, only 8.7% and 12.1% of cryptocurrencies are trading above their 200-day and 50-day moving averages, respectively, a clear sign of bearish sentiment now.
Despite Q2 tariff volatility and temporary market corrections, the US economy demonstrated remarkable resilience in 2025, with the S&P 500 achieving a 17.8% annual return and Q3 GDP growth accelerating to 4.3% annualized quarter-over-quarter. Consumer spending contributed 2.39 percentage points to Q3 growth, underscoring household demand strength, while full-year GDP growth reached 1.8%, matching long-term potential growth estimates and validating the economy’s fundamental stability. Looking ahead to 2026, we forecast 2% GDP growth supported by balanced labour markets, moderating inflation trajectories, and fiscal stimulus from the 2025 legislative package. This outlook reflects a continuation of the steady expansion trajectory established in late 2025, with reduced tariff uncertainty providing a more predictable policy backdrop for business investment and consumer confidence compared to the disruptions experienced earlier in the year
Overall, interest rate adjustments in 2026, whether hikes or cuts, are expected to be more moderate than in 2025. The impact of tariff conflicts has gradually faded, and economic growth across major economies has shown greater resilience than markets anticipated, signalling a return to more normalized global conditions rather than continued reliance on aggressive monetary easing. While global easing momentum has slowed, continued liquidity support from the Federal Reserve should keep financial conditions broadly accommodative, cushioning markets even as the era of uniform global easing fades.
Weekly Review
The major U.S. stock indexes produced gains of around 2.0% in the first full trading week of 2026. The S&P 500 and the Dow surpassed record highs set two weeks earlier, and the NASDAQ climbed to within 1.2% of its historic peak set more than two months ago.
Friday’s jobs report provided further evidence of a labour market slowdown. The economy generated a below-forecast 50,000 jobs in December, and initial estimates for the previous two months were revised downward by a combined 76,000 jobs. In 2025, payroll gains averaged 49,000 per month—less than one-third of 2024’s 168,000 average. A U.S. small-cap benchmark outperformed its large-cap peers by a wide margin and eclipsed a record high set four weeks earlier. The Russell 2000 Index added 4.6% for the week. Over the past month and a half, the index has added nearly 14%.
Precious metals prices rebounded from the previous week’s declines, extending rallies that began to pick up momentum in early 2025. Gold was trading above $4,520 per ounce on Friday afternoon and near a record level set two weeks earlier. Silver surpassed $80 per ounce for the first time on Tuesday and was trading just below that record level on Friday afternoon. Oil prices fluctuated widely amid a heavy flow of geopolitical news affecting commodity markets. The price of U.S. crude fell to as low as $56 per barrel on Wednesday before rebounding to as high as $60 on Friday, resulting in a more than 3% weekly gain.
U.S. consumer sentiment is up for the second month in a row and at its highest level in four months, based on Friday’s preliminary monthly report from a University of Michigan survey. The index’s initial January reading was 54.0, up from December’s final figure of 52.9. Both results marked a modest rebound following a string of recent monthly declines amid weakening jobs growth.
The growth rate for dividend payments by U.S. companies accelerated in 2025’s fourth quarter. The $13.1 billion in net dividend increases recorded by companies in the S&P 500 was well above the previous quarter’s $10.6 billion, according to S&P Dow Jones Indices, which said it expects 2026’s first quarter to be a busy period for dividend increases due to record-high earnings and sales levels. A Consumer Price Index report scheduled for release on Tuesday will show whether a recent downturn in inflation extended into December. The most recently released CPI report showed an annualized rate of 2.7% in November, well below economists’ consensus forecast for a 3.1% figure.
Australian equities finished the week on a subdued note as investors adopted a cautious stance ahead of key offshore catalysts. The S&P/ASX200 slipped marginally by 0.03% on Friday to close at 8,717.8, while the All Ordinaries edged down 0.01% to 9,045.9. For the week, the ASX200 declined 0.1%, marking its second consecutive weekly loss and underscoring the absence of a clear directional bias in markets.
Australian headline CPI surprised to the downside in November 2025, flat on the month versus expected 0.4%, creating downside risk to December-quarter inflation expectations. Annual CPI rose 3.4%, below market (3.6%) expectations, while Trimmed Mean inflation eased to 3.2%. Softer outcomes reflected smaller-than-expected electricity price rises, larger falls in discretionary items, and more moderate transport costs, partly offset by firmer food, rents and dwellings. Energy rebates continue to suppress measured inflation. Overall, the data support expectations that the RBA will remain cautious, pausing at its February meeting, with underlying inflation pressures expected to gradually moderate through 2026
Exhibit 1- World – Major Stock Indices Performance in 2025.
Exhibit 2: Commodity Market Performance in 2025
Market Summary Table
| Name | Week Close | Week Change | Week High | Week Low |
|---|---|---|---|---|
| Cash Rate% | 3.60% | |||
| 3m BBSW % | 3.74 | 0.02 | 3.75 | 3.74 |
| Aust 3y Bond %* | 4.05 | -0.07 | 4.18 | 4.03 |
| Aust 10y Bond %* | 4.67 | -0.09 | 4.81 | 4.65 |
| Aust 30y Bond %* | 5.20 | -0.08 | 5.29 | 5.18 |
| US 2y Bond % | 3.50 | 0.03 | 3.50 | 3.45 |
| US 10y Bond % | 4.18 | 0.05 | 4.18 | 4.13 |
| US 30y Bond % | 4.85 | 0.02 | 4.86 | 4.81 |
| $1AUD/US¢ | 66.79 | 0.76 | 67.56 | 66.70 |
Chart of the Week -Global Recession Probability & Global Equity Performance
MM Global Recession Probability aggregates indicators across consumption, employment, manufacturing, finance and commodities to estimate monthly global recession risk, with 50% as the neutral baseline. Sustained readings well above 50% signal elevated recession risk and typically coincide with major equity drawdowns.
The indicator currently sits at 37%, well below the 50% threshold and is supportive of equity risk-taking.
Global Liquidity Cycle – Where Liquidity Heads Next
As 2026 approaches, global monetary policy is shifting from synchronized easing toward divergence, raising questions about the future of global liquidity. After widespread rate cuts in 2025, largely in response to tariff shocks and slowing growth, central banks are now calibrating policy to more localized inflation and growth dynamics. The result is a more fragmented policy landscape, with implications for capital flows, currencies, and financial conditions.
In developed markets, the Federal Reserve remains the pivotal liquidity anchor. Having cut rates by 175 bps since September 2024, the Fed paused quantitative tightening in late 2025 and introduced Reserve Management Purchases, buying USD 40 billion of Treasury bills monthly. This combination of rate cuts and balance-sheet support suggests accommodative US liquidity will extend into 2026, with scope for a further 50–75 bps of easing even as consecutive cuts are no longer guaranteed.
By contrast, the European Central Bank appears to have concluded its cutting cycle. Improved growth and stable inflation near target support a prolonged pause through 2026. Similarly, the Bank of Canada is expected to keep rates unchanged after aggressive earlier easing, while modestly resuming asset purchases to manage liquidity amid trade uncertainty.
The Bank of England sits near neutral, with inflation still elevated. Limited additional cuts, perhaps one or two, are expected in 2026. Japan remains an outlier: the Bank of Japan has lifted rates to their highest level in decades, but fiscal stimulus, yield pressures, and easing inflation are likely to cap further hikes at one more move.
Australia stands apart among developed markets. With inflation re-accelerating and domestic demand firm, the Reserve Bank of Australia is widely expected to restart rate hikes in early 2026, making it one of the first to tighten again.
Across emerging markets, a clear split is forming. In Asia, stronger growth reduces reliance on stimulus: the People’s Bank of China remains accommodative but with reduced urgency for aggressive easing, while Taiwan and Korea are delaying or softening dovish guidance. In contrast, Latin America and parts of Europe and Africa are re-entering easing cycles as currency pressures fade. Indian central bank has commenced its easing cycle last year. Brazil and Russia are expected to deliver meaningful rate cuts through 2026.
Overall, interest rate adjustments in 2026, whether hikes or cuts, are expected to be more moderate than in 2025. The impact of tariff conflicts has gradually faded, and economic growth across major economies has shown greater resilience than markets anticipated, signalling a return to more normalized global conditions rather than continued reliance on aggressive monetary easing.
After the global net rate-cut ratio among central banks entered a high-level consolidation phase following Q4 this year, the MM Global Economic Expectations Index has continued to trend higher. We expect this momentum to persist at least through mid-next year. With liquidity support from the leading central bank, the Federal Reserve, even in the absence of aggressive rate cuts, financial conditions should remain accommodative, providing a buffer against high base effects facing the global economy in the second half of the year.
Global Equity Valuations
Global equity valuations remain highly uneven across markets. The US continues to trade at a clear premium, with MSCI P/E ratios near 28x, reflecting strong earnings expectations and persistent liquidity support. Australia and Taiwan also screen expensive, both above 20x, while Japan sits around the high teens.
Europe is more mixed, with Germany near 18x and the UK notably cheaper at ~15x. Emerging markets generally remain lower-valued: Brazil trades near 10x, China in the mid-teens, and Thailand around 16x. Overall, valuation dispersion highlights ongoing regional differences in growth outlook, policy support, and investor risk appetite.
Figure 3 – World MSCIPE Ratio by country
Overview of the US Equities Market
2025 Calendar Year Review
Global stock markets ended 2025 on a positive note amid sustained optimistic sentiment. US equities held firm at elevated levels, with the S&P 500 maintaining high-range consolidation despite slight weakness in tech sectors. Asian markets shone brightly, supported by semiconductor strength—Taiwan and South Korean markets surged to new all-time highs. European indices continued their upward trajectory, delivering the strongest annual performance since 2021.
The S&P 500’s 17.9% total return for 2025 marked the third year in a row that the index generated a double-digit gain. However, the latest result fell short of 2024’s 25.0% return and 2023’s 26.3% figure, which were the strongest back-to-back annual results since 1997/1998.
The technology-oriented mega-cap stocks known as the Magnificent Seven extended their dominance of the U.S. market. Those seven names contributed 42% of the S&P 500’s total return in 2025 and 55% over the latest three-year period, according to S&P Dow Jones Indices. Moreover, the Magnificent Seven’s share of the index’s overall market capitalization rose to 34.9% at the end of 2025 from 33.5% at the close of 2024.
For the third year in a row, communication services and information technology were the top-performing sectors in the S&P 500, as they generated total returns of 33.6% and 24.0% in 2025, according to S&P Dow Jones Indices. All 11 sectors delivered positive performance; while real estate was the weakest sector, it nevertheless generated a 3.2% return.
As major U.S. banks prepare to open quarterly earnings season in mid-January, analysts expect that fourth-quarter earnings per share for companies in the S&P 500 rose by an average of 8.3%, according to a recent survey from FactSet. At the sector level, information technology and materials are expected to generate the strongest fourth-quarter earnings gains.
Historically, January’s stock market performance has been a strong indicator of what may be in store for the rest of the year. In fact, about 72% of the time since 1929, the S&P 500 has posted a positive return for the year after gaining ground in January or has gone on to post an annual loss when the market has declined in the first month, according to S&P Dow Jones Indices. That’s also been the case each of the past four years.
While global easing momentum has slowed, continued liquidity support from the Federal Reserve should keep financial conditions broadly accommodative, cushioning markets even as the era of uniform global easing fades.
Overview of the US Treasuries Market and Other Fixed Income Markets
2025 Calendar Year Review
A U.S. bond market benchmark generated a return of 7.3% in 2025, a year that saw notable shifts in the outlook for inflation and monetary policy. The yield of the 10-year U.S. Treasury note reached as high as 4.80% in January before briefly slipping below 4.00% in October; it finished 2025 at 4.17%, down from 4.57% at the end of 2024.
November CPI inflation decelerated sharply to 2.7% year-over-year (from 3.0% prior), while core CPI fell to 2.6% (from 3.0%), reaching the lowest level since April 2021 and significantly undershooting market expectations. Core services inflation declined substantially to 3.0% annually (from 3.5% in September), with shelter costs moderating to 3.0% (from 3.6%), though October data collection gaps due to government operations disruptions may have artificially suppressed reported price increases. The pace of 2026 disinflation will hinge on the next three months of CPI momentum: if monthly increases rebound to 0.2%+ matching post-tariff 2025 levels, Fed rate cuts will concentrate in H2 2026, whereas sustained deceleration below 0.2% monthly could prompt a March rate cut and dovish dot plot revisions.
The July 2025 legislative package centred on tax reductions and expanded defence and border security spending will deliver its peak fiscal impact in 2026, with Congressional Budget Office estimates projecting an additional 0.9% of GDP in deficit expansion concentrated this year. Peak tariff policy uncertainty occurred in 2025, creating consumption and investment deferrals that weighed on growth; with tariff frameworks now largely established, the economic drag from policy uncertainty will progressively dissipate through 2026 even if additional trade measures emerge.
With midterm elections approaching in late 2026, potential exists for supplementary fiscal stimulus measures beyond the July 2025 package, creating upside risk to our 2% growth forecast. The combination of dual monetary and fiscal accommodation, Fed rate cuts alongside deficit-financed spending, significantly reduces the probability of sharp labour market deterioration, reinforcing stable economic expansion as the base case scenario for 2026.
Beyond rate policy, the December FED meeting’s most significant development was launching Reserve Management Purchases (RMPs) of Treasury bills at $40 billion monthly through April tax season, then potentially moderating to $20-25 billion monthly thereafter. Combined with approximately $17.5 billion in monthly MBS reinvestments, the Fed will inject nearly $600 billion in short-term debt demand, absorbing most new supply and ensuring ample underlying liquidity to support market functioning.
Weekly Review
U.S. and global bond markets were driven this week by shifting expectations around Federal Reserve policy, resilient labour data, and lingering political uncertainty. Strong signals from the U.S. labour market reinforced market pricing for a pause in Fed rate cuts, pushing Treasury yields higher at the front end while leaving longer maturities more mixed. Over the week, the two-year Treasury yield rose around 6 basis points to roughly 3.54%, reflecting sensitivity to near-term policy expectations, while the 10-year yield edged slightly lower to about 4.17%, underscoring ongoing uncertainty around growth and inflation beyond the short term.
December payroll data proved pivotal. Job creation undershot expectations, with payrolls rising only 50,000 versus a consensus of 73,000, and prior data were revised lower. However, the unemployment rate fell to 4.4%, suggesting continued labour market resilience. This combination briefly lifted yields and the U.S. dollar, as investors interpreted the data as strong enough to keep the Fed on hold, but not weak enough to justify renewed easing. Markets now see the January 28 Fed meeting as a likely pause point, with inflation data—particularly December CPI—becoming the next critical catalyst.
Political uncertainty added another layer of tension. Markets awaited a Supreme Court ruling on the legality of tariffs imposed under emergency powers, which failed to materialize, prolonging uncertainty. Comments from administration officials that contingency plans are in place to maintain tariffs further clouded the outlook, reinforcing caution across risk assets.
Outside the U.S., global bond markets were comparatively stable. Eurozone yields were little changed despite heavy sovereign issuance, with investors focused on U.S. data spillovers rather than domestic drivers. UK gilt yields were similarly steady, reflecting a wait-and-see approach ahead of U.S. payrolls and their implications for global rate paths.
Overall, Treasury yields remain confined to a narrow range. The Fed is viewed as near neutral and inclined to pause, while geopolitical and policy uncertainties are seen as unlikely to alter near-term macro trajectories. Markets remain highly data-dependent, with inflation releases expected to drive the next meaningful move.
Figure 4: Bond Yield Movements in the Past Week
Overview of the Australian Equities Market
Australian equities finished the week on a subdued note as investors adopted a cautious stance ahead of key offshore catalysts. The S&P/ASX200 slipped marginally by 0.03% on Friday to close at 8,717.8, while the All Ordinaries edged down 0.01% to 9,045.9. For the week, the ASX200 declined 0.1%, marking its second consecutive weekly loss and underscoring the absence of a clear directional bias in markets.
The dominant macro focus was the upcoming US non-farm payrolls report, the first “clean” read since the US government shutdown, which is expected to play a pivotal role in shaping the Federal Reserve’s near-term rate path. Markets currently anticipate a pause before further rate cuts. Adding to global uncertainty is the prospect of a US Supreme Court ruling on the legality of Donald Trump’s trade tariffs, which could materially affect global trade dynamics depending on the outcome.
Sector performance was mixed, with only four of the ASX’s 11 sectors finishing higher. Energy led gains, rising 2.1% as oil prices rebounded, lifting major producers such as Woodside Energy, Santos, and Karoon Energy. In contrast, materials weighed on the index after Rio Tinto fell sharply following news of preliminary all-share merger talks with Glencore. This contrasted with modest gains in BHP.
Financials were a drag, with all four major banks ending lower amid valuation sensitivity to global rate expectations. Corporate news also featured BlueScope Steel, which rose after Australian Super backed management’s rejection of a takeover bid. The standout performer was Codan, which surged to a record high on strong revenue guidance.
The Australian dollar softened slightly to around US$0.6695, reflecting cautious global sentiment ahead of critical US data.
Overview of the Australian Government Bond Market
Australian headline CPI surprised to the downside in November 2025, flat on the month versus expected 0.4%, creating downside risk to December-quarter inflation expectations. Annual CPI rose 3.4%, below market (3.6%) expectations, while Trimmed Mean inflation eased to 3.2%. Softer outcomes reflected smaller-than-expected electricity price rises, larger falls in discretionary items, and more moderate transport costs, partly offset by firmer food, rents and dwellings. Energy rebates continue to suppress measured inflation. Overall, the data support expectations that the RBA will remain cautious, pausing at its February meeting, with underlying inflation pressures expected to gradually moderate through 2026.
A quarterly survey of leading economists by The Australian Financial Review suggests Australian inflation will remain uncomfortably high over the coming year, raising the likelihood that the Reserve Bank of Australia will lift interest rates at least twice. Seven of the 38 economists surveyed, including teams at CBA and NAB, expect the first hike as early as the February policy meeting, reflecting concerns that inflation pressures have re-emerged and financial conditions remain relatively loose.
The RBA cut rates three times in 2025, taking the cash rate to 3.6%, but expectations have shifted after headline inflation jumped to 3.8% in October and core inflation rose to 3.3%, well above the 2–3% target band. Economists including Challenger’s Jonathan Kearns and Barrenjoey’s Jo Masters argue that rising housing and services costs, tight labour market conditions and strong wage growth leave the RBA increasingly uncomfortable. Markets are now pricing a one-in-three chance of a February hike and are fully priced for a rise by June.
However, views are sharply divided. While 17 economists forecast at least two hikes over the next 18 months, others see rates on hold or even falling if the labour market weakens and recent inflation spikes prove temporary. The survey split forecasters three ways: rate cuts, hikes, or no change by year-end. The median forecast sees core inflation easing to 2.8% by year-end, still above the RBA’s midpoint target, and unemployment edging up to 4.5%.
Overall, the survey highlights deep disagreement over whether the economy is re-accelerating or beginning to cool, leaving the RBA facing a difficult balancing act between inflation control and growth risks.
Australian and global fixed-income markets delivered a mixed performance over the week, reflecting diverging domestic and offshore dynamics. In Australia, the cash rate remained unchanged at 3.60%, while short-term funding costs edged higher, with 3-month BBSW rising 2 bps to 3.74%. In contrast, the government bond curve rallied, led by the long end. The 3-year yield fell 7 bps to 4.05%, the 10-year declined 9 bps to 4.67%, and the 30-year eased 8 bps to 5.20%, flattening the curve and signalling softer growth or inflation expectations.
US bond markets moved in the opposite direction, with yields rising modestly across the curve. The 2-year yield increased 3 bps to 3.50%, while the 10-year and 30-year yields rose 5 bps and 2 bps to 4.18% and 4.85%, respectively, reflecting resilient economic data and a reassessment of the pace of Federal Reserve easing.
In currency markets, the Australian dollar strengthened sharply, appreciating 0.76 US cents to 66.79, supported by improved risk sentiment and relative yield dynamics. Overall, markets remain sensitive to central bank guidance and incoming inflation data, driving cross-market divergence.
Looking Ahead: Major Economic Releases for the Week Ending 16th December
For the week ending January 16, 2026, there are no major economic releases scheduled for Australia. In the United States, economic data will be in the spotlight, with Core CPI (MM and YY) and headline CPI (MM and YY) expected to show persistent inflationary pressures. PPI Machine Manufacturing may reflect ongoing producer price trends. Retail Sales MM for November could rebound modestly from prior flatness, pointing to resilient consumer spending, and Existing Home Sales for December is projected to rise slightly, indicating a gradual real estate recovery. Import Prices YY for November might show emerging upward pressures from tariffs, Initial Jobless Claims are expected to edge lower, underscoring labor market strength despite fluctuations, and Philly Fed Business Index for January may turn negative, signaling cautious manufacturing sentiment.
Major Economic Releases for the Week ending 16 Jan, 2026
| Date | Country | Release | Consensus | Prior |
|---|---|---|---|---|
| Tuesday, 13/01 | United States | Core CPI MM, SA | 0.3 | 0.2 |
| Tuesday, 13/01 | United States | Core CPI YY, NSA | 2.7 | 2.6 |
| Tuesday, 13/01 | United States | CPI MM, SA | 0.3 | 0.3 |
| Tuesday, 13/01 | United States | CPI YY, NSA | 2.7 | 2.7 |
| Tuesday, 13/01 | United States | CPI Wage Earner | n/a | 317.414 |
| Tuesday, 13/01 | United States | New Home Sales-Units | n/a | 0.8 |
| Wednesday, 14/01 | United States | PPI Machine Manuf'ing | n/a | 192.2 |
| Wednesday, 14/01 | United States | Retail Sales MM | 0.4 | 0 |
| Wednesday, 14/01 | United States | Existing Home Sales | 4.23 | 4.13 |
| Thursday, 15/01 | United States | Import Prices YY | n/a | 0.3 |
| Thursday, 15/01 | United States | Initial Jobless Clm | 219 | 208 |
| Thursday, 15/01 | United States | Philly Fed Business Indx | -2 | -10.2 |
Source: Refinitiv
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