By Greg Peel

The Dow closed down 25 points, or 0.2%, while the S&P lost 0.4% to 1685 and the Nasdaq was flat.

There were a few melted brains on Aussie dollar spot desks around the world yesterday, as evident by the currency's reaction to a combination of the local CPI data release and HSBC's Chinese PMI.

The June quarter headline CPI came in at 0.6%, ahead of 0.5% expectation (Buy!), but the annual rate of 2.4% fell short of the 2.5% expectation (Sell!). These numbers are not as relevant as the core CPI numbers, which repeated the same outcome (0.6% and 2.4% against 0.5% and 2.5% expectation). Then just to add colour, HSBC's flash estimate of China's July manufacturing PMI registered an eleven month low of 47.7, down from June 48.2 (OMG, sell!).

The general feeling among economists is that the local CPI results neither ensure nor dismiss a rate cut from the RBA in August. As to whether the Chinese PMI is enough to spark the central bank into action is another matter. There are a couple of complications. Firstly, if Kevin Rudd calls the election in August the RBA may wish to stay put lest it be accused of being politically influenced. Secondly, the Chinese premier has now put a 7% floor under Chinese GDP slowdown, which might be enough to keep the RBA on the sidelines. Thirdly, while China's PMI was weak the US equivalent showed an increase to 53.2 from 51.9 to mark a four year high, and the eurozone equivalent (ring the bells, sound the trumpets!) showed a rise to 50.4 from 48.7 ? the first sign of expansion in nineteen months.

Then there's the small issue of the abovementioned Aussie dollar reaction. The Chinese PMI is the critical factor behind the Aussie's 1.4% to US$0.9167 decline over 24 hours, aided by the benign CPI result, and by the fact the US dollar index is up 0.4% to 82.29 on the strength of the US PMI. The lower the Aussie falls, the more the RBA will worry about inflation and thus refrain from cutting. The Aussie has not yet broken out of its recent range, nevertheless.

The ASX 200 was up 36 points ahead of yesterday's data, fell to be up only around 5 points just after midday and closed up 18. There was little panic in China, with the Shanghai index down only 0.5%. When all is said and done, the only shock possible from yesterday's Chinese PMI was an increase. The decrease fits in with the current trend on both PMI and GDP, and now that Li Keqiang has drawn the line (implying stimulus will indeed be deployed if necessary) we can perhaps call the July PMI "old news", even if we see an even lower number in August.

Perhaps that's what the afternoon drift-up in the ASX 200 was telling us, and the fact the SPI Overnight is up 6 points despite the S&P 500 being down 0.4%.

The weakness on Wall Street is attributable to a balance of the strong PMI, an 8.3% jump in June new home sales and some positive earnings reports posted last night, offset by some negative earnings reports, a weak response to the Treasury's five-year note auction, and the fact the indices are looking just a little toppy up here in the rarefied air.

The big up-mover in the session was Apple, which reported after the bell on Tuesday and posted a 5% gain last night. A positive response was also enjoyed by Dow component Ford (up 2.5%), while Dow components Caterpillar (down 2.4%) and AT&T (down 1%) disappointed. Boeing posted a strong result, but still lost ground, and Visa was among the non-Dow stocks suffering slight weakness. The good news is that the earnings growth run-rate for the S&P 500 at this stage of the season is 4.6%, which is above earlier forecasts.

And there was more good news after the bell. If Apple is the stock US investors love to love, Facebook is the stock they love to hate. Let's just say Facebook's result was well received, as the stock is up 18% in the aftermarket.

Back on Planet Earth, LME traders were caught between a negative PMI from China and positive PMIs from the US and Europe. Base metals movements were thus mixed, with copper down 0.5%, but nickel up 1.4%. The oils were mostly focused on China nevertheless, and the implications of a weak result from Caterpillar, and not to mention that the oils have run up hard on Egyptian unrest of late. Brent fell US$1.25 to US$107.19/bbl and West Texas fell US$1.84 to US$105.39/bbl.

Spot iron ore doesn't pay any attention to economic data, and it is up US20c to US$132.10.

Wall Street pays attention to the US bond market however, albeit with bond yields having drifted back down as the Fed dust has settled, stock market types have been mostly focused on earnings. On Tuesday the response to a Treasury auction of two-year notes was lacklustre and last night buyers were even less keen on the five-years on offer. Whether or not the Fed tapering begins this year or next, the bond market has basically decided it will start one day and hence there's little upside in bond investment. Last night the benchmark ten-year yield rose 7 basis points to 2.59%.

Wall Street watches bond yields because if that ten-year yield rises to meet or exceed the average S&P 500 dividend yield, yield stocks become less attractive. Thus weighing on the indices last night was weakness in utilities and other defensives.

Gold succumbed to the stronger greenback and rising bond yields after its big jump on Tuesday night, falling US$20.90 to US$1322.240/oz.

As noted, the SPI Overnight was up 6 points.

The UK will release its first estimate of June quarter GDP tonight, while the German IFO business sentiment survey will garner close attention. The US sees durable goods orders.

US earnings reports are due from 3M (Dow) along with Colgate-Palmolive, General Motors and Starbucks.

On the local stock front, Drillsearch ((DLS)), Newcrest ((NCM)) and OZ Minerals ((OZL)) will all post production reports and OceanaGold ((OGC)) will provide its results.

Rudi will appear on Sky Business today at noon.