The US dollar fell (DXY -0.1%), Equities were mixed (S&P500 +0.1%; EuroStoxx -0.3%), while yields were flat (US 10yrs +0.4bps). It seems markets are treading water ahead of Payrolls on Friday given more than usual uncertainty over the numbers due to possible hurricane effects.

Last night’s US Non-manufacturing ISM shot the lights out, printing at 59.8 and well above the consensus of 55.5 (55.3 previously). The index is now at its highest since August 2005 and is a sign that the US economy is recovering quickly from hurricane-related disruptions. Strength in the ISM is consistent with GDP growth in excess of 4%, inspiration for today’s title Fast Car by Tracy Chapman. For your scribe the most interesting bit of the report was the Prices Paid Sub-index which rose 8.4 points to 66.3 with prices for materials and services rising. Will this lead to a pick-up in US inflation – time will tell, but it is evident there has been a global upswing in prices paid according to recent surveys (see Chart).

ADP Payrolls was in line with expectations, up 135k in September. That overall is also suggestive of only a modest impact from hurricane damage (some reports estimate ADP would have been 175k without hurricane damage). Of course ADP is far from infallible and the market consensus for the more important Payrolls on Friday is 80k.

Moves in FX were fairly tight. There was very slight US dollar weakness with the DXY -0.1% overnight. The Euro rose (0.2%), along with the Yen (+0.1%) and Kiwi (+0.1%).

Outperforming slightly was the Aussie with the AUD/USD up 0.3% to 0.7860. The key for the Aussie today will be Retail Sales at 11.30 AEDT and whether this prints at or below consensus (see Coming UP for more details).

Moves in bonds were fairly muted. US Treasury yields rose 0.4 bps to 2.33% while German Bund yields fell 1.0bps to 0.45%. Market pricing for a US Fed rate hike in December remains at around +70% while 2 rate hikes are priced by the end of 2018 compared to the Fed dot points of four. On the next Fed Chair, it is now seen as a two-horse race between Warsh (seen as more hawkish) and Powell (seen as slightly dovish and willing to accommodate a relaxation in  financial regulation).

There was more action in the European periphery where Spanish 10-year yields have risen 17.8bps since the Catalonian Referendum. A pro-independence lawmaker tweeted Catalonia would declare independence following a parliamentary session on Monday, confirmed later by the Catalan president. It is unclear how this will unfold. Spain’s central government has said the Spanish state is indissolvable while the constitutional court has declared the referendum invalid. For euro watchers, the key here is that even if Catalonia secedes, it still wants to stay in the EU and that’s probably why there has been little reaction in the Euro or German Bunds to date.

Coming Up

Domestically we have Retail Sales and the Trade Balance (11.30am AEDT). Retail Sales is the one to watch with the market expecting a bounce back to +0.3% m/m after last month’s flat outcome. NAB’s own Cashless Indicator based on electronic transactions is suggestive of downside risks and we note Myer reported “below expectations” sales for the first six weeks of FY2018 (from end July so most of August). NAB is consequently forecasting a well below consensus print of -0.3% m/m. The Trade Balance is also released at the same time with the market consensus sitting at $850m – NAB is similar and is expecting an $800m surplus.

Internationally the major item will be the ECB Minutes (10.30pm AEDT). The Minutes may garner some attention this month for details on the “very preliminary” discussions held on tapering last meeting. NAB thinks a taper is likely to be announced at the October meeting.

The US is fairly quiet with only the usual Jobless Claims (11.30pm AEDT) and the Trade Balance (11.30pm AEDT). We will have to await until Friday for the more exciting Payrolls. There are also five Fed speakers with Powell, Williams, Harker and George. Powell and Williams are the ones to watch – Williams as he is seen to be close to the centre of gravity in the FOMC, and Powell for any potential views given he is a front runner to lead the Fed following the end of Yellen’s term.

Overnight

On global stock markets, the S&P 500 was +0.08%. Bond markets saw US 10-years +0.36bp to 2.33%. In commodities, Brent crude oil -0.50% to $55.72, gold+0.2% to $1,274, iron ore +0.0% to $62.05, steam coal +2.1% to $99.00, met. coal +0.0% to $179.00. AUD is at 0.7862 and the range since yesterday 5pm Sydney time is 0.783 to 0.7875.

For full analysis, download the report:

• Markets Today:5 October  2017 (PDF, 111kb)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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