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Fed Chair Powell failed to deliver the kind of pushback against easy financial conditions that many had the right to expect in his speech yesterday, as the policy guidance was rather light in the speech. Most of the speech centered on a discussion of inflationary risks and where the Fed felt comfortable with the trajectory and outlook, and where it felt less certain, which was especially notable in the labor market/wage dynamics. The heart of the speech discussed the likely permanent reduction in the potential labor force due to older workers leaving the work force during the pandemic and the uncertainty of how quickly the wage pressures would ease. Near the end of the speech, Powell said “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time.” The lack of certainty and Powell suggesting it may be appropriate to reduce the size of Fed hikes to 50 basis points at the December FOMC meeting emboldened the market. 
Soft US data added to the reaction function yesterday and helped US yields lower all along the curve, although this did not unfold until the market had a look at what the Fed Chair had to say. The November Chicago PMI plunged to a scary 37.2 (vs. 47 expected and 45.0 in October) and the November ADP private payrolls change were out at a 21-month low of +127k vs. the +200k expected. Today’s key event risk is the core month-on-month PCE inflation print, expected at +0.3% MoM and 5.0% year-on-year. Any upside surprise would sit very poorly with yesterday’s reaction, as would a stronger than expected November jobs and/or earnings data tomorrow.

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USDJPY plunged down through the 137.50 area recent pivot low yesterday in the wake of Fed Chair Powell’s speech as US yields dropped all along the curve, with the US 10-year benchmark yield hitting 3.60%, a new local low ahead of the important 3.50%. The 200-day moving average, currently near 134.50 and rising rapidly, is zooming into view and will be a key test that might be hard to break unless US yields continue lower, which will be far more down to incoming data in coming weeks. The pain trade across markets now will be either a) stronger than expected US data and/or b) more inflationary data regardless of the strength in the real economy (that would require the Fed to remain higher for longer and for the market to eventually reset forward inflation expectations). Also watch global energy prices, a second source of vulnerability for the JPY due to its import of nearly all energy supplies. Some BoJ member jaw-boning overnight on an eventual policy shift also helping the JPY at the margin.

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