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Not long before the session-end, the dollar index shot higher against its peers, reversing daily losses after the ISM non-manufacturing PMI readings for the month of September posted the highest mark since August 2015. The index surged by 4.5 points to 59.8, whilst projections were for a smaller increase to 55.5. New orders, employment and price PMI indices within the services industry also touched fresh highs, with prices surging the most in five years. The Markit equivalent also came in better than expected, with the composite PMI arriving at a two-year high of 51.1.

Earlier, the ADP national employment report indicated that 135,000 private jobs were added to the economy in September, surpassing the forecast of 125,000 but falling below August's downwardly revised mark of 228,000. This comes ahead of the nonfarm payrolls reading to be released on Friday.

Even though news of a less hawkish Fed chair candidate (specifically, Jerome Powell) being preferred by the US Treasury Secretary Steven Mnuchin made traders scratch their heads and pressured the dollar index near the 93-key level, the release of upbeat non-manufacturing PMI numbers lifted the index back to 93.51. Dollar/yen jumped to an intra-day high of 112.89 before falling to 112.71. Gold fell from a five-day high of $1,281.45 per ounce to $1,270.49, being 0.20% up on the day.

Later in the day, investors will eye a speech given by the Fed chairwoman, Janet Yellen, at the Community Banking in the 21st Century Conference in St. Louis.

The pound gained some ground against the dollar, picking up to an intra-day high of $1.3287 following the release of better-than-expected Markit services PMI numbers for the month of September. The sector's index edged up to 53.6, while forecasts were for the index to remain steady at August's level of 53.2.

Final Markit services PMI readings out of the Eurozone also surprised analysts to the upside, rising by 1.1 points to a four-month high of 55.8 in September compared to the expected 55.6. The region's composite PMI figure also climbed to a four-month high, gaining 1 point and rising to 56.7 as expected. However, a few hours later, August's retail sales out of the region disappointed analysts after the numbers showed that yearly retail sales fell from the downwardly revised 2.3% to 1.2% instead of growing by 2.6%. This was also the lowest growth seen since February.

Meanwhile, in Catalonia, a government official said that regional parties who are in favor of independence and hold most seats in the Catalan parliament have asked for a debate and a vote on breaking away from Spain on Monday.

Euro/dollar gave up gains in the wake of the US PMI data, falling to 1.1760. Nevertheless, it remained 0.14% up on the day. Euro/pound dropped by 0.16% to 0.8858.

In Moscow, an energy forum attended by several OPEC energy ministers and the Russian President, Vladimir Putin, boosted confidence on longer oil supply cuts after Putin said that the OPEC/non-OPEC deal on production cuts could be extended "at least until the end of 2018".

The Energy Information Administration's report on US crude oil inventories showed stockpiles falling by 6.02 million barrels in the week ending September 29, a much bigger drawdown than the expected 0.76m and the preceding week's reduction by 1.85m barrels. Gasoline inventories over the same period grew faster than expected though, rising by 1.64m barrels as opposed to the anticipated 1.09m. WTI jumped higher within the first few minutes of data release with Brent crude also recording gains. The former last traded 0.3% up on the day, at $50.57 per barrel. Brent was 0.1% higher at $56.04 a barrel.

Dollar/loonie rebounded during the session, rising from a five-day low of 1.2449 to 1.2479 after the EIA report.

The Institute for Supply Management's (ISM) non-manufacturing index surged by 4.5 points to 59.8 in September - the highest reading since August 2005. The headline print surprised to the upside, with market expectations set on a slight uptick to 55.5.

September marked the second consecutive month of broad-based gains among the sub-indices, with pullbacks recorded only in inventories and inventory sentiment.

Notable gains were recorded in business activity (+3.8 to 61.3), new orders (+5.9 to 63) and prices paid (+8.4 to 66.3), with the latter indicating that prices increased for the fourth consecutive month to the highest level in more than five years.

The acceleration in activity and demand slowed supplier deliveries in September with the sub-index increasing by 7.5 to 58 (a reading above 50 indicates slower deliveries). Comments from industry contacts pointed to weather conditions and the inability of suppliers to respond to increased demand as reasons for the slowdown.

Comments from survey contacts remained largely positive and nearly all industries reported growth on the month, with Arts, Entertainment & Recreation, and Mining being the only exceptions.

Key Implications

The ISM non-manufacturing index surprised significantly to the upside in September, in line with its manufacturing cousin. Just as in the case of the manufacturing index, some of the September gains appear to be driven by supply chain disruptions and rebuilding efforts in the aftermath of Hurricane Harvey and Irma.

Improvements in the employment and prices paid sub-indices are very encouraging. The former, taken together with an uptick in its manufacturing equivalent, point to some upside risk regarding expectations for a subdued payrolls report this Friday - given the likely Irma impacts. Meanwhile, the surge in the prices paid sub-index, while likely temporarily boosted by hurricane disruptions, nonetheless provides some comfort with regards to the inflation outlook.

While this is definitely a solid report, we are reluctant to put too much emphasis on the surprisingly upbeat headline print given the transitory forces at play. But, while the current headline may be overstated in light of the disruptions, we believe that underlying momentum remains solid given the details of the report and breadth of improvement.

• European stock markets lost up to 0.5% with Spain underperforming (-2%) as sources indicated that Catalonia will declare independence on Monday. US stock markets opened with minor losses.
• The pace of hiring in the US private sector slowed to its weakest pace in 13 months last month, as Hurricane Irma and Harvey disrupted businesses across a large swath of the south-eastern US. Non-farm private employers added 135,000 jobs from August to September, according to a report from payroll processor ADP.
• America's service industries expanded in September at the fastest clip in 12 years (from 55.3 to 59.8), signalling vibrancy across the bulk of the economy following two major hurricanes, a survey from the ISM showed.
• Catalonia will move on Monday to declare independence from Spain, a regional government source said, as the EU nation nears a rupture that threatens the foundations of its young democracy and has unnerved financial markets.
• Firms in the UK's important services sector reported better than expected growth in September (53.6 from 53.2) in the closely-watched PMI survey, but warned of potential difficulties ahead as new business growth fell to its lowest level in more than a year. The final EMU services PMI was upwardly revised from 55.6 to 55.8.
• President Donald Trump's tax plan would let US companies take bigger, faster deductions on capital investments, a step some experts said would deplete Washington's policy arsenal by using up a tax break normally reserved for fighting recessions.
• President Vladimir Putin said Russia may agree to extend a deal with OPEC to curb oil supplies beyond March to the end of 2018, though he'll wait to make a decision until nearer the end of the existing pact.
• The ECB's supervisors want lenders to be fully covered against losses from new loans that have gone sour, in a move that could hurt credit creation in weaker economies in the region.
• The National Bank of Poland kept its policy rate unchanged at 1.5%. NBP governor Glapinski holds a press conference later today.
• A month before a snap parliamentary election, Iceland's central bank cut its key interest for the fifth time in little more than a year, from 4.5% to 4.25%, in a move to offset the impact of lower inflation. The Reserve Bank of India kept its policy rates unchanged at 6%.

Rates

Volatile session, but limited changes after all

Core bonds had a constructive session helped by a volatile mild risk off sentiment and technical factors. The Bund outperformed US Treasuries, but this time in a sphere of (modestly) falling yields. The tide turned in the afternoon session on the core bond markets and gains melted partly away.

The Bund started strong on Spanish developments. The German Dax opened at an all-time high in a catch-up move (German markets closed for Day of the Unity yesterday), but couldn't sustain at these levels with other European indices losing ground (Spain underperforming). However, by the time of writing our report, the Dax is again upwardly oriented. The Bund managed to eke out additional gains because of technical reasons. The German 10-yr yield tried already a few days to break through 0.5% resistance, but didn't succeed, encouraging some bulls to take profit on shorts/open long positions. However in lockstep with rising equities, the Bund lost again some ground in the afternoon session. The EMU final PMI stayed nearly unrevised and EMU retail sales were weaker, but markets ignored the eco data, just like the US ADP employment report that was bang in line with (modest) expectations.

On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between +9 bps (Spain) and +4 bps (Italy and Portugal). The stand-off between the central government and the Catalonian authorities became grim again. The Spanish King condemned in harsh words the illegal referendum . The Catalonian leaders rebuked the King for not mentioning the violent policy action against peaceful voters and insisted they would call independence of the region soon. Investors are noticing now the situation and become worried. The spread increased 20 bps since the referendum and the Madrid bourse lost ground too.

US president Trump suggested that Puerto Rico's staggering $74B debt will be wiped out (default) to help the island recover from the effects of the hurricane Maria, estimated at $95B of damages. This might have serious implications for the big municipal market and could help safe-haven US Treasuries. However, once more there was no firm evidence that it effectively played a role. Fed Fischer, who leaves office later this month, continues to expect a tightening US labour market to lift wages and prices even though the process can take longer than anticipated. He is yesterdays' man for markets and thus unimportant. Gold and the yen rose in the morning session, but lost (part) of the gains in the afternoon, confirming that volatile risk sentiment was behind market movements.

The German Finanzagentur tapped the on the run 10-yr Bund (€3B 0.5% Aug2027). Total bids amounted €3.75B, slightly below the €4.07B average at the previous 4 Bund auctions. The Bundesbank set aside €0.59B for secondary market operations, resulting in an official bid cover of 1.6. The auction had no tail.

Currencies

Dollar going nowhere on conflicting stories

Today, USD traders faced several conflicting issues including strong EMU eco data, uncertainty on Catalonia and the US debate on who will succeed Yellen at the helm of the Fed. EUR/USD and USD/JPY hovered up and down. In the end, the trade-weighted dollar is little changed from the start in Europe. EUR/USD is changing hands in the 1.1770 area. USD/JPY tries to hold 112.50 area.

Overnight, Asian equities ex-Australia continued their uptrend. The Japan services PMI indicated modest growth, but didn't hurt the yen. The dollar declined slightly further as the political debate on a successor for Fed's Yellen intensified. There were rumours that chances of Fed member Powell, also on the shortlist, were growing. USD/JPY dropped to the mid 112 area. In the same vein, EUR/USD settled again in the upper half of the 1.17 big figure.

European FX traders faced a complex environment. The EMU PMI's were strong but rising tensions on Catalonia were a negative for euro sentiment. The rebound of European equities stalled and German bunds outperformed US Treasuries, widening the interest rate differential in favour of the dollar. However, it didn't help the US currency. EUR/USD gradually reversed an early dip and returned to the 1.1770/80 area. USD/JPY traded with a negative bias as core bond yields declined and as risk sentiment turned cautiously negative. Uncertainty on the successor of Fed Chair Yellen kept USD bulls side-lined. USD/JPY drifted (temporary?) below 112.50.

In the US, the ADP labour report showed a modest net growth of 135 000 private jobs in September, in line with consensus. ADP said the dip in job growth was in part due to the impact from the hurricanes. There was no dollar reaction, but the dollar tried to bottom going into the start of US equity trading. Maybe uncertainty on the financial position of Puerto Rico was also a slightly dollar negative. EUR/USD trades currently in the 1.1770 area. USD/JPY trades near 112.50 awaiting the US non-manufacturing ISM.

Sterling decline blocked by decent services PMI

Sterling hovered near the recent lows against the euro early today. EUR/GBP held a tight range in the 0.8875 area. Cable tried to move a bit further away from yesterday's correction low (1.3222) but this was due to dollar softness. On Monday and Tuesday , the manufacturing and the services PMI's were reported weaker than expected and weighted on the UK currency. Today, the services PMI rebounded from 53.2 to 53.6, while a stabilization was expected. The details from the report were not strong, but upward prices pressures persist. The report fits a scenario of a limited BOE tightening in the near future. However, the BOE will act very cautiously. Sterling rebounded, but the move was limited given the recent correction. EUR/GBP trades in the 0.8865 area. Cable hovers around 1.3275. The text of May's speech at the conservative party conference was released just before noon. The PM said she is seeking a Brexit deal that works, but the government is also preparing for a no-deal scenario. The impact on markets was very limited.

Daily Pivots: (S1) 1.1702; (P) 1.1738 (R1) 1.1780; More...

Since 1.1832 minor resistance remains intact, deeper decline is in favor in EUR/USD. Fall from 1.2091 would extend through 1.1661 support. Decline from 1.2091 is correcting whole rise from 1.0569. Deeper fall should be seen to 38.2% retracement of 1.0569 to 1.2091 at 1.1510, where we're expecting support to bring rebound. On the upside, break of 1.1832 minor resistance will suggest that the corrective fall is completed and turn bias back to the upside.

In the bigger picture, rise from medium term bottom at 1.0339 is not finished yet. It's expected to continue after pull back from 1.2091 completes. And, next target will be 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall from 1.6039 (2008 high) could resume. Hence, we'd be cautious on strong resistance from 1.2516 to limit upside.

Daily Pivots: (S1) 1.3212; (P) 1.3249; (R1) 1.3277; More....

At this point, GBP/USD's corrective fall from 1.3651 could still extend to 61.8% retracement of 1.2773 to 1.3651 at 1.3108 and below. However, break of 1.3454 will indicate completion of the pull back. In that case, intraday bias will be turned back to the upside for retesting 1.3651 high.

In the bigger picture, current development argues that the long term trend in GBP/USD has reversed. That is, a key bottom was formed back in 1.1946 on bullish convergence condition in monthly MACD. Current rise from 1.1946 will target 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466 next. In any case, medium term outlook will now stay bullish as long as 1.2773 support holds.

Daily Pivots: (S1) 0.9714; (P) 0.9749; (R1) 0.9771; More....

Intraday bias in USD/CHF remains neutral with focus staying on 0.9772 key resistance. And outlook remains unchanged. On the upside, decisive break of 0.9772 key resistance will suggest that whole down trend form 1.0342 has completed. In that case, near term outlook will be turned bullish for 0.9860/1.0099 resistance zone. However, break of 09669 minor support will suggest rejection from 09772 and turn bias back to the downside for 0.9587 support. Break will target retesting 0.9420 low.

In the bigger picture, focus remains on whether 0.9443 key support (2016 low) could be taken out firmly as down trend from 1.0342 extends. There are various interpretation of the price actions. But in any case, medium term outlook will stay bearish as long as 0.9772 resistance holds. Current down trend could extend to 38.2% retracement of 0.7065 (2011 low) to 1.0342 (2016 high) at 0.9090. However, break of 0.9772 will indicate that USD/CHF has successfully defended 0.9443 again and turn outlook bullish for 1.0099 resistance.

Stepping back momentarily from central banks & macro data, could the best month for US automakers since 2005 mean consumers are finding another gear? ADP slowed to 135K in September (meeting expectations) from a revised 228K partly due to the hurricanes. All currencies are up against USD since the close of Tuesday's NY session, with gold and GBP in the lead, CHF and CAD at the bottom. GBP got a lift from better than expected services PMI, keeping alive hopes of a November BoE hike. We turn to the US services ISM at 15:00 and Yellen's speech at 20:15 London time.  A new Premium trade has been posted and sent.

US auto sales smashed expectations in September with sales at an 18.57m pace, up from 16.14m in December and beating the 17.4m estimate. Optimists will say consumers are opening their wallets, buoyed by a better jobs market and hopes for a tax cut. Pessimists will sale say that replacements after hurricane Harvey simply took place more-quickly than anticipated.

The Fed's bias is to see good news as real and bad news as temporary so the numbers are more-likely to strengthen the case for a December rate hike, especially because the buying wasn't entirely limited to hurricane-hit areas. Odds of a December Fed hike remain  little changed at 70%. Yellen's speech today fires up an avalanche of speeches from Fed members this week (Williams, Harker, George, Bostic, Dudley, Kaplan & Bullard).

S&P 500 hit yet-another record high, climbing 5 points to 2534. NASDAQ is now at 4800.

GOLD - The commodity put in a temporary bottom and triggered a corrective recovery on Wednesday. This development has opened the door for more strength. On the downside, support comes in at the 1,270.00 level where a break will turn attention to the 1,260.00 level. Further down, a cut through here will open the door for a move lower towards the 1,250.00 level. Below here if seen could trigger further downside pressure targeting the 1,240.00 level. Conversely, resistance resides at the 1,280.00 level where a break will aim at the 1,290.00 level. A turn above there will expose the 1,300.00 level. Further out, resistance stands at the 1,320.00 level. All in all, GOLD looks to strengthen further on bull pressure.

Gold has posted gains in the Wednesday session. In North American trade, the spot price for an ounce of gold is $1275.10, up 0.26% on the day. In economic news, ADP Nonfarm Payrolls came in at 135 thousand, but managed to beat the estimate of 131 thousand. Later in the day, the US releases the ISM Nonfarm Manufacturing report, and Federal Reserve Chair Janet Yellen will speak at an event in hosted by the St. Louis Fed.

Gold prices showed some strength earlier on Wednesday, but the metal has retracted in the North American session, in response to the ADP Nonfarm Payrolls report. The key indicator dropped sharply, from 237 thousand in August to just 135 thousand, but this was better than expected. The hurricanes which tore through Texas and Florida caused extensive damage, and with many workers in those states unable to work, the markets were braced for low employment numbers. The official nonfarm payrolls, which will be released on Friday, are also expected to sharply decline in September, with a forecast of 85 thousand, compared to the August release of 156 thousand. Will the official release follow suit and beat the estimate?

Has the Federal Reserve decided to raise rates one final time in 2017? Just a few weeks ago, federal futures had priced in a December hike at below 50 percent, but the odds have surged to 76 percent, according to the latest CME Fed Watch release. Although FOMC members remain divided on the prudence of another rate hike in 2017, Fed Chair Janet Yellen has broadly hinted that she favors a December move, and the markets have picked up on her message. The US economy continues to perform well, and the labor market remains close to capacity. The Achilles heel in an otherwise strong economy is inflation, which remains well below the Fed's target of 2 percent. If sentiment towards a December hike remains high, the US dollar will be attractive to investors and could gain ground.

Daily Pivots: (S1) 112.56; (P) 112.87; (R1) 113.15; More...

USD/JPY continues stay in tight range below 113.25, around medium term channel resistance. Intraday bias stays neutral at this point. On the upside, sustained break of medium term channel resistance will argue that correction from 118.65 is already completed with three waves down to 107.31. Break of 114.49 will confirm this bullish case and target a test on 118.65 next. On the downside, considering bearish divergence condition in 4 hour MACD, break of 111.46 will suggest rejection from the channel resistance and turn bias back to the downside.

In the bigger picture, rise from 98.97 (2016 low) is seen as the second leg of the corrective pattern from 125.85 (2015 high). It's unclear whether this this second leg has completed at 118.65 or not. But medium term outlook will be mildly bearish as long as 114.49 resistance holds. And, there is prospect of breaking 98.97 ahead. Meanwhile, break of 114.49 will bring retest of 125.85 high. But even in that case, we don't expect a break there on first attempt.