Markets Cautious Again After ECB And GDP Volatility, NFP To Move

Much volatility was seen in the financial markets overnight, driven by two key events. Firstly, ECB unexpectedly cut interest rates by 25bps to historical low of 0.25%. Secondly, US GDP beat expectation by growing at 2.8% annualized in Q3. Euro tumbled broadly after ECB's move and even breached 1.33 against the greenback. While the common currency generally maintained loss against other major currencies, EUR/USD recovered quickly and is back trading above 1.34 at the of writing. On the other hand, the stocks and dollar was initially boosted by the strong GDP data, but then reversed. DOW closed down -152.9 pts at 15593.98 after making new record high at 15797.68. S&P 500 performed even worse by closing down -23.34 pts at 1747.15. The data revived speculations that Fed would taper in December, instead of March. And risk aversion drove the Japanese yen broadly higher. Markets, though, got cautious again as traders prepare for another key event of non-farm payroll today.

The ECB cut the main refi rate by -25 bps to another record low of 0.25% while the marginal lending facility rate is down to 0.75% from 1%. Yet, the deposit rate stays unchanged at 0%. As mentioned in the statement, the rate cut was driven by the indications of "further diminishing underlying price pressures in the Euro area over the medium term, starting from currently low annual inflation rates of below 1%". At the press conference, President Draghi warned that the Eurozone may "experience a prolonged period of low inflation". The ECB reiterated to maintain its target of keeping inflation rates below, but close to, 2% in the medium- to long-term. President Draghi pledged to extend its unlimited offerings of 1-month and 3-month cash until mid-2015.The euro slumped after the announcement. More in ECB Surprisingly Reduces Policy Rate as Deflation Pressure Looms.

The change on expectation on when Fed would start scaling back the $85 per month open ended asset purchase will continue to be driven by incoming economic data. The main question is whether Fed would starting tapering in March or earlier. The stronger than expected Q3 GDP data released definitely pushed expectation of an earlier tapering. Today's NFP will be another key factor in gauging the expectation. Markets are expecting NFP to show 125k growth in October, down from prior month's 148k growth. Unemployment rate is expected to rise to 7.3%.

Looking at the leading NFP data, ADP employment growth slowed to 130k in October, from prior month's 145k. The 4-week moving average of initial jobless claims jumped sharply from 305k to 348.3k. The ISM manufacturing employment component dropped to 53.2, from 55.4. But the ISM services employment rose sharply from 52.7 to 56.2. Overall, the leading indicators suggested a small job growth in October than September.

Elsewhere, Swiss will release unemployment, retail sales. Germany and UK will release trade balance. US will also release personal incoming and spending and U of Michigan confidence. Canada will also release employment data.