The AUD is back trading with a 73 handle for the first time since 19 October, helped along by a disappoint US ISM manufacturing print. While the AUD was already in an upward trend following yesterday’s solid October building approvals number, the overnight fall in the US ISM manufacturing index to 48.6 triggered a broad base USD sell off and provided another leg up to the AUD.

After two months of flirtation with the psychological 50 level, the ISM manufacturing index fell below 50 in November for the first time in 3 years, disappointing expectations of a modest rebound to 50.5. The index is now signalling contraction in the US manufacturing sector and it will add to concerns that weakness could spread to the broader economy.

The probability of a December Fed hike has now moved to 70% from 75% earlier in the week. The soft manufacturing print now raises the significance of the ISM non-manufacturing November release on Thursday ahead of the all-important nonfarm payrolls report on Friday. We would note too that overnight Fed Evans (voter, dove) admitted to ‘some nervousness’ about Dec FOMC decision.

Looking at currencies in more detail, the USD lost ground against most currencies with the NZD and AUD sitting at the top of the G10 leader board. The CAD was the only G10 underperformer following a disappointing September GDP print. GDP shrunk by 0.5% in the month compared to expectations for a flat outcome. Interruptions in oil production were noted as the main culprit.

Equity markets had a mixed night. The soft ISM number triggered a sell off on both side of the Atlantic, but while US indices managed to rebound back into positive territory, most European indices posted losses for the day.
In bond markets reaction to the soft ISM print saw core global yields move lower. German bunds managed to reversed most of the initial move while UK Gilts ended the day sharply lower. Relative to Sydney’s closing levels 30y and 10y yields are down just over 7bps (currently trading at 2.15% and 2.91% respectively) while the 2y yield dropped by 4bps trading at 0.9% as we type.

Earlier in the session the Eurozone unemployment report was better than expected and probably contributed to the German bunds underperformance. The region wide unemployment rate fell from 10.8% to 10.7%, beating expectations of a flat outcome and it also left the rate at its lowest since January 2012. The final November Euro-zone manufacturing PMI reading also confirmed the flash estimate of a rise from 52.3 to 52.8.
Finally in commodities, WIT oil drop 0.7% to $44.29, Gold is almost unchanged at $1067.9 and iron ore lost 1.7% closing the day at $42.2

Coming Up

This morning at 11:12am AEDT we have RBA’s Governor Stevens speaking in Perth and 18 minutes later we get Australia’s GDP growth number for the September quarter.

The Governor’s speech is entitled ‘”Economic Conditions and Prospects”. Our expectations would be for the speech to cover how business surveys point to a gradual improvement in non-mining sectors, and how these improvements should support the ongoing moderate expansion in the economy in spite of the decline in capital spending in the mining sector. However, we also know from last week’s CAPEX survey that a pickup in non-mining investment remains an elusive piece in the transition to non-mining investment led growth. So in this regard, today’s speech could be an opportunity for the Governor to expand on this missing piece of the puzzle.

In terms of the Q3 GDP growth release, NAB maintains its expectations for a 0.8% print (in line with consensus). Net exports are expected to add 1.5% points in the quarter (after subtracting 0.6% in Q2) while investment is expected to detract around 0.9.

Looking at offshore markets and ahead of Thursday’s ECB meeting, the November flash Euro-zone CPI reading is arguably today’s most important data release. We know the ECB has been concerned by deflationary risks with Draghi noting in November that ECB policymakers would “do what we must to raise inflation as quickly as possible”. Core CPI is expected to print at 1.1% yoy in November, but this is largely due to base line effects which are expected to fade over the coming months.

In the US we get ADP employment change for November (188k exp), however because this report is highly affected by the prior non-farm payrolls number, unless we get a really soft print other outcomes are unlikely to trouble the scorers. We also get final Q3 productivity and labor cost readings as well as the last edition of the Fed Beige book for 2015. In Canada we get BoC policy rate announcement where the consensus view is for the bank to remain on hold.

As for central bank speakers, BoJ Iwata speaks in Okayama and in the US we have Fed Chair Yellen as well as Fed Lockhart and William speaking on the US Economic outlook. The expectation is for all of them to emphasise the gradual nature of the upcoming tightening cycle.

Overnight

On global stock markets, the S&P 500 was +0.80%. Bond markets saw US 10-years -5.77bp to 2.15%. On commodity markets, Brent crude oil -0.99% to $44.17, gold+0.2% to $1,068, iron ore -1.7% to $42.24. AUD is at 0.7332 and the range was 0.7223 to 0.7336

For full analysis, download report:

• Markets Today: 2 December 2015 (PDF,271KB)

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