By Greg Peel

The Dow dropped 7 points, the S&P was up 0.1% to 1405 and the Nasdaq gained 0.5%.

It is looking increasingly likely the Fed will not need to provide additional stimulus in any big way in September. The US bond market is certainly coming to that conclusion, or at least does not want to get caught holding paper at the top of the bond market. Last night the benchmark US ten-year yield rose another 8bps to 1.80%. Some sixteen trading sessions ago it was at 1.40%. Forty basis points is a big move in that space of time.

It's not yet a collapse in bond prices ? anything under 2% seems low anyway and suggestions are that 2% will hold for a while before we finally get some news on the central bank front. For the US stock market, it's all about being stuck between a pillow and a soft place. If the US economy appears to be improving, that's good, and if it isn't the Fed will respond, which is good. So if the Fed would only not respond for good reasons, why sell?

And you wouldn't take the punt and sell ahead of the ECB meeting, but without any clarity yet, and following a covering of short positions to bring the Dow within 200 points of a 52-week high, you wouldn't buy it either. So what do you do? You look out the window at the sunshine and ask: why am I here?

Recent average volumes on Wall Street have fallen so low as to be almost imperceptible. Thank God for the Australian earnings season, otherwise we'd be sitting here in the cold going nuts. Not that we're exactly bouncing around anyway.

Last night's release of US industrial production data for July showed a 0.6% increase. It was expected, but a much better result than the 0.1% gains in both June and May. Capacity utilisation rose to 79.3% ? the highest level since April 2008, albeit still below the 40-year average.

The NAHB housing sentiment index rose by 2 points to a seasonally adjusted 37 ? the best result since February 2007. Again it seems the US housing market is on the improve, albeit slowly. Remember that the NABH index is 50-neutral so there still a-ways to go to get to "positive" sentiment.

The Fed's core CPI inflation measure rose by 0.1% in July to 2.1% annualised. While the Fed's "comfort zone" for inflation is 1-2%, rather than the RBA's 2-3%, there's not enough here to prevent QE3. But nor is QE3 desperately needed on these numbers. The spike in food prices for the month was offset by lower oil prices, so the headline rate was flat, and 1.4% annualised. Things might be more interesting this month, given oil has bounced but food prices have not reversed.

All of the above suggests little reason for a central bank to pull out the rocket launchers. There was one weak release last night however, being the Empire State manufacturing index. Activity in the New York State area has fallen to minus 5.9 on this zero-neutral index from plus 7.4 last month, to mark the first negative reading since last October. Weighing down the index were data on hiring intentions.

And herein lies the crux. Were the Fed to introduce further policy measures the move would be based on the FOMC's fundamental concern over the stubbornly high US unemployment rate. The Empire survey found that a large percentage of employers are reluctant to hire given uncertainty. Uncertainty over Europe is a given, but it is the fiscal cliff which is providing all the domestic uncertainty. At present we have a Democrat administration with a minority in Congress, and thus a stalemate. Assuming nothing is resolved ahead of the "lame duck" period before the election, uncertainty will only be removed if the party that wins the election also wins Congress. Whether or not an employer sees the presidential winner as good or bad, at least uncertainty will be removed with a majority mandate.

If the result is a Democrat administration (ahead with the bookies) and a Republican-run Congress, then employers will continue to be in the dark over tax policy, spending policy, financial market regulation and so forth. Should I put on more staff? Best I wait.

In a perfect world, the Fed would not make any major monetary policy changes ahead of an election and the fiscal policy changes any election will bring. Assuming the ECB does the right thing, and given the improving US data discussed above, the chances of the Fed acting in September are not strong. But, again, it will ultimately depend on what does or doesn't happen in Europe.

The more the hope of QE3 fades, the more the impact on dollar-denominated commodity prices. So the base metals were all down again last night by a percent or so. If we look at food prices, however, we still have a drought in the US. And if we look at oil, we still have geopolitical tensions. And last night we had another "surprise" drawdown in the weekly US inventory numbers, sending West Texas up US88c to US$94.31/bbl. For Brent, it's all about potential export sanctions meeting declining production volumes, and it was up US$2.21 to US$116.24/bbl. The spread has now blown back out to US$22, but it has been to US$28.

The US dollar index was up slightly last night to 82.66, but then so were gold (up US$4.70 to US$1603.60/oz) and the Aussie (US$1.0505).

The SPI Overnight was up 5 points.

It's another busy day for the local earnings season today including reports from the AMP ((AMP)), the ASX ((ASX)), Alumina ((AWC)), Brambles ((BXB)) and Wesfarmers ((WES)).

Rudi will be appearing on Sky Business at noon.

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