Coming into work this morning I couldn’t help but think of Diana Ross’ Chain Reaction. It certainly was where US markets were concerned, with markets playing catch-up following the Columbus Day holiday to developments since the weekend – namely the higher oil price and the US Presidential election campaign.

The likelihood of Clinton wining the US Presidential election (RealClearPolitics has Clinton leading Trump by 6 in its average of polls) along with a higher oil price have seen the probability of a US rate hike by December edge up to 79%. With that background, US Treasury yields ended the session 4.2 bps higher at 1.76%. A softer NFIB survey and LMCI did little to move the market (the NFIB fell to 94.1 against expectations of 95.0 while the LMCI also dipped to -2.2).

The oil price gave up some of its gains overnight, down 1.3% to $US50.70 (WTI measure). Russia’s largest oil producer Roseneft stated it wouldn’t cut output, contrasting to Russian President Putin’s earlier comments about being willing to freeze or cut output. A higher oil price has started to boost market-based measures of inflation expectations, with 10-year breakeven inflation rates hovering around 1.65%, well up from the 1.47% level in early September – that should be somewhat reassuring to some Fed officials.

In the FX space, it was a story of broad US dollar strength (US dollar index is up 0.6-0.8% for the day) with all G10 currencies lower against the dollar except the Yen. The Pound had the sharpest fall, down 1.9% and while there was not an immediate catalyst, two BoE officials were out overnight citing downside risks. Chief among those was Saunders who stating “Given the scale and persistence of the UK’s current account deficit, I would not be surprised if sterling falls further…” and as for the flash crash earlier in the week BoE officials are none the wiser.

Other currency moves were broadly as expected given US dollar strength, with the Aussie down 0.9% and the Euro down 0.7%. The Kiwi fell further, down 1.1%, helped lower by dovish comments by the RBNZ’s McDermott yesterday who reinforced the case of a near-term easing: “our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.” Our NZ colleagues think a 25bps cut in November remains likely.

Equities were mostly lower overnight, with a disappointing earnings result from Alcoa and Illumina helping to drag the S&P 500 down 1.3%. European equities were also lower with the Dax and FTSE each down 0.4%. The fall in German equities came despite a strengthening in German investor confidence, where the ZEW Survey was better than expected at 59.5 against expectations of 55.5, and suggestive that concerns over Deutsche Bank and Brexit are abating.

Coming Up

This morning in Australia we get the W-MI Monthly measure of Consumer Confidence which is unlikely to be market moving. The weekly ANZ-Roy Morgan measure has remained slightly above average for the past four weeks and so we expect the monthly measure to also tick slightly higher. The statistician also releases detailed Building Activity data, and while not usually observed by the market, will be of interest to economists in judging the pipeline of residential building activity.

As for the international data, the pick will be the US FOMC September Meeting Minutes along with a speech by the Fed’s Dudley. Vice-chair Fischer said the September decision “was a close call” and market attention will be paid to how close the Fed was to hiking rates in September – recall three out of four rotating regional feds dissented at the meeting. In reality a number of Fed speakers have hit the airways between September and now and the odds are on of a December rate hike. In terms of the trajectory for rates, it looks like it is going to be a slow cycle with Fischer also on record as stating he wants to see wages growth pick up to 3% a year to have inflation consistent with target. Dudley’s words tonight will also be watched for his views, being seen as one of the big-three FOMC members (along with Yellen and Fischer).

Other data out includes Japanese Machine Orders/Tool Orders, European Industrial Production and the US Monthly Budget Statement. OPEC also releases its monthly oil market report which could garner some attention given recent moves in the oil price. That oil price has started to shift market inflation expectations so is worth watching for in terms of the inflationary process.

Overnight

On global stock markets, the S&P 500 was -1.26%. Bond markets saw US 10-years +4.22bp to 1.76%. In commodities, Brent crude oil -1.49% to $52.35, gold-0.4% to $1,253, iron ore +1.8% to $57.68. AUD is at 0.7544 and the range since yesterday 5pm Sydney time is 0.7534 to 0.7569.

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•  Markets Today:  12 October 2016 (PDF, 198kb)

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