Trading Day: Three cheers for 'whacky' inflation

By Jamie McGeever

ORLANDO, Florida, Dec 18 (Reuters) - ‌This will be the last regular 'Trading Day' newsletter of the year. Thank you for all your support and feedback, and we look forward to an equally eventful and rewarding 2026. Normal service will be resumed on Monday, January 5. Happy holidays.

U.S. stocks rose and Treasury yields fell on Thursday after ‍U.S. heavily distorted inflation ‌figures strengthened bets for another rate cut early next year, while global markets turned their attention to the Bank of Japan's policy meeting and guidance on Friday.

In my column today, I look at how the BOJ decision will affect the yen. Whatever the BOJ signals, the currency may struggle to exit ⁠the 'intervention zone' it's been languishing in for several weeks.

If you have more time to read, here are a few articles I recommend to help you make sense of ‌what happened in markets today.

1. US annual consumer inflation moderates in November amidmissing data 2. Trump says next Fed chair will believe in lower interestrates 'by a lot' 3. ECB holds rates steady, upgrades economic outlook 4. Bank of England cuts rates after tight vote but signalscaution about further moves 5. BoE needs to rein in rising real rates: Mike Dolan

Today's Key Market Moves

* STOCKS: Solid gains on Wall Street, led by the Nasdaq.Asia mostly lower, a sea of green across Europe, with majorindices up as much as 1%. * SECTORS/SHARES: U.S. consumer discretionaries +1.8%,tech +1.4%. Energy -1.4%. Micron Technology +10%, Lululemon+3.5%, Palantir +5%. Cannabis stocks surge then recoil. TrumpMedia & Technology +42%. * FX: Dollar ends little changed, slides most vs CLP, NOK. * BONDS: Japanese yields dip slightly ahead of BOJ, UK andGerman yields steady after rate decisions. U.S. yields fall 3-4bps across the curve. * COMMODITIES/METALS: Oil ends little changed. Same withgold ⁠and Comex copper.

Today's Talking Points

* U.S. data credibility issues

The U.S. inflation figures published on Thursday were so far out of consensus - "whacky", according to KPMG's Diane Swonk - that serious doubt is being cast on their credibility. The reason? The government shutdown that delayed and distorted the data collection process.

This may explain the muted reaction of Treasuries, and especially the dollar, to core inflation falling to 2.6%, the lowest since March ​2021. The consensus was for a slight rise to 3.1%. Some economists note this was the biggest downside "miss" since 2009.

* European hawks show their talons

The Bank of England cut rates on Thursday, ‌while the European Central Bank and Norges Bank stayed on hold. But on balance, the underlying tone of officials' statements and guidance was generally ⁠hawkish.

Traders are now beginning to wager that the ECB's next move will be a hike, albeit not until 2027. The BoE's 5-4 vote could not have been closer, and the Bank indicated that its gradual pace of easing might slow further. Taken together with the surprise fall in U.S. inflation, the Fed seems even more of a dovish outlier.

* Cannabis stocks get high then come down

U.S. President Donald Trump signed an executive order on Thursday recommending the easing of regulations on marijuana, which could reshape the industry, unlock billions in research funding, and open doors long closed to banks and investors.

U.S.- and Canada-listed cannabis stocks rallied ​on the news, some posting double-digit gains. But they reversed course sharply on the realization that this will be a process, and therefore could be diluted or even thwarted altogether.

Yen struggles to exit 'danger zone' even as Japan hikes rates

The Japanese yen was the worst-performing major currency against the bruised U.S. dollar in 2025, even though the Bank of Japan was the only major central bank to raise interest rates. Further tightening will not guarantee the yen escapes the intervention "danger zone."

The BOJ is expected to continue its gradual tightening cycle on Friday with a quarter percentage point rate increase, bringing its policy rate to a three-decade-high of 0.75%. Interest‑rate futures imply around 40 basis points of additional hikes next year.

    As things stand, that will make the BOJ one of the most hawkish G10 central banks next year along with the Reserve Bank of New Zealand and the Reserve Bank of Australia. Governor Kazuo Ueda's guidance on Friday will be closely scrutinized for clues about the BOJ's ​appetite for additional tightening.

    But more ‍hikes may not end in a yen recovery in 2026. Most major central banks are ​close to the end of their easing cycles, with the notable exception of the U.S. Federal Reserve. If monetary policy starts tightening globally in the coming year, other central banks could quickly narrow the gap with the BOJ.

    ATTRACTIVE YIELDS, SHAKY MARKET

    Ueda has to perform a delicate balancing act, with pressure coming from three different fronts: Prime Minister Sanae Takaichi, bond investors, and the currency market. With so little room to maneuver, he will likely maintain the cautious stance he has taken this year.

    Japan's economy appears to be rebounding from a U.S. tariff-fueled contraction in the third quarter. Big business sentiment is the highest in four years, the labor market is the tightest in decades, by some measures, which should support wage growth and consumer spending.

    Moreover, inflation is entering its third year above the BOJ's 2% target, so the natural urge among BOJ officials may be to raise rates faster.

    But the Japanese government bond (JGB) market - burdened by public debt of around 250% of GDP, the world's highest - is not so ready and willing.

    To be sure, higher JGB yields will attract foreign demand, especially private sector pension funds and central bank reserve managers seeking to diversify away from their dollar-denominated holdings.  

    Ministry of Finance data shows that foreigners currently hold 12.2% of all JGBs and Japanese bills. That's more than double the share held in 2010 and close to the record high ⁠of 14.4% in March 2022.

    That share may rise further in 2026. As Jordan Rochester at Mizuho notes, the fragility of the JGB market is forcing domestic life insurance companies to sell, with foreigners eager to buy due to the attractive hedging-adjusted yields.

    But the JGB market is fragile for overseas investors too. It has been the worst-performing major bond market in the world this year, with the 10-year JGB yield now at its loftiest point since 2007 and longer-dated yields hovering ​near record highs.

YEN'S INTERVENTION ZONE    

    Bond yield spreads have moved significantly in the yen's favor this year, yet the currency has still struggled, hitting a record low against the euro and slumping back toward the 160 per dollar level that triggered government yen-buying in recent years.

    Ministry of Finance officials have issued intervention warnings in the past month, but there appears to be little appetite to act, at least as long as dollar/yen stays below 160.00. At this point, the only thing keeping those wolves at bay seems to be the latest bout of dollar weakness.

    The main reason the yen and JGB market are under so much pressure is, of course, Japan's fiscal plight. The upper house on Tuesday passed an 18.3 trillion yen ($118 billion) supplementary budget, the country's largest stimulus package since the pandemic. Takaichi's spending splurge will mostly be financed through new debt issuance.

    The BOJ governor will be ‌careful not to rock the bond market on Friday. But no matter what he does, JGBs and the yen are entering the new year on shaky ground.

What could move markets tomorrow?

* Japan interest rate decision * Japan CPI inflation (November) * UK public sector borrowing (November) * UK retail sales (November) * Germany GfK consumer sentiment (January) * Germany PPI inflation (November) * ECB board member Philip Lane speaks * Canada retail sales (November) * U.S. University of Michigan consumer confidence (December,final)

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Jamie McGeever;)