This week, U.S. employment and inflation data are relatively mild, the Bank of Japan's interest rate hike has not triggered systemic panic, and global risk assets show no significant trend in a volatile pattern. U.S. inflation has eased, and employment has weakened marginally, but this is unlikely to trigger aggressive easing. Japan's interest rate hike is advancing policy normalization, but real interest rates remain negative. The market's trading logic has shifted from 'extreme scenarios' to 'policy paths and time windows', with pricing restructured around three main lines.
Key data and policy landing: why is the market 'standing still'?
Employment data 'fuzzy signals': growth slows but does not hard land
In the latest week, the number of initial jobless claims in the US decreased, while the number of continuing claims saw a slight increase. The overall employment market remains in a slowing path: new job additions have significantly cooled compared to previous peaks, new momentum in services and cyclical sectors has weakened, and the unemployment rate is hovering near high levels. This series of data paints a clear picture: economic growth is slowing, but it has not fallen into the trap of a hard landing.
For the market, this set of data neither reinforces concerns about 'a second rise in inflation' nor is sufficient to convince investors that 'the economy has entered a recession and forced the Federal Reserve to quickly cut rates'. Therefore, both the stock and bond markets lack clear directional guidance, with US stocks oscillating around a range while the interest rate side maintains a narrow, watchful state.
Inflation below expectations: alleviating fears of aggressive rate hikes, but not solving the fundamental issue
The latest US CPI (Consumer Price Index, reflecting price changes of goods and services related to residents' daily lives, is a core indicator for observing inflation levels) significantly fell below market expectations, with core inflation (excluding the more volatile food and energy prices, better reflecting long-term inflation trends) and overall inflation continuing to retreat from high levels, with price increases for services, rents, and some goods narrowing, indicating some easing of inflation stickiness.
This result reinforces the judgment that 'inflation has peaked and is nearing the target range', reducing market concerns about maintaining extremely high policy rates after 2026. However, current inflation levels remain significantly above the 2% policy target, and medium- to long-term inflation expectations are slightly above the target range, indicating that the data only 'confirms the downward trend', rather than 'proclaiming that the inflation problem is completely resolved'. Therefore, market expectations for the number of interest rate cuts in the coming year have only been moderately adjusted downward, without betting on aggressive cuts, and actual interest rates and yield curve changes are limited.
The implementation of Japan's interest rate hike: small short-term ripples, long-term rewriting of funding patterns
This week, the Bank of Japan raised its policy rate by 25 basis points to approximately 0.75%, a new 30-year high, officially ending the long-standing 'zero interest rate + ultra-loose' era, sending a signal of policy normalization to the market through a unanimous decision. The authorities acknowledged the slowing economic growth, pressure on real wages, while emphasizing the positive interaction between prices and wages is consolidating, and inflation is expected to stabilize above 2%.
From the market response, Japanese government bond yields had already risen ahead of the interest rate hike, while Japanese stocks and regional markets only saw slight fluctuations on the decision day. The yen reacted mildly against major currencies, indicating that this rate hike had 'minuscule expectation differentials', with most impacts having been digested by the market beforehand. The true core significance lies in Japan's transition from 'the last bastion of negative interest rates globally' to a 'structural turning point towards moderate positive interest rates', which will long-term alter cross-border capital flows and carry trading (the transaction model of borrowing low-interest currency to invest in high-interest assets for profit) ecology, rather than just causing short-term bearish shocks.
Market phenomena: US stocks oscillating, cryptocurrencies 'decoupling', bond and currency markets focusing on 'time dimensions'
US stocks: No-trend oscillation under the game of data and expectations
This week, the main US stock indices showed a sideways oscillation pattern: short-term pulse fluctuations occurred around the release of employment and inflation data, but then quickly reverted to the range. Daily fluctuations intensified but lacked a trend-driven single-direction market, and trading volume decreased compared to previous data-intensive periods, while the volatility index saw a slight rise from low levels.
From a professional perspective, this is the market recalibrating future profit expectations and discount rate paths in an environment where 'growth continues, inflation recedes, and policies are not urgent'. Investors are reluctant to make significant adjustments based on extreme scenarios of 'hard landing' or 'secondary inflation', opting instead to gradually complete sector rotation and style switching through a volatile market—shifting from a reliance on liquidity-driven movements to focusing more on the quality of corporate profits and the predictability of cash flows.
Cryptocurrency: Risk appetite recovery, but decoupled from macroeconomic phases
Cryptocurrency continues to exhibit high volatility characteristics: mainstream coins still react sensitively to US inflation and interest rate changes in the short term, but price centers are more driven by liquidity and industry internal events, often showing significant overbought and oversold situations within a single week, contrasting sharply with the 'mild oscillation' of US stocks. Some sector-specific coins frequently fluctuate at high levels without obvious fundamental support, following market sentiment.
From a pricing logic perspective, although cryptocurrencies are still constrained by 'real interest rate levels' and 'US dollar liquidity environments', the lack of stable cash flows and traditional valuation anchors makes their prices more sensitive to investors' expectations of short-term liquidity tightening. Simply put, traditional assets trade on 'economic trends and corporate profits', while cryptocurrencies are more about trading 'investors' risk tolerance and market sentiment', leading to a misalignment in the pace of movement between the two this week.
Foreign exchange market: Not entangled in 'direction', but more focused on 'time paths'
In the foreign exchange market, the core of the yen's volatility against the dollar is the game between 'Japan's policy rate increase' and 'US long-term rate adjustments': Japan's interest rate hike has narrowed some short-end spreads, but since Japan's real rates remain negative and US rates are still high, the classic yen carry trade has not fully reversed, only shifting from 'extreme one-way trading' to a structure that emphasizes timing and risk management more. Overall, the pricing core in the forex market is no longer 'where central banks will ultimately set interest rates', but 'how long it will take to reach that level and what kind of volatility it will experience'.
Key insights: Three main lines reconstructing market pricing logic
This week, the market showed oscillation rather than a trend? This is the real trading core of the current market.
Interest rate pricing shift: from 'final landing point' to 'process uncertainty'
Traditional macro trading often revolves around 'terminal rates' (the ultimate target level of central bank policy rates), such as the market's focus on where the Federal Reserve's federal funds rate will ultimately settle and whether the Bank of Japan has completed its rate hike cycle. However, in the current environment, US inflation is falling but still above target, employment is slowing but not in recession, and Japan is transitioning from extreme easing to moderate positive rates, making the core of market trading 'policy path uncertainty'—i.e., how long the central bank will take and at what pace to adjust policies.
From a valuation logic perspective, long-term rates can be decomposed into 'expected short-term rate average + inflation expectations + term premium (the extra yield compensation required by investors for holding long-term bonds)'. Recent data, while reducing the small probability risk of 'significant further interest rate hikes', has increased the likelihood of 'high rates being maintained for longer', prompting a repricing of term premiums and path premiums (compensation for uncertainty in policy adjustment timing). For the stock market, this means investors need to rebalance between profit growth and high discount rates; for the bond and currency markets, it means reassessing the relative value of assets across different maturities rather than simply hedging interest rate direction.
Liquidity reconstruction: No 'draining' observed, but funds have started to 'change seats'
Superficially, the US still maintains high interest rates and continues to shrink its balance sheet (i.e., the central bank sells assets to recover funds, tightening market liquidity), while Japan's rates, despite their increase, remain relatively low. Global liquidity has not experienced a severe tightening, and the financial system shows no systemic signs of 'draining'—short-term money market rates are stable, and credit spreads (the interest rate difference between corporate bonds and government bonds, reflecting credit risk) have not shown widespread panic widening.
However, from a funding behavior perspective, the re-evaluation of liquidity expectations and 'future funding costs' has driven structural migration: first, some traditional carry trades have begun to slightly adjust leverage and investment horizons; second, some institutions have shifted from high-volatility, high-beta assets to 'high profit visibility + reasonable valuation' assets to adapt to a long-term neutrally tight monetary environment. This migration has not triggered a 'liquidity collapse', but has led to a reallocation of valuation premiums among different sectors and assets, resulting in oscillations at the index level while showing clear internal structural divergence.
Risk appetite recovery: solely relying on sentiment, lacking cash flow support
The marginal improvement in employment and inflation data, along with the 'shoe dropping' of the Bank of Japan's interest rate hike, alleviated market concerns about extreme scenarios such as 'out-of-control inflation' and 'significant policy misalignment', driving a temporary recovery in risk appetite—high-beta assets and growth sectors strengthened briefly after the data release, and the volatility index retreated from high levels.
However, from the corporate fundamentals perspective, corporate profit expectations have not been fully adjusted upward, the economic growth outlook is moderately biased, and the credit environment has not significantly loosened. In other words, the evidence supporting the current valuations of 'cash flow improvements' is insufficient; this risk appetite recovery is more about a warming of 'sentiment and risk tolerance'. Thus, the market presents a state of 'risk appetite recovery but valuation expansion difficult overall', which is also the core reason for the oscillation in US stocks and the rapid switching between highs and pullbacks in cryptocurrencies.
Conclusion and outlook: Oscillation is not 'directionless', but a reconstruction of pricing logic
Oscillation is 'price discovery reboot', not a lack of trend
This week's macro data and policy events did not provide a clear directional answer: the US economy is neither overheating nor rapidly declining, inflation is trending down but has not reached the target, and while the interest rate hike in Japan marks a policy turning point, it has not disrupted global capital structures. In this context, the market is rediscovering prices through oscillations—different assets digest new information through volatility, with investors lowering the weight of extreme scenario expectations while adjusting positions between different assets. This is not the market 'not seeing the direction', but a more moderate, high-frequency way of completing pricing adjustments to avoid systemic risks caused by one-off severe repricings.
Core trading logic: focusing on 'path' and 'risk budget'
For medium- to long-term investors, there is no need to overly focus on single non-farm data or monthly CPI for the next year. The core variables to track are three related to 'policy paths': first, whether employment data continues to moderately slow without 'plummeting'; second, whether inflation stabilizes and retreats within the 2-3% range; third, whether the Bank of Japan and other major global central banks maintain a moderate pace and transparent communication during policy normalization. These variables will directly determine the smoothness of the policy path and the market's demand for 'path premiums', subsequently affecting equity risk premiums, credit spreads, and volatility indices. The market game for the next year will be a 'risk budgeting and position structure management' game, rather than a simple bet on 'bull or bear markets'.
The true significance of Japan's interest rate hike: the starting point of a long-term structural change
Japan's move from negative interest rates and yield curve control towards moderate positive interest rates indicates that the last piece of the 'aberrant puzzle' in the global interest rate system is returning to normal. In the long term, this will reshape global bond pricing, cross-border capital flows, and exchange rate structures, especially for investors and trading strategies reliant on yen funds, which is a core thread that must be reassessed.
However, in the short term, Japan's real interest rates remain negative, and monetary conditions remain relatively loose globally. This interest rate hike serves more to 'repair sentiment and expectations'—confirming the market's belief that the central bank has the capacity and willingness to gradually step away from extreme policies rather than tightening abruptly. The true determinants of global risk premiums will still be the medium- to long-term paths of US inflation and employment, as well as whether major global central banks can maintain a fragile balance between growth, inflation, and financial stability.
Three major risks to watch: policy, valuation, cross-asset mismatch
Policy reversals and communication risks
If US inflation unexpectedly rebounds or employment deteriorates sharply, it may force monetary authorities to suddenly change their current 'slow-paced adjustment' communication, triggering significant repricing of interest and exchange rates. Additionally, if Japan continues to raise rates while the economy is not yet stable, or is forced to adjust policy direction amid severe exchange rate fluctuations, it will amplify uncertainty in global markets.
Fundamentals and valuation mismatch risks
Current prices of some overvalued sectors reflect more of the expectations of 'interest rates peaking + risk appetite recovery' rather than systemic improvement in corporate profits. Once corporate profits fail to meet expectations, they will face valuation compression risks. Especially in cryptocurrencies and high-growth sectors, the disconnect between valuation systems and cash flows is more pronounced, posing relatively higher risks.
Cross-asset and regional mismatch risks
As Japan's policy normalization progresses and US interest rates hover at high levels, cross-market and cross-asset funding allocations are shifting from 'single-direction carry trading' to more complex portfolio strategies. In this process, any unexpected volatility in either the interest rate or exchange rate 'legs' could transmit through leverage and asset correlations, triggering non-linear risk diffusion across assets.
