By Greg Peel

The Dow closed up 7 points, while the S&P was flat at 1512 and the Nasdaq lost 0.1%.

It was interesting to note the market reaction on Bridge Street to yesterday's weak December retail sales number (down 0.2% when a rise of 0.3% was expected). The index dipped initially, but then reclaimed its lost ground to close out another solid session. It would seem we have now become America, where for four years Wall Street has worked off a "good news is good news and bad news is good news too" theme. If the US economic data was bad, it meant more QE. Now it seems if the Australian economic data is bad, it means more rate cuts.

A point that should be noted is that the monthly retail sales release does not include domestic online sales. Online will, however, be picked up in the sales segment of the GDP number (March 6). Online purchases from offshore do not, nevertheless, count. Either way, there is a strong case to argue, just as many American commentators argued for quite some time with regards to QE, that RBA rate cuts have had little effect. Consumer spending remains weak, housing construction remains weak, manufacturing is a dead sector walking, the service sector isn't much better, and the Aussie dollar has stubbornly refused to fall below parity.

We may wish to compare with Japan. Yesterday the governor of the Bank of Japan announced he would step down three weeks earlier than the April expiry of his tenure. In response, the Nikkei index rallied 3.8%. The outgoing governor is seen as part of the old school of Japanese monetarists who have maintained an inflation level under 1% and growth non-existent for decades. The new prime minister's policy is to raise the inflation target to 2% (to which the BoJ recently acceded) and to print, print, print to devalue the yen, boost Japanese exports and foster economic growth. The outgoing governor has seen the writing on the wall and is making it easier for Abe to install his own man as soon as possible.

Since October, the yen has fallen 20% against the US dollar. To put that into context, imagine if the Aussie was now 83 cents. The mining, manufacturing, tourism and even retail industries would be beside themselves with joy. The economy would be motoring. We will not, however, be seeing anything like an 83 Aussie with even a couple more 25bp rate cuts. If nothing else, we can't get away from the significant foreign currency inflows still needed as ongoing funding for the massive LNG and other resource sector projects underway.

Over in Europe, there is a good deal of nervousness being created around polling ahead of the February 24 Italian election. Typically, no two polls agree, but they do show a level of growing support for Berlusconi who's policy, in a nutshell, is to reverse all of Mario Monti's hard-fought austerity measures. At best, Berlusconi will likely drive a wedge, leaving Italy in the familiar position of having to assemble a tenuous coalition of un-likeminded protagonists. The euro fell 0.5% against the US dollar last night.

With the yen and euro both falling, the US dollar index rose 0.3% to 79.73. There were some positive earnings reports on Wall Street last night, but no economic data releases of note. Gold continues to bungle around at current levels, rising US$5.50 to US$1677.70/oz, while the Aussie tanked yesterday on rate cut speculation, falling 0.7% to US$1.0324.

Berlusconi is indirectly having an impact on sentiment in London, with base metals last night falling 1-2%. We must also now take heed of Chinese New Year, which falls next week and ushers in a week-long public holiday. Typically there is a frenzy of industrial activity in China ahead of the break, a lull, and then a hangover, all of which serves to distort Chinese data releases this time of year. And commodity prices. Iron ore, however, is up US90c to US$155.10/t.

The oils were quiet last night, with Brent and WTI reads up a little to US$116.84 and US$96.72 per barrel respectively.

The SPI Overnight rose 7 points.

It's unemployment day in Australia today, while News Corp ((NWS)), Tabcorp ((TAH)) and Tesltra ((TLS)) will provide the earnings highlights. The ECB will hold a policy meeting tonight but is expected to maintain its 0.75% cash rate, while chain store sales data for January will be released in the US.

Rudi will appear on Sky Business today at noon.

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