Who would want to run the Fed? Once upon a time running the Fed was straight out of a Harvard textbook, now its straight out of an Oxford honorary English class on Shakespeare as your use of language is everything.

Have we really entered in the realm where ‘Language is everything – Delivery is nothing’?

The reactions to Jay Powell’s Wall Street Journal’s job summit address suggests so as it was taken so negatively not because he stated that policy was changing but more because of what he did and didn’t say.

Remember, nothing has changed at the Fed in terms of delivery or forecasts – it’s the speculation that the Fed is going to be forced to move due to the reflation trade and specifically its current ‘unwillingness’ to step in and deal with surging bond yields that is moving markets.

So what did matter from the speech?

What he did say: [The US] is still a long way from reaching its policy goals… [there is] a lot of ground we have to cover. That was interpreted as policy will remain very accommodative for an undefined long period – but no additional action will be taken at this time.

When discussing the moves in long-dated treasuries; he said: ‘there were a number of reasons, including an increase in confidence’ add this [rate of change] notable and caught my attention, and conceded he is ‘concerned about disorderly moves’ and any ‘persistent tightening in financial conditions.’ There is a lot to speculate on here – which the market gladly did.

When questioned about future inflation, its expected rise and if it will be transitory or sustained, Powell stated prices should be moving higher from the sub 2% pace. In part due to increased spending from the economic re-opening but he also highlighted that the developed world has been stuck in a low inflation world for some time (pre-COVID) and that is unlikely to change. His statement around a ‘transitory’ increase was as expected – which is why the Fed will be patient.

But as mentioned above the market decided to interpret all this language as – ‘no action required’ and aloud bond vigilantes to roam the bond markets once more.

However, the biggest test to the thesis reflation will derail central bank timelines has to be employment – as without employment tightening the slack in the market, wages are not going to move and therefore inflation, even with the pent-up demand of the past year and record stimulus for governments won’t be moving structurally it will be transitory.

Its why the figures non-farm payroll (NFP) the ADP private sector and the sub-sector reading in the PMIs are making us sit up.

They are waning and look to be experiencing (expected) disjointed moves month on month. If this disjointed labour trend continues throughout 2021 it will be hard to argue that stimulus support will remain in place for the foreseeable future.

But, in the interim the USD is back with a vengeance. The USD is smashing G10 currencies interestingly the CHF and JPY suffered against commodity risk currency which makes this a USD story rather than anything else. EUR/USD fell 1 cent on Powell’s speech to be sub-$1.20

The most interesting pair out there in our view is USD/JPY – from ¥104.50 2 weeks ago its now risen almost interruption to ¥107.95 new eight-month high and is showing no signs of slowing. The spread between JGB and US papers are clearly highly attractive.

AUD/USD is going to struggle to catch $0.80 for a while, the Powell speech knocked the wind out of risk pairs – AUD is back under $0.78 got as low as $0.7709 will say though that the spread in the Aussie bond market is going to pull some FX flows back into long positions.