Struggling a bit for a song this morning, which is the title track from UK songstress Birdy’s third album. Last night’s US non-manufacturing ISM report was certainly something to behold, with not only the headline read of 57.1 more than reversing the August drip – and the best sense October 2015 – but driven by a leap in the new orders sub-series to 60.1 from 51.4 and with the employment index up to 57.2 from 50.7, its strongest read this year.

At the same time, glancing at the Atlanta Fed’s latest ‘GDPNow’ estimate for third quarter GDP growth, we see it is stuck at 2.2%, unchanged from Monday. In short, their estimates for private sector consumption and business investment have both been lifted slightly post the ISM survey, but the Atlanta Fed now see a drag from net exports of 0.13% of GDP in Q3 after the August trade figures, whereas on Monday they had a 0.13% positive contribution. We also a somewhat mediocre ADP employment estimate of 154k (down from 165k and compared to 175k expected) but this won’t have anyone reaching to downgrade their expectations for Friday’s non-farm payroll estimates (currently 172k). If anything the ISM employment sub-series may warrant some upward revisions.

While it’s tempting to attribute the decent showing by U.S. stocks to the ISM report, the truth is the energy sector led the gains in the broader indices (+/-0.5%) thanks to another lift in oil prices. Crude prices are up either side of $1 with Brent now at $51.78 – its best level since the end of June. While hopes of OPEC formally agreeing production cuts next month is the background driver, concerns that hurricane activity in North America could disrupt both production and shipping look to be the immediate driver of the latest gains.

Stocks market gains have seen the VIX back on a 12 handle for the first time in a week, through this is providing no benefit to to either the AUD or NZD – the latter in particular and which is the second worse performer in the last 24 hours (-0.6% to 0.7168). AUD/USD briefly dipped below 0.76 last night (low of 0.7593 or thereabouts) but is off only 0.05% since this time yesterday and currently sits at 0.7616.

More relevant to these currencies just at the moment may be the rising global yield environment, led yesterday by the report the ECB is thinking about tapering its QE bond buying programme after the currently scheduled March 2017 end date and now augmented by the strong ISM data. 10 year Bunds are up another 5bps overnight and treasuries 2-3bps.

Falling bond prices is not the ideal environment to be continuing the search for yield just at the moment.

Coming Up

The Thursday before a Friday night U.S. payrolls ritual is usually a pretty dead one for markets. Looking at today’s economic calendar, it’s hard to argue that today will run counter to form. Australia August trade data, the ECB’s account of its 8 September meeting and weekly U.S. jobless claims are really all that’s on offer. That said the AUD proved sensitive to yesterday’s better than expected 0.4% rise in retail sales, so might show some response for the trade figures. NAB is slightly more positive than the market consensus of -$2.3bn in expecting a deficit of $2.1bn. We note iron ore export loadings at Port Hedland reached a record in August. It will take something much different to $2-2.5bn to have material market impact.

Interest in the ECB’ account of its September meeting is greater than usual after Tuesday’s Bloomberg ‘source’ story suggesting a consensus was emerging regarding tapering of the ECB’s ECB €80bn per month QE bond buying programme (whether from as early as next March, which is as far as the current commitment extends, or later). It’s doubtful though that the minutes wills shed any light on this, given an ECB spokesman – in response to the Bloomberg story – said that the matter ‘had’ not been discussed by the Governing Council. In the meantime, talk of a ‘taper tantrum’ a la 2013 after the Fed first hinted at tapering its own QE programme is not going to quickly disappear from the radar.

Overnight

On global stock markets, the S&P 500 was +0.62%. Bond markets saw US 10-years +2.27bp to 1.71%. In commodities, Brent crude oil +1.81% to $51.79, gold-0.1% to $1,265, iron ore +0.0% to $55.86. AUD is at 0.7614 and the range since yesterday 5pm Sydney time is 0.7594 to 0.7631.

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•  Markets Today: 6 October 2016 (PDF, 128kb)

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