While we often we use song for the title and theme of our morning note, reading the overnight news and checking the market reaction, the title of one of my favourite movies of all time seemed more appropriate. Inception is a science fiction thriller starring Leonardo di Caprio and is based on the idea that if one can implant a thought on another person’s mind then you can influence their behaviour. Last night the ECB released its accounts of its September policy meeting and as expected there was no mention of tapering, the Bank reiterated its willingness and ability to ease further, if needed, while concerns over the lack of an uplift in core inflation was also evident. Reaction to the minutes was fairly muted, but better than expected US Jobless claims supported the recent theme of higher core global yields and stronger USD. Then, headlines from an MNI interview with Vice President Constancio that the governing council “has not discussed anything about the timetable of QE”, triggered a small rally in bond yields and helped equities pair back early losses.

In the end, however, reaction to Constancio’s comments proved to be short lived. Core yields continued their ascendency and after trading in and out of positive territory European and US equities have ended the day slightly lower to unchanged. Just like in the inception movie, the idea of QE tapering has already been planted in investor’s minds and a denial by the ECB is unlikely to reverse this thinking. ECB president Draghi speaks in Washington on Sunday and it will be interesting to see what he has to say.

As for currencies, GBP remains the whipping boy against backdrop of broad USD strength. Indeed over the past 24hrs all G10 currencies have underperformed the USD. GBP is now trading with a 26 handle for the first time since mid-1985 with ongoing concern and headline news on the consequence from a hard Brexit the main catalyst. JPY weakness is another ongoing theme with USD/JPY back above ¥104 for the first time since early September. Higher US yields and short covering the major drivers for Yen weakness. The AUD lost 0.46% against the USD and is back trading below 76c. Meanwhile NZD is now comfortably trading sub 72c, with both currency seemingly at the mercy of USD moves.

As noted above, UST yields have continued to drift higher and in addition  to solid US data, the ongoing ascendency in oil prices has also been a contributing factor. WTI is now trading above $50 for the first time since late June and the move appears to be supported by news that hurricane Matthew continues to strengthen as it approaches the US.

Coming Up

US Non-farm payrolls tonight is the only game in town suggesting we are in for a quiet session today, ahead of potentially some fireworks tonight.

This morning in Australia we get the AIG Construction index and Japan prints its labour cash earnings numbers for August (0.4% exp. vs 1.2% prev). While typically this data is not market moving, the numbers are an important source of information for the Bank of Japan in terms of wage inflation. The strong Yen over the past 12 months and its impact on corporate profits suggest a slowdown in pay rises could be in the offing.

Moving on to Europe, it’s all about industrial production with Germany, France, Spain and the UK releasing figures for October. For choice the UK data is probably the most important of the lot, recent UK data has been on the strong side and a solid Industrial Production print would be another argument for the BoE to stand pat in November.

As for tonight, Bloomberg is currently showing consensus for payrolls is at 172k, up from the 151k print in August. While both ISM surveys this week have been better than expected with the ISM non-manufacturing employment index in particular showing a solid jump to 57.2 from 50.7, the ISM relationships with non-farm payrolls tend to be reflected with some lags. Some commentators have also noted a bias for September numbers to be underreported initially and then revised up later. Bearing these caveats in mind and considering the rump up in UST yields and Fed expectations over the past week (Dec Fed hike is currently priced at 75% compared to high 50s last week), we are probably more likely to get a bigger reaction from a soft print while a solid number would help vindicate the recent spike in Fed hiking expectations.

Tonight we also have no less than four Fed speakers. Mester and George, the known dissenters, are scheduled to speak along with Vice Chair Fisher and Fed Governor Brainerd. Lastly, although China’s market has been closed for a week long holiday, some statisticians got the short end of the straw. The Caixin Services and Composite PMI are due out tomorrow along with FX reserves for September.

Overnight

On global stock markets, the S&P 500 was -0.07%. Bond markets saw US 10-years +3.51bp to 1.74%. In commodities, Brent crude oil +1.98% to $52.63, gold-1.1% to $1,254, iron ore +0.0% to $55.86. AUD is at 0.7587 and the range since yesterday 5pm Sydney time is 0.7563 to 0.7602.

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•  Markets Today: 7 October 2016 (PDF, 112kb)

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