By Greg Peel

The Dow closed down 19 points or 0.2% while the S&P lost 0.1% to 1284 and the Nasdaq was basically square.

It was a strong opening on Wall Street last night after successive miserable sessions based on weak US data, suggesting to commentators that bargain-hunters were being sparked into action at levels below previous technical support in the S&P 500 at 1295. However, any buying early in the session was always going to be a risk given Fed chairman Ben Bernanke was due to make a speech about half an hour before the closing bell. Given the apparent sudden deterioration of the US economic recovery, there was much anticipation of what the Fed's response would be.

In other words, expectations had grown that Bernanke would announce QE3 is ready to be rolled out as soon as QE2 expires this month. While the Fed has spent much time discussing inflationary pressures and exit strategies from QE and a near-zero funds rate of late, it had always added that were conditions to deteriorate notably, the central bank "stands ready" to do what it has to.

So it was that just after 2pm in New York, the Dow was up 90 points. But then it began to drift lower, possibly as day-traders took profits ahead of the speech. The drift soon turned into a steep drop such that by the time Bernanke opened his mouth, the Dow was almost back to flat on the day. As he spoke, the average fell sharply to the closing bell, at which point Bernanke was still speaking.

It looked like Wall Street had squared up before it learned what Bernanke had to say but copies of the speech were issued to the media prior and embargoed until speech time. Hence the guts of the speech was quickly disseminated before Bernanke even rose from his seat. It seems Wall Street responded beforehand to the fact traders didn't hear what they wanted to hear.

What the chairman said was that while the most recent data looked poor, the US economy was still recovering modestly. There will always be bumps in the road, oh ye of little faith, he suggested, but most importantly the Fed still expects the recovery to pick up again in the second half of 2011. Yes, the latest jobs numbers were bad, but if you look at the longer trend from 2008 you'll find that jobs growth is accelerating. It's just a frustratingly slow acceleration and the unemployment problem will not be resolved quickly.

There in a nutshell was the "no QE3" call. Bernanke reiterated that QE2 would end as planned this month but that maturities and coupons would continue to be reinvested, which we have dubbed QE two and a half. From the other side of the argument he reiterated that inflation expectations remained low and that recent spikes in commodity prices would prove "transitory". Food price movements in particular could simply be put down to unusual weather conditions prevailing across the globe in the past twelve months, meaning a normalisation of weather should lead to a pullback in prices.

The chairman went to very great lengths to address the common accusation that global headline inflation ? oil and food in particular but also base metals ? was simply due to a weak US dollar which in turn was due to accommodative Fed policy. He pulled out the charts, figuratively, to point out that the fall in the US dollar was minimal compared to the rise in commodity prices, and he also suggested the fall in the US dollar was mostly due to the withdrawal of the "flight to safety" which occurred in 2008-09.

The rises in commodity prices, he noted, were almost entirely due to the legitimate growth of demand from emerging markets. Add the recent supply disruptions (Libyan oil loss, weather problems for food) and the propensity for futures traders to anticipate increased demand (speculation) and what we have is price-spikes that will adjust themselves in the shorter term. In the longer term, Bernanke noted that the growth in global oil production is simply not keeping up with the growth in global demand. This means watching inflation carefully, albeit no immediate risk is seen for the US.

So the upshot is, the Fed funds rate will remain exceptionally low for an extended period but there will be no QE3. Bernanke did, however, warn that Fed monetary policy could be thrown into disarray by Congress. He agreed that the US deficit had to be addressed but pleaded that any resolution to sharply cut the deficit must have a longer term objective. To violently slash fiscal spending now would provide a negative shock to the US economy which could quickly derail the modest, bumpy, recovery.

Before Bernanke's speech, there were signs of an accelerating recovery from across the pond. Surprisingly good eurozone retail sales and German factory orders numbers sent the euro higher, and traders are now expecting the ECB will hint at a July rate rise to counter inflation when it has its June meeting on Thursday night. The stronger euro sent the US dollar index down 0.6% to 73.54.

The Aussie is steady after 24 hours at US$1.0719. The Aussie dipped yesterday when the RBA didn't raise and suddenly sounded a lot less hawkish than it did a month ago (RBA Backs Down) but last night's US dollar fall corrected the balance.

For commodity markets it was a largely steady night ahead of Bernanke's speech. Gold was as good as square at US$1544.60/oz while silver and base metals were mixed on mostly small movements. The exception is lead, which was up another 2%. It appears someone is trying to corner the lead market given one account represents 90% of long LME positions.

And a funny thing happened in oil. Having established a fairly consistent spread of around US$15 over past months based on storage cost discrepancy, Brent-WTI suddenly blew out to over US$17 last night as Brent rose US$2.30 to US$116.78/bbl while West Texas rose only US8c to US$99.09/bbl. I'll address that issue in a story today.

Ahead of the speech, the US Treasury auctioned US$32bn of three-year notes and despite the low yield, demand was buoyant with foreign central banks taking 36% compared to a 32% running average. The benchmark ten-year yield fell after the auction but recovered after Bernanke spoke to be little changed at 3.01%.

The SPI Overnight rose a fairly individual looking 21 points or 0.5%. One presumes that having had more time to absorb yesterday's RBA statement, the market is now confident there won't be a rate rise until at least August, and then maybe not even in August.

Read Bernanke's speech here.