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While Kocherlakota was predictably dovish, the one who really surprised the market was James Bullard, saying a logical policy response at this juncture may involve delaying the end of QE. These aggressive comments came despite unemployment claims well ahead of expectations at 264,000 (the lowest since April 2000). In fact, most of the data out of the US was positive as industrial production and the Philly Fed manufacturing index all smashed expectations.
All this positive data helped treasury yields recover, with the 10-year closing at 2.16%. Bullard’s comments really lifted the equity market, and investors seem to have ignored the fact he also said he sees the Fed tightening in 2015.
This marks a big shift from his recent comments, where he said inflation downside risk wasn't a concern and called for early rate hikes. Bear in mind, however, that he’s not a voting member till 2016.
Later today we have Fed chair Yellen speaking on inequality of economic opportunity. Perhaps she might mention the recent market volatility.
USD/JPY squeezing higher
While there were some developments in equities and bond markets, the FX space remained relatively subdued. In fact, the USD was mildly firmer against the majors after having put in a woeful performance in the previous session.
USD/JPY popped back above ¥106.00 and was perhaps the most significant move as the major risk pairs were fairly sidelined. I feel the pair could squeeze to ¥107 in the near term, which is the 38.2% retracement of the drop from early October highs to this week’s lows.