What the Bullard Bomb Really Means

Whether the Fed decides to buy another $15 billion in bonds through November is immaterial in dollar terms but it sends an extraordinarily powerful signal. Bullard hinted the Fed could delay ending the taper at the FOMC meeting at month-end. The comment reversed the rout on risk assets Thursday.  

Bullard said it would be logical for the Fed to delay the taper because metrics of inflation expectations – like 5-year breakevens at 1.47% -- have changed the outlook.

The idea wasn't even circulating in markets before the comment and that it came from a Fed hawk like Bullard was a shock that instantly sent stocks higher, bonds lower and the US dollar down. Over the remainder of the day, the US dollar sagged around a cent on most crosses.

The sudden change re-establishes the idea that the Fed will forever back-up risk assets and tirelessly work to prevent any kind of shakeout or scare. Essentially, it's the Yellen put.

At the same time, evidence continues to show the US economy improving. Initial jobless claims and industrial production both hit post-crisis highs in reports Thursday while the Philly Fed was a touch stronger than expectations. If anything, Wednesday's soft retail sales report has been the outlier.

The underlying story is that Europe is slowing and once the shakeout is complete, markets will refocus on that theme.

In the meantime, a mini-bomb hit early in Asia-Pacific trading after the RBNZ inadvertently republished the report saying NZD moves are unjustified and unsustainable. The erroneous report sent NZD a half cent lower before it bounced on the retraction. These are volatile days.

Otherwise, the Asia-Pac calendar is quiet.