By Greg Peel

The Dow closed up 123 points or 1.0% while the S&P gained 1.3% to 1287 and the Nasdaq added 1.5%.

Yesterday China's May CPI inflation registered 5.5% year-on-year which was up from April's 5.3%. Although a higher number, it was bang on consensus expectation and this was a good thing, as far as markets were concerned, given there were grave fears the number could be a lot higher.

Industrial production (13.3%) was one percentage point better than expectation and retail sales (16.9%) one point below but neither result suggested any significant slowdown. The fixed asset investment result was a bit higher with a 34.6% (year to May) increase in real estate investment rising over the 34.3% (year to April) rate.

The PBoC wasted no time in yet again raising its bank reserve ratio requirement by another 50bps as soon as the Shanghai stock exchange had closed. Global markets no longer fear China's RRR increases given they have a fairly benign effect and realistically China's property developers are now issuing their own bonds as a means of raising funds, rather than relying on bank loans. So across the globe, stock markets were stronger yesterday and last night on what was seen as "not all that bad" set of Chinese data. Australia spun around to be up on the day following an early loss, Shanghai gained 1.1% taking the rest of Asia with it, and strong gains were seen in Europe.

We won't mention the PBoC cash rate rise that must inevitably come. Economists are nevertheless banking on an easing of inflation pressure in China in the second half, maybe after another high number or two. Food inflation was up 11.7% in May on surging pork and vegetable costs and that number is volatile.

It could all have come a cropper in the US, however, when the May retail sales were shown to have fallen 0.2% for the first drop since last June. Economists were expecting a fall of 0.7% given the weighty impact of diminished auto sales affected by the Japanese earthquake. Ex-autos, retails sales rose 0.3% and that was good news for Wall Street.

The other US economic release of the night was the producer price index which showed both headline and core wholesale inflation rose 0.2% in May, largely as expected. It was the smallest gain since last July and reflected the May correction in commodity prices. Tonight is the CPI.

Wall Street has been itching for a bounce, and a combination of not so bad data out of both China and the US is a good catalyst. The S&P 500 is currently trading on an average PE of about 13.5x which is too cheap, according to the bulls, on a historical basis. As to whether this bounce has legs is another matter, and many are assuming it will be earnings forecasts for the June quarter which fall to raise the PE rather than stock prices rising. With June quarter results due in July, we will soon see the "confession session" of corporate guidance adjustments and pre-releases. At present, analysts are expecting 20% earnings growth which seems out of line with weaker data.

The good news out of China is good news for Australia, which is why the Aussie is now up another three quarters of a cent to US$1.0682. Movements in other currencies were limited, leaving the US dollar index relatively unchanged on 74.44.

The dollar-commodity price correlation has been mostly missing of late and last night commodity prices jumped on all the supposedly good news. Copper surged 3% as all base metals rose 1-4% and silver added 2%. Gold selling reversed to see the precious metal back up US$8.30 to US$1523.70/oz.

And a funny thing happened in oil. Brent crude rose US93c to US$120.22/bbl but at one point in the session, the Brent-WTI spread had blown out to US$23. Finally Nymex traders decided this was simply too much, and within a blink that spread collapsed 5%. West Texas ended the day up US$2.11 to US$99.41/bbl and the spread eased to just under US$21.

But whaddya know, Wall Street simply saw "oil up two bucks" which meant the energy sector had a strong session. At least this makes up for some of the weak sessions for the sector these past couple of days as West Texas has slipped well below Brent.

The US bond market has been fairly quiet of late, with the ten-year yield stuck around 3%. Bonds are hard to buy at these low levels but a weakening economy means low rates for longer and the Fed has quashed any talk of QE3. The endless argument in Congress over the debt ceiling and budget cuts is yet to be resolved. But last night's solid retail sales result finally broke the bond deadlock and the ten-year jumped 11 basis points to 3.11%.

Given we had our response to the Chinese data in yesterday's afternoon session, the SPI Overnight was up only 13 points or 0.3%. And that currency is heading north again.

Today's local highlight will be a speech from the RBA governor.