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US Treasuries outperformed yesterday on benign November CPI numbers. The partial inflation report showed headline and core inflation slowing down to respectively 2.7% Y/Y and 2.6% Y/Y from 3%. It fits in our view that markets are underestimating the risk of continuation of the Fed’s normalization cycle in Q1 2026. The dollar temporarily lost ground but fought back in the end (close around EUR/USD 1.1725). US equity markets rebounded on the prospect of a more accommodative Fed’s stance with strong Micron earnings also putting aside AI valuation concerns. Decisions by the ECB and the BoE were as expected. The ECB raised its growth forecasts over the 2025-2028 horizon, but president Lagarde refused to give any forward guidance on interest rates sticking to the mantra that policy “is in a good place” instead. Interest rate stability is our base scenario for at least another 6 months. BoE governor Bailey flipped the vote from 5-4 in favour of unchanged in November to 5-4 in favour of a 25 bps rate cut (to 3.75%) yesterday. Three out of those five showed reservations against another rate cut on “auto pilot” early next year. They want more prove of either the disinflation process or a further weakening of the economy/labour market. The “hawkish” cut provided only temporarily relief for sterling with Gilts underperforming.

The Bank of Japan raised its policy rate by 25 bps to 0.75% this morning, the highest level since 1995. The central bank believes that the likelihood of realizing the baseline scenario that underlying CPI inflation will be at a level that is generally consistent with the 2% inflation target in the second half of the projection period (fiscal 2025-2027) has been rising. Looking forward, the BoJ thinks that it highly likely that the mechanism in which both wages and prices rise moderately will be maintained. Moves to pass on wage increases to selling prices continues, keeping underlying CPI on an upward trajectory. Simultaneously, uncertainties around the US economy and the impact of trade policies remain but they have declined. Real interest rates are expected to remain significantly negative and accommodative financial conditions will continue to firmly support economic activity. Therefore, if the outlook presented in October is realized, the BoJ will raise the policy rate further and adjust the degree of monetary accommodation. Japanese bonds underperform this morning because of the slightly hawkish guidance. Money market discount a next move at the July meeting, which would accord to the +- 6 month hiking pace in place since March2024 but interrupted during the trade war. Japanese yields add 2.2 bps (2-yr) to 4.8 bps (10-yr) with the 10-yr yield surpassing the 2% mark and reaching the highest level since 1999. The Japanese yen fails to profit against a slightly stronger overall dollar and in a positive risk environment (USD/JPY 156.35).

News & Views

• The Czech National Bank (CNB) unanimously decided to keep its policy rate unchanged at 3.5% yesterday. Even as inflation has held close to the 2% target over the previous two years, core inflation is assessed to remain elevated in the quarters ahead. This ongoing inflation pressures from the domestic economy currently rule out a further decrease in interest rates. The CNB still thinks that a relatively tight monetary policy compared to the past is needed as elevated credit growth is fostering a rise in the quantity of money in the economy. The labour market remains tight and wages are rising at an elevated pace. Household consumption is also increasing. Elevated services inflation and property price growth are having an inflationary effect. Despite this assessment, the CNB now sees the risks and the uncertainties for the fulfilment of the inflation target as “balanced overall”. In November this risk balance was labeled as “inflationary overall”. At the press conference, governor Michl saw an equal chance for a rate cut or a hike as the next step. He also indicated that policy won’t react to one-off changes in power prices which might push headline inflation below the 2% target next year. The Czech 2-y swap yield declined further to 3.66%.

The EU this morning reached an agreement for a loan of €90bn to Ukraine. The funding of the loan will come from joint debt issuance backed by the EU budget. In this respect, the EU moved away from the plan to use frozen Russian assets. According to EU leaders, Russian assets remain blocked. If Moscow later pays reparation loans to Ukraine, then Ukraine can use these funds to pay back the EU loan. The agreement also includes that the use of the EU budget won’t impact the financial obligations of Hungary, the Czech Republic and Slovakia, who were skeptical to provide financial support to Ukraine.

Daily Pivots: (S1) 155.23; (P) 155.61; (R1) 155.93; More...

Immediate focus in USD/JPY is now on 156.94 resistance with today's strong rise. Firm break there will argue that larger rally from 139.87 is resuming through 157.88 to 158.85 key structural resistance. Decisive break there will be a strong medium term bullish signal. Risk will now stay on the upside as long as 154.38 support holds, in case of retreat.

In the bigger picture, corrective pattern from 161.94 (2024 high) could have completed with three waves at 139.87. Larger up trend from 102.58 (2021 low) could be ready to resume through 161.94 high. Decisive break of 158.85 structural resistance will solidify this bullish case and target 161.94 for confirmation. On the downside, break of 150.90 resistance turned support will dampen this bullish view and extend the corrective range pattern with another falling leg.

Yen weakened broadly today despite the BoJ delivering a widely expected 25bps rate hike. The move pushed 10-year JGB yields above the psychologically important 2% level for the first time since 1999, but higher yields failed to translate into currency support.

Part of the reaction reflects a classic sell-on-news dynamic. With the long-anticipated BoJ decision out of the way, markets reverted to the prevailing trend rather than extending positioning on the headline outcome. More importantly, the BoJ offered little clarity on where policy rates are ultimately heading. While the tightening bias was retained, there was no guidance on the destination, leaving investors without a clear anchor for longer-term Yen valuation.

Governor Kazuo Ueda openly acknowledged that estimates of Japan’s neutral rate span a wide range, with no consensus on where it lies. That uncertainty argues for caution, particularly as any further rate increase would push policy closer to neutral, if not into it. As a result, markets are increasingly skeptical that the BoJ will move again any time soon. Without a credible path toward materially higher rates

Elsewhere, Dollar is recovering from its post-CPI selloff. While November inflation data showed a sharp cooling, skepticism has grown around the quality of the report due to gaps caused by the government shutdown. Some economists have labeled the release a “Swiss cheese” CPI report, highlighting missing components as the lots of holes. Most notably, shelter costs—roughly a third of the CPI basket—were absent, significantly distorting the inflation signal. Missing data were effectively treated as showing no price growth, raising concerns about statistical reliability.

That has tempered enthusiasm for aggressive Fed repricing, even as inflation appears to be easing. For now, the Fed is still expected to hold rates in January, with March cut odds hovering around 55%. With three more months of jobs and inflation data still to come, it remains premature to draw firm conclusions.

In FX markets this week so far, Swiss Franc leads, followed by Dollar and Sterling, while Kiwi lags despite strong domestic data today, followed by Aussie and Yen. Euro and Loonie sit in the middle.

In Asia, Nikkei rose 1.03%. Hong Kong HSI rose 0.69%. China Shanghai SSE rose 0.36%. Singapore Strait Times is up 0.10%. Japan 10-year JGB yield rose 0.056 to 2.022. Overnight, DOW rose 0.14%. S&P 500 rose 0.79%. NASDAQ rose 1.38%. 10-year yield fell -0.035 to 4.116.

BoJ raises rates to 0.75%, keeps tightening bias intact

The BoJ raised its policy rate by 25bps to 0.75%, as widely expected, marking another step in its gradual normalization process. Despite the hike, the BoJ emphasized that financial conditions remain highly accommodative, with real interest rates still “significantly negative.”

In its statement, the BoJ reaffirmed a tightening bias. If the outlook laid out in the October 2025 Outlook Report is realized, the Bank said it will "continue to raise the policy interest rate". Policymakers also expressed increased confidence that the likelihood of realizing the outlook "has been rising".

At the post-meeting press conference, Governor Kazuo Ueda stressed future adjustments will depend on incoming data on economic, price, and financial conditions, with policy decisions reassessed at every meeting rather than following a preset path.

On the neutral rate, Ueda acknowledged substantial uncertainty. He described the estimate as sitting within a wide range and said they would assess how the economy and prices respond to each rate move. "We will seek to produce new estimates on Japan's neutral rate, if needed, though I don't think that will help us narrow the range that much," he added.

NZ trade deficit narrows to ND -163m on 9.2% yoy exports surge

New Zealand’s trade balance surprised to the upside in November, with the deficit narrowing sharply to NZD -163m, far smaller than expectations for a shortfall of around NZD -1.2B. The improvement was driven by a solid pickup in exports, which rose 9.2% yoy, or NZD 588m, to NZD 7.0B.

Export performance was mixed by destination. Shipments to Australia surged by 31% yoy, while exports to the EU also rose strongly by 51% yoy. By contrast, exports to China slipped modestly by -0.7%yoy, while shipments to the US fell sharply by -17% yoy, and Japan by -1.9% yoy.

Imports rose at a more moderate pace of 4.4% yoy to NZD 7.2B. Gains were led by stronger inflows from the US (36% yoy), EU (17% yoy) and South Korea (20% yoy). Imports from China rose a modest 1.7% yoy. Imports from Australia declined (-7.7% yoy).

NZ ANZ business confidence hits 30-year high as cyclical recovery gathers pace

New Zealand business confidence surged in December, with the ANZ headline index jumping from 67.1 to 73.6. Firms’ own activity outlook rose sharply from 53.1 to 60.9. Both readings are the strongest in 30 years, pointing to a broad-based improvement in sentiment as the economic cycle turns.

Inflation indicators ticked up modestly but remain contained. The share of firms expecting to raise prices in the next three months rose one point to 52%, while those anticipating cost increases climbed two points to 76%. Inflation expectations, however, were unchanged at 2.69%, suggesting confidence is improving without triggering a renewed inflation scare.

ANZ said “things are clearly looking up,” noting that the earlier slowdown was deliberately engineered by tight monetary policy. With that restraint easing, interest rates and the exchange rate both well below their peaks, and the RBNZ signaling no intention to hike rates any time soon, cyclical forces appear firmly supportive of recovery.

USD/JPY Daily Outlook

Daily Pivots: (S1) 155.23; (P) 155.61; (R1) 155.93; More...

Immediate focus in USD/JPY is now on 156.94 resistance with today's strong rise. Firm break there will argue that larger rally from 139.87 is resuming through 157.88 to 158.85 key structural resistance. Decisive break there will be a strong medium term bullish signal. Risk will now stay on the upside as long as 154.38 support holds, in case of retreat.

In the bigger picture, corrective pattern from 161.94 (2024 high) could have completed with three waves at 139.87. Larger up trend from 102.58 (2021 low) could be ready to resume through 161.94 high. Decisive break of 158.85 structural resistance will solidify this bullish case and target 161.94 for confirmation. On the downside, break of 150.90 resistance turned support will dampen this bullish view and extend the corrective range pattern with another falling leg.

I almost started believing in Christmas magic after seeing yesterday’s US CPI numbers. Headline inflation fell from 3.0% to 2.7% in November, while consensus had expected a rise toward 3.1%. Core CPI also dropped sharply, from 3.0% to 2.6%, versus expectations that it would remain sticky at 3.0%. A big surprise — perhaps a little too good to be true.

And indeed, behind the scenes, the picture was messier than the beautiful headline figures suggested. October pricing data were missing for several components, prompting EY-Parthenon to label this a “Swiss cheese” CPI report — full of holes.

Crucially, the missing components included one of the most important drivers of inflation: shelter costs, which make up roughly a third of the US CPI basket. Unsurprisingly, if you strip shelter inflation out, life suddenly looks a lot cheaper.

Another key detail: missing data were treated as showing no price growth: an unbelievable statistical malpractice.

Put together with Thursday’s jobs report — which pointed to a softening but not collapsing labour market — the CPI release failed to deliver clear guidance on the inflation outlook. Bottom line: we are no closer to knowing what the Federal Reserve (Fed) should do next than we were before the data.

Some argue that shelter inflation is genuinely trending lower and should exert disinflationary pressure in the months ahead — but likely not as quickly as markets would like. Energy costs will also matter. While US gasoline prices rose only modestly year-on-year, fuel oil prices jumped 11.3%, electricity costs rose close to 7%, and natural gas prices climbed more than 9%. Energy inflation was a major driver of post-pandemic price pressures, so it is far too early to declare victory.

Beyond this imperfect CPI print, I am slowly warming to the idea that US inflation could fall without ever clearly showing the much-anticipated tariff impact in the data. It echoes the US recession that never materialised despite a 26-month inversion of the 2-10-year yield curve. Twenty-six months of inversion — and nothing. This may be heading in a similar direction.

If tariff-led inflation never truly appears and the US labour market weakens, markets face two choices: either believe the data and push equities higher — or believe the Fed and push equities higher. The real question is whether there will be a bump along the way.

Markets, however, briefly celebrated. The US 2-year yield fell below 3.45% before rebounding, the 10-year flirted with 4.10% before retracing, and the probability of a March Fed rate cut rose from around 50% to near 60%.

Market reaction: US equities rallied post-CPI, but enthusiasm faded quickly. The S&P 500 gave back most of its gains, though it still closed about 0.8% higher. Small caps initially outperformed but later surrendered gains, while the dollar reversed early losses and is better bid this morning in Asia.

Ironically, the broader market backdrop is not necessarily bad. AI enthusiasm may be debatable, but Fed expectations are dovish, liquidity conditions are supportive and the case for rotation from tech into non-tech sectors remains strong.

So the Santa rally may be looking a little bruised as we head into Christmas week — but it’s not cancelled yet.

Elsewhere, Europe delivered more traditional central-bank fare. The European Central Bank (ECB) held rates steady at its final meeting of the year, raised its growth forecasts for 2026 and 2027, and reiterated that inflation will only return to target in 2028. In plain English: there is too much uncertainty to commit to a rate-cutting path, and cuts are likely paused for now. The euro weakened as the dollar gained broadly.

In the UK, the Bank of England (BoE) cut rates by 25bp as expected, but the vote split — 5-4 — was surprisingly close. Many had hoped easing inflation and a disinflationary budget would pull some hawks toward the dovish camp. Instead, several MPC members remained unconvinced that disinflation is straightforward. Sterling saw large swings on the combination of a relatively hawkish BoE and questionable US inflation cooling, before coming under renewed pressure as the dollar strengthened.

Elsewhere, the Riksbank and Norges Bank left policy unchanged, while the Bank of Japan raised rates by 25bp to 0.75% — the highest level since 1995. Policymakers stressed that real rates remain “significantly negative” and financial conditions broadly accommodative, implying further hikes ahead. The 10-year JGB yield jumped to 2.6%, not great news for global risk appetite given the risk of Japanese investors repatriating capital from US Treasuries. Yet the USDJPY still rose, as dollar strength outweighed higher Japanese yields.

One final reminder: Fed dovishness alone can offset tighter stances elsewhere. Even as Fed doves scratch their heads, the US central bank remains more dovish than most of its peers, many of whom appear inclined to pause rate cuts next year.

In focus today

Following the large batch of Central Bank meetings yesterday, attention turns to taking the temperature of consumer well-being through data releases on consumer confidence and retail sales. Both figures are released in the morning for Denmark, Sweden and Germany, while consumer confidence figures are out later in the day for the euro area and the US.

In Sweden, the Economic Tendency Survey (ETS) is released. The main indicator for economic sentiment increased for a fifth consecutive month in November to a level above 100. We expect another print above the 100-level, re-affirming the positive sentiment. Our optimistic growth outlook for 2026 is contingent on a continued improvement in consumer sentiment.

In Norway, we expect the seasonally adjusted unemployment rate to remain unchanged at 2.2% in December, but with the number of unemployed persons rising marginally. Keep an eye on new vacancies as well, as demand for labour still looks strong.

The Finnish State Treasury will publish their funding outlook for 2026. We expect that they will issue some EUR 21-22bn in RFGBs and EUR 2-3bn in their EMTN program. Hence, a total of EUR 23-24bn in long-term debt. However, given yesterday's upward revision of the budget deficit due to additional defence expenditure that was supposed to be due in 2025 and has been pushed to 2026, then there is upward risk to our forecast.

It is crunch time for the French 2026 budget. The parliament is set to vote on the aggregate finance bill (PLF) and it appears difficult to make a sufficient compromise that could be approved. However, many parties would rather move on from the troubling finance bill instead of 'kicking the can' to the beginning of 2026. France's revised fiscal plans for 2026 now anticipate a budget deficit of 5.3% of GDP, notably higher than the initially proposed 4.7% of GDP deficit. Without a budget agreement this week, France will not face a US style government shutdown and can extend the 2025 budget into 2026, while negotiations continue in January like we saw last year. Regardless of the outcome, we expect a limited market reaction except for the case where a new parliamentary election is called, which at the current momentum seems unlikely.

The Danske Morning Mail will be on break until 2 January 2026. We wish you a merry Christmas and a happy New Year.

Economic and market news

What happened overnight

In the Ukraine war, the EU has agreed to lend Ukraine EUR 90bn. The funds will be raised through a loan in capital markets, secured against the EUs shared budget. Ukraine will only have to pay back the loan after Russia has paid reparations. The proposal to use frozen Russian assets did not immediately succeed, but it was suggested that they could be used to repay the loan if no reparations to Ukraine are paid. Hence, there may an increase in the funding for EU, which just recently published their funding outlook for 2026, where the increase their maximum of borrowing from EUR 200bn from EUR 170bn in 2025.

In Japan, the Bank of Japan (BoJ) hiked its policy rate by 0.25bp to 0.75%, the highest level since 1995. In its statement, the BoJ recognises the diminishing risk from US trade policies and highlights its confidence that wages will continue to increase and add further to price pressures. The central bank also states that it still views the policy stance as significantly accommodative and it will continue to raise rates if the October outlook is confirmed. The market reaction has been muted so far. We will listen in later this morning, when Governor Ueda elaborates. The November CPI increased by 2.9% y/y, slightly down from 3.0% in October but within expectations. The core measure (excl. fresh food) stayed at 3.0% y/y.

What happened yesterday

In the euro area, the ECB also kept its policy rates unchanged, leaving the deposit facility rate at 2.0% as expected. The staff projections were revised up for GDP growth across the board and inflation in 2026. The revisions were a larger than expected surprise, however at the press conference, ECB President Lagarde calmed speculations about future interest rate hikes though her "meeting by meeting" approach. We maintain our call that the ECB will leave the deposit rate unchanged at 2.00% throughout both 2026 and 2027. For more details, see our ECB Review - In an even better place, 18 December.

The German Debt Office (Finanzagentur) published their funding outlook for 2026. They plan to issue a record amount of bonds and bills - EUR 512bn (including Green bonds). This is funded through EUR 318bn in German government bonds sold at auctions, EUR 16-19bn in Green bonds, which include a new 15Y Green bond (issued through syndication) and finally, Bubills of EUR 176bn.

In the US, the delayed November CPI release surprised to the downside by quite a margin. Headline inflation slowed to 2.7% y/y (cons: 3.1%) from 3.0% in Sep. and core inflation to 2.6% y/y (cons: 3.0%) also from 3.0% in Sep. The market reaction ended up being relatively muted, which could be caused by changes in shelter prices, the government shutdown and Black Friday. If this was the case, inflation should rebound in December. For the details of our assessment, see our latest overview of global inflation developments, the Global Inflation Watch - Diverging inflation trends, 18 December.

In Sweden, the Riksbank stayed on hold as expected, keeping the policy rate at 1.75%. The policy rate path was revised marginally and by less than we had expected. In the press conference, Riksbank Governor Thedéen said he expected the Riksbank to be forward looking next year, smoothing over spot deviations caused by e.g. the upcoming VAT reduction.

In Norway, Norges Bank left the deposit rate unchanged at 4.00% as widely expected. The central bank signalled that it would keep the door open for interest rate cuts if the economy evolves broadly as projected in the year ahead. The rate path in the new monetary policy report was adjusted downwards but less than we had expected and indicates no probability for a rate cut in March and roughly 1-2 cuts in 2026 as whole.

In the UK, the Bank of England cut the Bank Rate to 3.75% from 4.00% as expected. The Monetary Policy Committee vote split was also in line with expectations, as 5 members voted for reducing the Bank Rate to 3.75% and 4 members voted to maintain the Bank Rate at 4.00%. Judging the guidance, we think the Bank Rate is likely to continue on a gradual downward path. But further policy easing will become a closer call. Bank of England review - Split committee cuts Bank Rate, 18 December.

Equities: Global equities had a strong session yesterday, rising 0.7%, with cyclical sectors clearly outperforming defensives. Consumer discretionary and communication services topped the performance table, while defensive sectors underperformed. In the US, the S&P 500 closed 0.8% higher, the Nasdaq gained 1.4%, Russell 2000 advanced 0.6%, and the Stoxx 600 rose 1.0%. Overnight, Asian equity markets are trading in the green across the board, supporting a constructive risk tone to end the week.

FI and FX: It was a fairly volatile day in the European fixed income market given a somewhat hawkish ECB as well as a record amount of issuance from Germany in 2026. However, lower than expected US inflation data send bond yields lower and we ended the day a few bp lower in 10Y Germany and 3bp lower in 10Y Treasuries. Furthermore, the BTPS-Bund spread tightened and there was a general spread compression between core-EU and the semi-core/periphery. This is the last edition of the FI and FX Daily brief. We will return on 5 January 2026.

The BoJ raised its policy rate by 25bps to 0.75%, as widely expected, marking another step in its gradual normalization process. Despite the hike, the BoJ emphasized that financial conditions remain highly accommodative, with real interest rates still “significantly negative.”

In its statement, the BoJ reaffirmed a tightening bias. If the outlook laid out in the October 2025 Outlook Report is realized, the Bank said it will "continue to raise the policy interest rate". Policymakers also expressed increased confidence that the likelihood of realizing the outlook "has been rising".

At the post-meeting press conference, Governor Kazuo Ueda stressed future adjustments will depend on incoming data on economic, price, and financial conditions, with policy decisions reassessed at every meeting rather than following a preset path.

On the neutral rate, Ueda acknowledged substantial uncertainty. He described the estimate as sitting within a wide range and said they would assess how the economy and prices respond to each rate move. "We will seek to produce new estimates on Japan's neutral rate, if needed, though I don't think that will help us narrow the range that much," he added.

Full BoJ statement here.

New Zealand business confidence surged in December, with the ANZ headline index jumping from 67.1 to 73.6. Firms’ own activity outlook rose sharply from 53.1 to 60.9. Both readings are the strongest in 30 years, pointing to a broad-based improvement in sentiment as the economic cycle turns.

Inflation indicators ticked up modestly but remain contained. The share of firms expecting to raise prices in the next three months rose one point to 52%, while those anticipating cost increases climbed two points to 76%. Inflation expectations, however, were unchanged at 2.69%, suggesting confidence is improving without triggering a renewed inflation scare.

ANZ said “things are clearly looking up,” noting that the earlier slowdown was deliberately engineered by tight monetary policy. With that restraint easing, interest rates and the exchange rate both well below their peaks, and the RBNZ signaling no intention to hike rates any time soon, cyclical forces appear firmly supportive of recovery.

Full NZ ANZ business confidence release here.

New Zealand’s trade balance surprised to the upside in November, with the deficit narrowing sharply to NZD -163m, far smaller than expectations for a shortfall of around NZD -1.2B. The improvement was driven by a solid pickup in exports, which rose 9.2% yoy, or NZD 588m, to NZD 7.0B.

Export performance was mixed by destination. Shipments to Australia surged by 31% yoy, while exports to the EU also rose strongly by 51% yoy. By contrast, exports to China slipped modestly by -0.7%yoy, while shipments to the US fell sharply by -17% yoy, and Japan by -1.9% yoy.

Imports rose at a more moderate pace of 4.4% yoy to NZD 7.2B. Gains were led by stronger inflows from the US (36% yoy), EU (17% yoy) and South Korea (20% yoy). Imports from China rose a modest 1.7% yoy. Imports from Australia declined (-7.7% yoy).

Full NZ trade balance release here.

Key insights from the week that was.

Australia’s key release for the week was the Westpac-MI Consumer Sentiment Index which, after November’s ‘net positive’ read, fell 9% to 94.5 in December – a ‘cautiously pessimistic’ level. Responses to questions on news recall suggest consumers were shaken by recent inflation results, the tone of related coverage now viewed as decisively negative versus somewhat mixed three months ago. This has sparked one of the sharpest turnarounds in consumers’ mortgage rate expectations on record, 86% of those with a view now anticipate mortgage rates to be the same or higher in a year’s time.

This has fed into renewed concerns over the economy, the one-year and five-year ahead sub-indexes falling 9.7% and 11.7% respectively. Buyer sentiment also looks to have been crimped, the ‘time to buy a major household item’ sub-index shedding 11.4% to be well below average. Official data is pointing to a genuine consumer upswing, driven by a recovery in real household disposable incomes; however, higher inflation, interest rates and bracket creep threaten the outturn. As a result, the year-ahead outlook for family finances fell 6.1% to be modestly below average.

The RBA has also taken signal from the recent lift in inflation, with only some of the pressures deemed temporary. As detailed by Chief Economist Luci Ellis earlier this week, Westpac continues to believe inflation will moderate through 2026, but the Monetary Policy Board’s more hawkish assessment has pushed back the timing of further policy easing into 2027. There are risks to both sides of our view for policy to remain on hold in 2026 and two cuts in H1 2027. If inflation continues surprising meaningfully to the upside in the near term, a rate hike could become a possibility. But, if the labour market weakens more than expected, the cuts now forecast for 2027 may need to be brought forward.

Fiscal policy developments are also worth monitoring vis a vis inflation and growth. The Federal Government’s MYEFO revealed an $8.7bn improvement in the budget’s bottom line over the forward estimates due to a tax windfall associated with higher commodity prices and a firmer-than-expected economic upswing. If the government elects to save the bulk of the windfall, it would ease near-term inflationary pressures – at the margin.

Before moving offshore, a final note on the local manufacturing sector. The latest Westpac-ACCI Survey of Industrial Trends revealed that the long-awaited improvement in conditions is finally starting to materialise, the Actual Composite bouncing from a broadly neutral read to a solid 55.1 in Q4. The Expected Composite meanwhile continued to lift to fresh cycle highs. Some of the hallmark challenges facing the sector, such as elevated costs, skilled labour shortages and material constraints, has restricted the ability for some manufacturers to respond to firmer demand. Solid investment intentions and plans for hiring, if realised, should go some way to alleviating capacity constraints.

Over in the UK, the Bank of England cut rates by 25bps to 3.75% in a narrow 5-4 vote. Those voting for a cut emphasised the downside risks to growth; those for a pause that inflation, which came in at 3.2%yr earlier in the week, could show greater persistence. On the outlook, Governor Bailey noted that “judgements around further policy easing will become a closer call” suggesting that the BoE is nearing the end of its easing cycle. With GDP growth expected to be only slightly above 1% in 2026 and inflation trending down, we maintain a view of further gradual BoE easing in H1 2026, by 25bp per quarter. However, the committee may proceed more cautiously, delaying cuts to the second half of next year.

Across the English Channel, the European Central Bank kept rates steady at 2.0% with President Lagarde noting once again that "policy is in a good place". Inflation was revised up for 2026 due to a slower descent in services inflation (core inflation now 2.2%yr), but it is still expected to stabilise at target in 2027/2028 (1.9% and 2.0%). The economic growth projections have also been revised up to 1.4% in 2025, 1.2% in 2026 and 1.4% in 2027, where growth is expected to remain in 2028. The statement made clear the "Governing Council is not pre-committing to a particular rate path", highlighting that policy will be fine-tuned depending on how the risks evolve.

In the US, November's inflation read surprised to the downside, the core measure rising 2.6%yr while headline prices rose 2.7%yr, both down from 3.0%yr in September. However, with the government shutdown precluding an October report and essentially no month-to-month detail provided for November, the FOMC is unlikely to take signal from this inflation read. Earlier in the week, non-farm payrolls rose 64k in November after a 105k decline in October, both released at the same time. Average job gains over the last 3 months are circa 20k, towards the bottom of the range estimated to be consistent with balance between labour demand and supply. It is unsurprising then that the unemployment rate edged up 0.2ppts between September and November to 4.6%.

In Asia meanwhile, Chinese partial data came in softer than expected in November. Retail trade was up just 4%ytd, weighed down by persistent weakness in consumer prices, but more significantly weak sentiment and declining wealth. Equities are now trending higher, but house prices continue to decline. Industrial production grew 6%ytd, however, highlighting that the capacity investment of recent years is earning a return. Fixed asset investment fell 2.6%ytd though, as high-tech manufacturing retraced some of its rapid gains of prior years, and property construction continued to contract. Clearly, pro-active stimulus in scale is necessary to put a floor under activity and, in time, see sentiment move back up.

Further east, the Q4 Tankan survey showed conditions improved by two points to 17pts, supporting views for a rate hike later today by the Bank of Japan. The output prices measure remained broadly steady, with one-year, three-year and five-year ahead projections all consistent with at-target inflation. Investment plans remain high, albeit with a slight downgrade from last quarter's expectations. Software investment is anticipated to increase 12.2%, while R&D investment is expected to rise 4.6%. All this is consistent with reports of firms investing to reduce their demand for labour and in pursuit of productivity. Employment conditions remained consistent with a tight labour market; firms expect to hire more new graduates in the following financial year. Overall, the survey points to a tight labour and historically elevated inflation expectations, which should aid workers case for higher wages in FY26 (ending in March 2027).

Key Highlights

• USD/JPY is struggling to continue higher above 156.00.
• A key bearish trend line is forming with resistance at 156.35 on the 4-hour chart.
• Bitcoin remained in a range above the $85,000 support.
• Gold could continue to rise if it settles above $4,365.

USD/JPY Technical Analysis

The US Dollar formed a base near 154.35 and corrected some losses against the Japanese Yen. USD/JPY climbed above 155.00 before the bears appeared.

Looking at the 4-hour chart, the pair surpassed the 200 simple moving average (green, 4-hour) and tested the 100 simple moving average (red, 4-hour) and. The bears remained active near the 61.8% Fib retracement level of the downward move from the 156.95 swing high to the 154.39 low.

Immediate resistance sits near 156.00. The first key hurdle is seen near 156.30. There is also a key bearish trend line forming with resistance at 156.35.

A close above 156.35 could open the doors for a move toward 157.00. Any more gains could set the pace for a steady increase toward 158.00.

On the downside, there is key support at 155.00. The first major support is 154.50. The next support could be 154.30, below which the bears might aim for a move toward 153.50.

Looking at Gold, the bulls remain in action and might soon aim for a move above the $4,380 level in the near term.

Upcoming Key Economic Events:

• US Existing Home Sales for Nov 2025 (MoM) - Forecast +0.1%, versus +1.1% previous.
• Michigan Consumer Sentiment Index for Oct 2025 (Prelim) – Forecast 54.2, versus 55.1 previous.