By Greg Peel

The Dow closed up 2 points, the S&P was flat at 1403 and the Nasdaq slipped 0.2%.

The US economy is consumer-driven, hence data on consumer spending are an important indicator of the health of the US economy. Last night it was revealed that after three straight months of declining figures, US retail sales rose by 0.8% in July for the biggest gain since February.

That's good news, isn't it? Well it depends how much faith one has in QE3. One sales number does not a summer make, but for a central bank to implement "emergency" measures one presumes the data need to indicate an economy sliding towards recession. Both QE2 and Operation Twist followed US summer periods for which a "double dip" seemed a real threat.

The data weren't all positive last night ? US business inventories showed flat growth in June. If businesses are not confident enough to restock, the economy can't be all that rosy after all. The bottom line, however, is that recent US economic data could be called "mixed" but could not really be called "bad". If they're not bad, then there seems little need for the Fed to pull out the big guns.

Which is perhaps why Wall Street fell from the open, rallied to send the Dow up 50 points by midday, then fell away again. Wall Street presently represents a battle ground between those who believe good news is simply good news and those who fear good news means no more sugar pills from the Fed. Things are, however, a bit clearer in the bond market it would seem.

Last night the US ten-year bond yield rose 7 basis points to 1.72%. Only a couple of weeks ago the yield hit an all-time low at just over 1.4%. If the US economy is looking okay, then the Fed may not buy any bonds via a QE program. Might as well sell bonds then. If the Fed does implement QE3, presumably macro risk is reduced and a shift to risk assets seems like the go. Might as well sell bonds then.

Since yesterday morning the Aussie has slipped 0.3% to 1.0488. Only last week it was nudging over the 106 mark. History would suggest that if the world decides to go "risk on", it's good for commodity prices and thus good for the Aussie. But the Aussie's moves have not reflected commodity prices all year. Instead, Australian bonds have been highly sought after as one of the world's few AAA-rated securities actually offering a (slightly) positive real yield. If global risk subsides, presumably a chunk of that money will flow out again and the Aussie will fall ? even if commodity prices rise.

Toto, I don't think we're in Kansas anymore.

There was also good news last night from, believe it or not, Europe. Despite fears the eurozone's large "saviour" economies may have fallen into contraction in the June quarter, the first read of Germany's GDP showed a 0.3% gain and that France's economy was flat. The aggregate eurozone GDP fell 0.2% for the quarter, or 0.4% year on year, which is not as bad as had been feared. The major European stock indices rose half to one percent on the news. Spanish and Italian bond yields fell 18 and 12bps respectively.

That is not to suggest the ECB need not act next month. Indeed, if it doesn't this market may well lose its bottle. Right now the stimulus stakes are China, definitely, US, probably not and Europe, something better happen or else. Meanwhile it was reported last night that Greece will ask for an extension of two more years in which to reduce its budget deficit to the required level, arguing growth measures need to be implemented if ever that level can be achieved. Given a newfound growth push in Europe, the Greeks may just get lucky.

To summarise, it would seem that stock markets are at the risk of pulling back, but one can no longer see an immediate risk of another massive sell-off of the like we've come to endure. Stock markets may even struggle to pull back, given a distinct feeling in the air of "I really want to buy this". One can't be too sure just yet, given a lot hangs on September. Forget the Fed, it's all about the ECB.

The US dollar index was slightly higher last night at 82.53 and as expectations of Fed action wane further. Gold fell US$10.90 to US$1598.90/oz. Base metals were mostly asleep bar a 2.5% spike in tin, while Brent crude rose US43c to US$114.03/bbl and West Texas gained US64c to US$93.37/bbl.

The SPI Overnight rose 2 points.

Westpac will offer up its monthly survey of local consumer confidence today, while a solid block of earnings reports will include numbers from CommBank ((CBA)) and Westfield ((WDC)). The US data will continue to flow tonight with inflation, housing and industrial production in the frame.

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