Short-Term and Medium-Term Outlook Hinge on Key US Data and BoJ
In my opinion, the short- to medium-term outlook remains cautiously bullish amid rising bets on a March Fed rate cut. Despite concerns about a BoJ rate hike and a yen carry trade unwind, US-Japan rate differentials are likely to remain profitable, albeit less attractive, dampening fears of market disruption.
However, several events may derail the cautiously bullish short- and medium-term outlook, including:
- Bank of Japan declares a 2% neutral rate, signaling multiple rate hikes in 2026 and a sharply narrower US-Japan rate differential.
- Hawkish Fed rhetoric, supporting one 2026 rate cut.
- US retail sales tumble, and inflation data fuels risks of stagflation.
Conclusion: Outlook Cautiously Bullish
In summary, cooler US inflation data would raise bets on a March Fed rate cut, boosting demand for US equity futures.
However, traders should closely monitor JGB yields, the USD/JPY, and the Nikkei 225. Their trends are potential warning signals for a yen carry trade unwind.
Key levels include a USD/JPY drop to 150 and 10-year JGBs at 2%, an important level to watch. These levels would likely trigger a sharper Nikkei 225 sell-off, weighing on broader risk sentiment.
A dovish BoJ rate hike, rising bets on a March Fed rate cut, and easing stagflation fears would likely send US stock futures to their all-time highs.
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