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The Fed debate has suddenly become much more engaging. Investors are torn as to whether or not Wednesday's decision is a game-changer. Was it a case of the reflation trades getting taken to the woodshed, or is it the Fed pivot you do not want to sit on the wrong side of the fence? 

US equities recovered Monday. S&P back up 1.4% and reversing the losses on Friday. A modest reprieve of the twist flattening as well: US 2yrs yields were unchanged, but US10Y yields rose 5bps to 1.49%

Powell was cautious on new virus strains, optimistic about the inflation trajectory. In remarks released overnight but delivered in a testimony Tuesday US time, Powell noted: "the pace of vaccinations has slowed and new strains of the virus remain a risk." On inflation: repeated that "as transitory supply effects abate; inflation is expected to drop back toward our longer-run goal."

Upbeat, but not relatively hawkish remarks from NY Fed's Williams as well: "we're a ways from achieving substantial progress," but the "medium-term outlook is very good." On the market's reaction to the FOMC last week: on the whole, "pretty modest adjustments in market perceptions."

Fed speakers take center stage in a light week for data. That allows them to dial back on their more hawkish-than-expected message. Fed Chair Powell's House select sub-committee testimony (Tuesday) and New York Fed President Williams (Thursday).

Still, the impact of last week's FOMC meeting continues to reverberate. The Fed's shift to Flexible Average Inflation Targeting was an effort to break the link between improving economic data and expectations of monetary tightening, mainly when there is an output gap. The Fed should not push back this week against the idea that it connects employment and inflation data on the real economy with the yield curve and tightens expectations. This development is superficially negative for pro-cyclical trades, including long commodities, Value over Growth for the stock picker, and short USD trades for the currency crowd. These trades will ultimately come back (long stock short dollars), but markets need to get over perceptions of a policy mistake.

The Fed has told us they will tighten in a couple of years. Of course, I struggled with the market overreaction last week while scratching my head, asking myself: What's the big deal? "Rally on" line up at the trough, now! The Fed will help risk appetite, the external and internal balances continue to deteriorate sharply, and the USD resumes its slide.

 I like fading the move in USDCAD on fundamental grounds post-FOMC. The Bank of Canada's three core CPI readings have accelerated above 2.5%, putting the BoC's characterization of risks to inflation as "broadly balanced" under some scrutiny, and making further (hawkish) guidance on rate normalization more likely.

The retail equity gang has been caught off guard with the rapidity of the Fed re-pricing.

Equity pro traders are split on what signal the following jobs data will provide. Strong prints could mean the end of labor shortages and take the gas out of the inflation threat. Conversely, the return to full employment with stimulus still fairy dusting everything could lift markets to the next level with cyclical leadership restored. The former seems more credible at the moment.