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Economic data from the U.S. turned out mostly better than expected but these weren’t enough to lift the Greenback’s spirits as it worried about a potential leadership change in the Fed.

  • U.S. ISM non-manu PMI up from up from 55.3 to 59.8 vs. 55.5 forecast
  • U.S. Markit final services PMI upgraded from 55.1 to 55.3
  • ADP non-farm employment change at 135K vs. 131K in September
  • Politico report: Kevin Warsh or Fed official Powell to replace Yellen?
  • Secretary of State Rex Tillerson did not consider resigning
  • U.S. crude oil inventories down by 6M barrels vs. projected 0.5M reduction

Major Events/Reports

Upbeat U.S. services PMI and ADP

All green for Uncle Sam! The latest reports beat expectations, setting the tone for a potential upside surprise in Friday’s NFP release.

The ISM non-manufacturing PMI rose from 55.3 to 59.8 to reflect a much stronger pace of industry growth compared to the estimate at 55.5. Components of the report showed a rise in the employment index from 56.2 to 56.8 and an even larger gain in prices from 57.9 to 66.3. New orders, business activity, supplier deliveries also ticked higher while inventories and inventory sentiment dipped.

The Markit version of the services PMI, which had an earlier flash estimate at 55.1, was upgraded to 55.3 to also indicate a faster pace of expansion.

Meanwhile, the ADP non-farm employment change reading clocked in a 135K increase, slightly higher than the estimated 131K rise for September. However, this was weaker compared to the August figure, which was downgraded from 237K to 228K. Perhaps we’ll see a downgrade in the previous NFP read, too?

Dovish Fed head in line?

With Yellen’s term set to expire in February next year, market watchers have been on the lookout for clues on who the Donald might appoint as the next Fed head.

A Politico report revealed that the current front-runners are Fed official Powell and former governor Kevin Warsh. Now Powell, who is rumored to be “The Chosen One,” is one of the more dovish members of the central bank as he has repeatedly warned about the downside risks to inflation and the dangers of hiking too soon, so the idea that his name is on the ticket led dollar traders to second guess the Fed’s tightening path for next year.

Analysts say that Powell will likely favor more gradual policy tightening compared to the Fed’s current pace while Warsh has been critical of the central bank’s bond-buying program in the past, hinting that he might be on Team Hawks. There were also rumors that Team Doves’ captain Neel Kashkari might also be next in line, but these were quickly dispelled.

In her latest testimony (and also in the September FOMC presser), Fed head Yellen seems to have taken the news in stride and refrained from giving away too many clues on Fed policy plans beyond her term. In her opening remarks at a community banking conference in St. Louis, Yellen barely even talked about the economy or monetary policy.

U.S. equities push for new highs… again!

Wall Street has been in a pretty good mood lately, what with the possibility of a less hawkish Fed head, a potential upside surprise in employment data, and the prospect of tax cuts.

With that, equity indices continued their ascent for the third consecutive session:

  • Dow 30 index is up 19.97 points to 22,661.64 (+0.09%)
  • S&P 500 index is up 3.16 points to 2,537.74 (+0.12%)
  • Nasdaq is up 2.91 points to 6,534.63 (+0.04%)

Bond yields, however, ticked lower on the prospect of slower tightening if Powell takes Yellen’s spot:

  • U.S. 10-year yield is down to 2.327% (-0.16%)
  • U.S. 30-year yield is down to 2.871% (-0.20%)
  • U.S. 2-year yield is down to 1.475% (-0.26%)

Major Market Mover(s):

USD

The Greenback was in a weak spot but was able to recoup some of its losses when positive reports came along and U.S. Secretary of State Tillerson denied that he considered resigning. Price action was relatively quiet, though, as traders might be biting their nails ahead of the NFP release.

EUR/USD reached a high of 1.1781 then retreated back to 1.1757, USD/JPY dipped to 112.34 then bounced back to 112.80, USD/CAD is pulling back to 1.2480, and USD/CHF is back at the .9750 mark.

Watch Out For:

  • Chinese banks closed for the holiday
  • 1:30 am GMT: Australian retail sales m/m (0.3% expected, 0.0% previous)
  • 1:30 am GMT: Australian trade balance (0.88B AUD expected, 0.46B AUD previous)