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Euro bulls jumped on Draghi’s slightly more upbeat tone during the ECB presser, focusing on the improved inflation outlook and shrugging of downgraded GDP forecasts.

  • U.S. headline CPI at 0.2% vs. 0.3% consensus in August, 0.2% previous
  • U.S. August core CPI at 0.1% vs. 0.2% consensus, 0.2% previous
  • Year-over-year U.S. headline CPI at 2.7% vs. 2.8% projected
  • U.S. initial jobless claims dipped from 205K to 204K vs. 210K estimate
  • USDA looking into another round of tariffs aid for farmers in Dec
  • U.S. House panel voted to make individual tax cuts permanent
  • IEA highlighted risks from emerging economies on crude oil market
  • ECB downgraded 2018 and 2019 GDP forecasts, inflation estimates unchanged
  • ECB head Draghi: Spillover risks from Turkey and Argentina not substantial
  • Draghi also downplayed potential spillover from Italy’s politics
  • Draghi: We haven’t changed the balance of risks to growth
  • FOMC member Bostic: Rate hikes can continue for a handful of quarters
  • Bostic: Trade risks could dampen investment but had limited effect so far
  • BOE head Carney: Cannot cut rates to offset a “no deal” Brexit

Major Events/Reports:

ECB forecasts and presser

In the earlier session, the ECB announced their decision to keep monetary policy unchanged for the time being. As it turned out, the euro party was just getting started as the central bank had yet to print their updated economic forecasts and hold a press conference.

First up, here are their updated growth and inflation forecasts for 2018 and the next couple of years:

  • 2018 GDP forecast downgraded from 2.1% to 2.0%
  • 2019 GDP forecast downgraded from 1.9% to 1.8%
  • 2020 GDP forecast unchanged at 1.7%
  • 2018-2020 HICP (inflation) forecast unchanged at 1.7%

Under usual circumstances this might’ve led to a dip in the euro, but some point to the leak earlier in the week as the reason why the shared currency barely reacted to the growth downgrades.

Besides, market watchers likely put more focus on the unchanged inflation forecasts as Draghi’s tone on this topic during the presser was a tad more upbeat. He also emphasized that they haven’t changed their balance of risks to growth.

Furthermore, Draghi cited that they expect stronger core inflation, explaining that lower growth doesn’t necessarily mean lower price levels, saying:

“The underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding down of our net asset purchases..”

The ECB head honcho also sounded confident that the region would be able to weather any troubles from emerging markets or Italian politics. In particular, he emphasized that spillovers from Turkey or Argentina haven’t been substantial. While he acknowledged that there has been some political damage in Italy, he assured that there haven’t been spillovers in the greater euro area.

Weaker than expected U.S. CPI

Uncle Sam’s inflation readings turned out weaker than expected for August, with the headline CPI up 0.2% versus the 0.3% consensus and the core CPI up 0.1% versus the 0.2% estimate.

Components of the August CPI report revealed that healthcare and apparel prices slipped but some of the losses were offset by higher costs of gasoline and shelter. On a year-over-year basis, headline inflation is down from 2.9% to 2.7% versus the estimate at 2.8%.

Stocks up, commodities down

The mood in Wall Street was also mostly positive as folks still seemed giddy about the shiny new things Apple unveiled the previous day.

Fiscal policy factors may have also lifted investors’ spirits. A Republican-led House panel backed a bill to make individual tax cuts permanent (More disposable income, yay!) and the USDA released a white paper on another set of aid for farmers hit by tariffs.

  • Dow 30 index is up 147.07 points to 25,145.99 (+0.57%)
  • S&P 500 index is up 15.26 points to 2,904.18 (+0.53%)
  • Nasdaq is up 59.48 points to 8,013.71 (+0.75%)

Crude oil, on the other hand, had a rough session as the IEA warned that emerging market troubles and trade tensions are weighing on their demand outlook. According to the agency:

“As we move into 2019, a possible risk to our forecast lies in some key emerging economies, partly due to currency depreciations versus the U.S. dollar, raising the cost of imported energy. In addition, there is a risk to growth from an escalation of trade disputes.”

  • WTI crude oil is down to $68.74 per barrel (-2.32%)
  • Brent crude oil slipped to $78.18 per barrel (-2.01%)

Adding more downside pressure on commodities was Trump’s tweet on being under no pressure to strike a deal with China. So much for the optimism on another round of higher-level talks!

The POTUS shared plans to rebrand NAFTA to USMC, which stands for U.S.-Mexico-Canada… and also U.S. Marine Corps. Not confusing at all. Speaking to Republican donors at a private fundraiser, he also reportedly threatened to drop the “C” if they don’t agree with his changes.

Major Market Mover(s):

EUR

The euro got a strong boost as ECB head Draghi drew traders’ attention to strong underlying momentum and brushed off potential contagion effects.

EUR/USD popped up from 1.1619 to a high of 1.1702; EUR/JPY is up from 129.58 to a high of 130.93; EUR/AUD is up to 1.6261, and EUR/NZD rebounded from 1.1743 to 1.7816.

JPY

The lower-yielding yen shed ground across the board, carrying on with its slide from earlier sessions.

USD/JPY advanced from 111.45 to 112.04; GBP/JPY climbed from 145.48 to a high of 146.71; AUD/JPY reached a high of 80.79; NZD/JPY rallied to 73.68, and CAD/JPY is up to 86.20.

Watch Out For:

  • 2:00 am GMT: Chinese fixed asset investment ytd/y (no change from 5.5% expected)
  • China’s industrial production y/y (no change from 6.0% expected)
  • Chinese retail sales y/y (no change from 8.8% expected)
  • 4:30 am GMT: Japanese revised industrial production
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