\n\tBy Greg Peel<\/p>\n
\n\tThe Dow closed up 44 points or 0.4% while the S&P gained 0.3% to 1317 and the Nasdaq<\/span> added 0.5%.<\/p>\n \n\tThe Dow immediately opened 50 points higher last night after days of Italian turmoil on news of the Chinese June quarter GDP, released in yesterday's Asian session.<\/p>\n \n\tAt 9.5% year-on-year growth, China's GDP result was below the 9.7% of March but above consensus estimates of 9.3%. Belying weakening manufacturing PMIs<\/span> of late, industrial production rose 15.1% in the month of June from 13.3% in May against expectations of 13.1%, while retail sales jumped 17.7% from 16.9% when 17.0% was expected.<\/p>\n \n\tThese numbers once again temper fears that Beijing might bring China in for a hard landing through monetary policy tightening. Last week brought concern that China's CPI reading of 6.4% was dangerous, although economists had expected a CPI pop ahead of an easing in inflation in the second half. Moreover, economists note that an underlying driver of inflation has been a big increase in low-end wages which, from a global perspective, might be considered “good” inflation. The more spending power the Chinese have, the stronger China's domestic economy can become, and the more the Chinese will become importers of manufactured goods and raw materials rather than simply exporters of manufactured goods, thus reducing the global imbalance at a time when recessions in the US and Europe threaten demand for goods from China.<\/p>\n \n\tNot so long ago we always faced the catch-22 issue of a solid Chinese GDP, being the subsequent expectation of further tightening via a rate hike. But Beijing raised rates last week, and global markets have become to appreciate the benefits rather than the threats of tighter policy. Many are concerned too loose a policy will result in a bust of China's credit bubble. (See China is Not The Next Greece<\/a>; Challenging The Panda Bears<\/a>)<\/p>\n \n\tWith a better mood established in early Wall Street trading, it was over to Fed chairman Ben Bernanke, who was providing a regular testimony to the US Congress. In short, Ben dropped a bombshell.<\/p>\n \n\tTo paraphrase, Bernanke told Congress that weak economic conditions in the US may remain persistent, and deflation may once again threaten, in which case further stimulus would be appropriate. In other words, Ben suggested if things didn't improve over the next few months then he'll roll out QE3<\/span>. This is a big turnaround from the chairman's last testimony to Congress in April, in which he suggested inflation pressures were ruling out any further stimulus.<\/p>\n \n\tOn that news, Wall Street shot up in a blink, no doubt aided by short-covering. At around 11am<\/span> the Dow was up 160 points. But with shorts covered, the indices failed to hold onto their gains.<\/p>\n \n\tYes, it's Groundhog year again. From here on, as it did last year, Wall Street will begin to trade on a “bad is good” basis. There won't be too much initial excitement, because for QE3<\/span> to be implemented things have to stay bad or get worse from here and that's hardly a reason to buy stocks. But if things do get worse, Wall Street knows that QE3<\/span> is closer. It also knows that QE2<\/span> sparked a very strong rally.<\/p>\n \n\tBut there is another issue. Fundamental emerging market demand aside, QE2<\/span> also weakened the US dollar and helped push the prices of energy, food and raw materials back up towards 2008 peak levels. In other words, QE2<\/span> was inflationary. On the mere thought of QE3<\/span>, last night wheat jumped 6%. Brent oil was up US$1.03 to US$118.78\/bbl<\/span>. Base metals were stronger, although not remarkably so, but silver leapt 6%. Commodities indices closed much higher on the day.<\/p>\n \n\tBernanke will launch QE3<\/span> if deflation threatens. A return to surging commodity prices is hardly deflationary. The Fed does, however, ignore food and energy prices in its inflation measure. But in China, where those staples represent a much greater proportion of the average household budget, Beijing looks very closely at headline CPI.<\/p>\n \n\tAny talk of QE3<\/span> in Washington will no doubt have Beijing fuming, just as it fumed over QE2<\/span>. How can Chinese inflation be contained if the Fed keeps devaluing the US dollar? Well a short answer to that is it's time for Beijing to get serious about revaluing the renminbi<\/span>, easing the pressure of its inflationary dollar-peg.<\/p>\n \n\tWall Street continued to drift off quietly in the afternoon as traders weighed up the pros and cons of what Bernanke had said. But at 3pm<\/span> a Republican representative announced, to again paraphrase, that a resolution on the US debt ceiling was nowhere in sight. Wall Street's drift-off turned into a slide, and we closed only marginally higher.<\/p>\n \n\tMost in the market believe there will ultimately be a resolution on the debt ceiling and budget cuts, but that it won't be until the eleventh hour. In the meantime, it's a staring competition and both sides are refusing to blink. It may even be that the US government has to default for a day or two, some believe, for a resolution to be forthcoming. But it will be forthcoming, because why would either party want to make the US of A the new Lehman?<\/p>\n \n\t“Lehman” is a word that I believe is now very important to policy all over the globe. Whereas once upon a time Americans liked to say “Remember the Alamo,” now the word “Lehman” is enough to send shivers down any spine. It is why Europe will eventually sort itself out, and if they had half a brain in Europe they'd ignore ratings agencies altogether (Fitch downgraded Ireland last night to junkier<\/span> junk. Thanks Scoop). It is why a debt ceiling\/budget cut resolution will eventuate. Such resolutions will of course simply mean pushing the problem further out into time, but they will otherwise be seen as buying time. That's what QE3<\/span> will be all about, as were QEs<\/span> 1 and 2.<\/p>\n \n\tWhile stocks may have fallen back some distance from their highs last night, the US dollar fell and stayed down. The index was down a substantial 1.3% to 75.05 on QE3<\/span> assumptions, and in the same vein gold was up US$15.30 to US$1582.60\/oz – a new all-time nominal high.<\/p>\n \n\tIt was an interesting day for the US Treasury to auction US$21bn<\/span> of ten-year bonds, given Europe fears are still encouraging safe-haven (yes I know it's a joke but it's all there is) buying and QE3<\/span> implies further Fed buying. But prices had already shot up this week so despite solid demand, the ten-year closed down only one point at 2.92%. The auction settlement was at the lowest yield since November (when QE2<\/span> began). Foreign central banks nevertheless only bought 42% compared to a 52% running average.<\/p>\n \n\tLet's face it – just how long can you keep lending money to a country heading for default, which is about to devalue those loans further with more money printing?<\/p>\n \n\tOn the big drop in the dollar, and despite yesterday's weak consumer data in Australia, the Aussie is up 1.3% to US$1.0732.<\/p>\n \n\tThe SPI<\/span> Overnight is acknowledging that the ASX<\/span> 200 already had its China GDP boost yesterday, and is up only two points.<\/p>\n \n\tLet us not forget that a lot is riding on the US results season, which has many concerned given recent economic weakness. Last night Yum Brands, purveyors of cardiologist favourites<\/span> KFC and Pizza Hut, announced after the bell and beat on both top and bottom lines due to growing business in China. Yum shares are up 2.5% in the after-market. Tonight brings a very important release in the form of JP Morgan's (Dow) result.<\/p>\n