By Greg Peel

The Dow fell 71 points or 0.5% while the S&P lost 0.5% to 1405 and the Nasdaq dropped 0.5%.

If Wall Street loves it when Bernanke drops hints about QE3, Bridge Street loves it when Glenn Stevens begins to also sound dovish. Stevens has been acknowledging Australia's two-speed economy for several months now in RBA statements but has also been quick to point out the realities of historically high terms of trade and enormous capex in the resource sector ? such growth-drivers he fears may lead to inflation.

Stevens has recently referred to "structural" changes in the Australian economy ? a word which tends to suggest the RBA does not consider the "two-speed" to be temporary or cyclical but a more enduring trend, particularly with regard to what we might call "traditional" sectors. Any talk of interest rate relief, predicated by acknowledgment that inflation remains low at present, has been with regard to macro influences ? the possible reemergence of the European crisis ? and not to domestic influences. In other words, Stevens has not to date given any indication that weakness in manufacturing or retail, for example, is enough for the RBA to consider further rate cuts.

However, the RBA's latest Financial Stability Report, released yesterday, noted specifically that while mining is strong, industries such as retail, manufacturing, construction and tourism are facing "headwinds". Economic conditions are widely divergent across the economy, the report noted, and business failures and debt defaults are above norms.

Does this mean the RBA will cut its rate next week? Local markets seemed to think so, with the ASX 200 rising 1% yesterday and the Aussie having now fallen to its lowest level this year at US$1.0394. This is more like the upside-down world of Wall Street than Bridge Street, where "bad" news is often "good" on expectations of stimulus.

Yesterday's local stock market rally also defied more weak news out of China, being a 5% fall in industrial profits ? the first fall since 2009. The Shanghai market responded with a 2.7% drop. The Aussie would normally be weak on this news, but so would the stock market. Traders will want to hope their bet on a rate cut next week is accurate, because look out if we don't get one.

In rising yesterday the local market also defied weakness on Wall Street and that weakness continued last night, triggered by a weaker than expected new durable goods orders number. After a surprise fall in January, durable goods orders rose 2.2% last month. Economists had expected a 2.9% rise, and a lot of the growth came down to lumpy aircraft and defense orders.

Wall Street thus traded lower from the bell, and at one point the Dow was down 128 points. It seems a little overdone on the data alone, but with only two more sessions to go in the quarter those profits ? and we recall that a 12% rise in the S&P 500 for the quarter is the best March result since 1998 ? are worth locking in. On the flipside, weakness is bringing out buyers either looking for bargains or desperately topping up equity allocations ahead of quarterly reports.

US weakness was also aided by a down-session for the energy sector, which reacted to a fall in the oil price. Yes, it's Thursday, which means we all get to roll in the aisles as we yet again hear that oil analysts were "surprised" by weekly US inventory movements overnight. I think these guys get a surprise every time the sun comes up in the morning. Last week's inventories were stronger than expected, so West Texas fell US$1.77 to US$105.56/bbl and a sympathetic Brent lost US$1.41 to US$124.14/bbl.

The US dollar index remained steady last night at 79.14 but that didn't stop gold falling US$18.50 to US$1663.10/oz. Gold doesn't seem to know what to do at the moment, with one minute monetary inflation expectations returning and the next minute oil price inflation abating. London base metals are also a bit hither and thither, and last night fell 1-2% on the US durable goods numbers.

The US Treasury held an auction last night and nobody came. Well, demand for five years was pretty subdued and it's increasingly clear no one is keen to play for upside in US bond prices anymore. The weak durable goods result nevertheless provided some offset, hence the benchmark ten-year yield only rose one bip to 2.19%.

The SPI Overnight is down 18 points or 0.4%.

Rudi will appear on Sky Business today at noon.

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