By Greg Peel

The Dow fell 38 points or 0.4% while the S&P fell 0.5% to 1120 and the Nasdaq lost 0.5%.

After a strong rally on Monday night we reverted to a more typical mid-summer session on Wall Street last night. The Dow fell around 30 points from the open and stayed that way for most of the session. Volume was uninspiring. Traders were nevertheless heartened that only 38 points were lost.

Having returned to a “less bad is good” mentality on Monday, last night's data were not less bad at all.

Factory orders were expected to fall 0.5% in June but fell 1.2% following a 1.8% fall in May. More ominously, consensus had pending home sales rising 4% in June following the big post-stimulus fall of 30% in May, but instead they fell 2.6%. New vehicle sales rose around a net 5% in July but the market was really hoping for a rise of around 10%.

The flurry of car discounting has now diminished but Wall Street can at least take some heart that Americans are buying American cars. GM, for example saw solid sales in its “core” brands, but one must remember GM is the government-owned carmaker. Sales of Japanese cars slumped, led by Toyota which is still suffering the fallout from its recall issues.

To address the global economic imbalance Americans need to buy American, and not Chinese in particular, and President Obama is specifically pushing that line. He also wants Americans to cut reckless spending, particularly on credit, and thus reduce imports while a weaker dollar looks after increasing exports.

It all sounds like sensible policy, and at a macro, global level it is also what Wall Street would like to see. But at a more micro level, US consumer frugality is anathema to Wall Street's core values. The US consumer does, after all represent 70% of economic growth. Hence there is an ongoing conundrum.

It was with this in mind that Wall Street was disappointed by the release of last night's June personal income and expenditure numbers. Economists were forecasting incomes to rise 0.2% and spending to rise 0.1%. Spending did rise 0.1%, on an inflation adjusted basis, but the bad news was that income growth was flat and that consumer prices were also flat – both of which suggest lack of inflation. And if you're not inflating, you must be deflating.

The savings rate rose to 6.4% in June which is the highest level for the year and part of an upward trend. Prior to the GFC, the American savings rate was negative. This is again part of the conundrum. More savings mean less chance of credit defaults, but also less money going into the US economy.

On the earnings front, drug-maker Pfizer (Dow) posted a solid result but consumer staple Procter & Gamble (Dow) disappointed in its result and outlook, blaming performance on the more reticent US consumer.

There is a large cohort on Wall Street which one might deem the “blinkered bulls”. They are the group in somewhat of a denial that the American way of life can be anything other than globally superior, deficit or not, and are assuming nothing other than a return to normal programming post-GFC. They are the group that spins the notion of “cash on the sidelines”, money parked in fixed interest, and consumer savings, as reasons why the stock market can only go up, and sharply, soon. They suggest that when that money comes back in, look out.

They have been saying this since early 2009.

What the blinkered bulls fail to consider is that perhaps the GFC has been the reality check an out-of-control America actually needed. In the 2004-07 bull market, investors were very overweight stocks and dismissive of the vanilla notion of a portfolio diversified with fixed interest and cash. In the bull property market of the same period, consumers simply assumed house prices must go up forever and spent the unrealised value of those houses at every opportunity, borrowing to do so.

But the reality check came, stock investors lost vast amounts in the GFC, houses were lost, jobs were lost, households were wiped out. The response has been – and let's not forget we are coming up to the second anniversary of Lehman – a return to investment portfolios reweighted back to fixed interest and cash, and household portfolios reweighted back to “rainy day” savings.

It might take a very long time – a generation perhaps – before the ghosts of the GFC are flushed from Americans' cupboards. If anything, the swing in sentiment has been back the other way, beyond a “neutral” or balanced portfolio approach to one of greater safety. It will be a long return to risk-taking abandon for anyone other than the short-term Wall Street trader.

Last night the US ten-year bond yield fell 6 basis points to 2.91%

Recent weak US data have been sending the US dollar lower, and last night its index fell 0.4% to 80.60. The flipside is the euro, which is now up above US$1.32 which is a far cry from the sub US$1.20 levels threatening at the height of the sovereign crisis. By contrast, eurozone economic data have been relatively strong, under the circumstances. A lot of that can be attributed to a weaker euro driving exports, but then the euro gets stronger every day.

At what point will the sharp adjustment back from the European crisis actually settle and focus more on the austerity measures that will keep Europe sluggish for years to come? It is an important point for gold investors, because if the euro begins to drift off again and the US dollar rises, gold has nowhere to go but down. Last night gold managed a US$3.60 gain to US$1185.60/oz.

The caveat, however, is further US monetary and fiscal stimulus intended to prop up a flagging recovery, which effectively means turning the printing presses back on. This will combat near-term price and wage deflation, but it will once again promote warnings of longer term monetary inflation.

On the former, there is a growing assumption the Fed is about to make good on its recent assurance that the quantitative easing taps will be turned back on if necessary. Necessary is now, according to many both without and within the Fed. On the latter, there is a growing suggestion that Obama will not allow the Bush tax cuts to expire as intended, perhaps extending the period until such time as the US economy looks healthier and higher taxes will not derail the recovery.

Both would weaken the US dollar, and again place upward pressure on gold.

Oil's move back over US$80 last night reignited a wandering energy market, and as such a weaker dollar last night was enough to have oil up another US$1.21 to US$82.55/bbl despite signs of a weaker consumer amidst the summer driving season.

Base metals nevertheless took a breather after a period of solid gains, with most down 1% and aluminium down 2%.

The SPI Overnight lost 4 points.

Today in Australia sees the July services sector PMI and the June trade balance, along with another house price index. AXA Asia-Pacific ((AXA)) and West Oz News ((WAN)) will report results.

Tonight in the US also sees the services sector PMI, along with the precursor to Friday's unemployment numbers – the private sector ADP report. Earnings reports include News Corp ((NWS)) and Toyota.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

FN Arena is building the future of financial news reporting at www.fnarena.com . Our daily news reports can be trialed at no cost and with no obligations. Simply sign up and get a feel for what we are trying to achieve.

Subscribers and trialists should read our terms and conditions, available on the website.

All material published by FN Arena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.