Today’s tittle was a toss-up between Rhianna’s hits Disturbia or Pounding by Doves. Core global yields and the Euro have been disturbed by a Bloomberg report claiming ECB officials were considering QE tapering while early in the session the Pound was under renewed pressure trading to a new post Brexit low.

Headlines suggesting the ECB is near consensus on the need to taper its QE programme triggered a selloff in core bond yields and a mini rally in the Euro. 10y Bunds ended the day 4bps higher at -0.058%, 10y UK Gilts climbed 4.6bps to 0.777% and 10y UST are currently trading at 1.686% after trading at 1.637% prior to the headlines hitting the screens. The Euro jumped from 1.1138 to 1.1239 on the news and now it has settled just under 1.12. Reading through the article it seems the market has overreacted to the headlines, discussion on how to go about ending the programme doesn’t necessarily mean it is about to happen. The story also notes officials did not exclude the asset purchase program could still be extended. We would also note that the ECB extended its buying programme from EUR60bn to EUR80bn in April and given the anaemic growth in the Eurozone and subdued inflation, tapering the programme at this stage wouldn’t make any sense.

GBP came under pressure at the London open making a new post Brexit low with better than expected data doing little to stem the fall. UK September construction PMI rebounded to 52.3 from 49.2, a six month high. So although the economy appears to be travelling at a better than expected pace, concern over a hard “Brexit” as PM May purses a policy driven by immigration and at the possible expense of access to Europe’s Single Market is weighing on the currency. Cable is currently trading at 1.2734, after trading to an overnight low of 1.2720.

All that said when looking at the G10 leader board, JPY sit at the bottom of the pack, down 1.16%. After trading through its 50DMA of ¥101.74, USDJPY appears to have some technical room to trade higher, boosted as well by broad USD strength on the back of better than expected data of late. NZD is another big underperformer, down 0.93% following a soft dairy auction overnight (first fall in GDT prices since July). The AUD is also a bit softer (-0.74%), currently trading at 0.7625 and after trading to an overnight low 0.7608. Yesterday, the RBA stood pat as expected and overall the statement left us comfortable with our view that the RBA is on hold for the remainder of 2016 although a low Q3 CPI print (due for release on 26 October) could still bring a November cut back into play.

European equities managed to end the day in positive territory with the ECB article published after the close while US indices have struggled to perform amid an increase in expectations of a Fed hike in December. Gold share have also come under pressure with the shiny metal breaking through key support level at $1304.

Fed Lacker (non-voter, hawk ) was on the wires noting that  the Fed should head off a likely pickup in inflation with pre-emptive rate rises. Reckons Fed funds should be about 1.5%.

Coming Up                    

We have quite a busy day of data releases with the US ISM non-manufacturing print for September the highlight in offshore markets while domestically retail sales figures for August should also be important.

In July, Australian retail sales were unchanged against expectations of a 0.3%m/m increase and this subdued reading was largely driven by a sharp decline (-6.2%) in the department store category. Our economists note that when department store sales fall sharply, they tend to rebound strongly and this relationship underpins our above consensus pick-up in retail sales to 0.4% m/m in August, a rate that is double the market consensus of 0.2%.

Japan’s Nikkei PMI Services and composite readings for September are also out this morning and Fed Evans speaks at the CFA society in Auckland.

Europe (final) and the UK also get their September services and composite PMI readings and on the other side of the Atlantic the ADP employment change for September is due for release. The market is looking for ADP to print 165k, but the Philly Fed’s ADS index of economic activity suggest that there could be upside risk to this number.

As for the ISM non-manufacturing survey, similar to the manufacturing survey a rebound in September is also expected (53 vs 51.4 prev), but many commentators have noted that the potential for an even stronger print on the back of recent solid core retail sales growth.

Lastly Fed Lacker is scheduled to speak just after midnight (Sydney time) and Fed Kashkari speaks early tomorrow morning.

Overnight

On global stock markets, the S&P 500 was -0.47%. Bond markets saw US 10-years +6.26bp to 1.68%. In commodities, Brent crude oil +0.06% to $50.83, gold-3.3% to $1,267, iron ore +0.0% to $55.86. AUD is at 0.7623 and the range since yesterday 5pm Sydney time is 0.761 to 0.7672

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• Markets Today:  5 October 2016 (PDF, 108kb)

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