Dow Jones & Nasdaq 100 Mixed as JGB Yield Surge Sets Cautious Tone

US stock futures had a mixed Asian trading session on Thursday, December 4, as 10-year Japanese Government Bond yields rose to their highest levels since 2007. Yields have soared in response to expectations of a December Bank of Japan rate hike clashing with the Japanese government’s $135 billion stimulus package.

However, USD/JPY rose 0.12% to 155.393 in morning trading, easing market fears of a yen carry trade unwind, sending the Nikkei 225 up 1.42%. Analysts view USD/JPY and Nikkei 225 trends as key indicators of yen carry trade flows.

Market caution ahead of key US inflation figures due out on Friday, December 5, likely left US equity futures mixed.

In my view, the easing risk of a yen carry trade unwind, easing services sector inflation, and rising bets on multiple Fed rate cuts support a bullish short- to-medium-term outlook for US stock futures. The ISM Services Price Index fell from 70.0 in October to 65.4 in November.

Below, I’ll outline the key market drivers, the medium-term outlook, and the key technical levels traders should watch.

Bank of Japan Governor Udea Talks Policy Normalization

Speculation about the Bank of Japan rate path intensified on Thursday, December 4, as BoJ Governor Kazuo Ueda discussed monetary policy for the second time this week. After signaling a December rate hike, the BoJ Governor fueled uncertainty about the number of rate hikes needed to reach policy normalization. He reportedly stated:

“Unfortunately, the neutral rate of interest is a concept for which we can only produce an estimate with quite a wide range. We have continued to make efforts to narrow the estimated range. If we can successfully do so, we would like to disclose our findings. […] As such, there is uncertainty on how far we should raise interest rates.”

The BoJ previously hinted at a 1% neutral rate, where monetary policy is neither accommodative nor restrictive. However, with the BoJ potentially raising interest rates to 0.75% this month, just one more rate hike would yield a neutral rate.

The BoJ’s neutral rate could be crucial for market stability. A higher-than-expected neutral rate would push JGB yields higher, narrowing the US-Japan rate differential. A sharper narrowing in rate differentials would likely trigger a yen carry trade unwind, leading to the sell-off of foreign assets and the buying back of the yen. Crucially, the yen carry trade is a major source of market liquidity.

In July 2024, the BoJ cut JGB purchases and raised interest rates, triggering a yen carry trade unwind. The Nasdaq 100 E-mini futures slid from 19,717 to 17,351 in just three sessions before steadying.

US Labor Market in Focus

Futures were mixed during the Asian morning session. The Dow Jones E-mini gained 50 points, while the Nasdaq 100 E-mini and the S&P 500 E-mini dropped 24 points and 1 point, respectively. Rising bets on multiple Fed rate cuts cushioned the downside for the Nasdaq 100 E-mini and the S&P 500 E-mini.

According to the CME FedWatch Tool, the chances of a December Fed rate cut increased from 88.0% on December 2 to 89.0% on December 3. Furthermore, the probability of a March rate cut rose from 45.6% to 52.9%.

Later on Thursday, US jobs data will influence risk sentiment. Economists forecast initial jobless claims to rise from 216k week ending November 22 to 220k week ending November 29. A higher jobless claims reading will likely boost March Fed rate cut bets. A more dovish Fed rate path and easing fears of a US recession support a bullish short- to medium-term outlook for US stock futures.

Key Technical Levels for Dow Jones, Nasdaq 100, and S&P 500

Despite the mixed morning, the Dow Jones E-mini, the Nasdaq 100 E-mini, and the S&P 500 E-mini remained above their 50-day and 200-day EMAs, indicating a bullish bias.

Near-term trends will hinge on JGB yield trends, USD/JPY movements, and US data. Key levels to monitor include:

Dow Jones

• Resistance: the November 12 record high of 48,528.
• Support: 47,500, the 50-day EMA (46,898), 46,000, and then the November 21 low of 45,779.

Nasdaq 100

• Resistance: 25,750, 26,000, and then the October 30 record high of 26,399.
• Support: 25,500, the 50-day EMA (25,047), 24,500, and then 24,000.

S&P 500

• Resistance: the October 30 record high of 6,954, and then 7,000.
• Support: the 50-day EMA (6,738), 6,500, and then 6,250.

Near-Term and Medium-Term Outlook Hinge on Key Data

In my view, the short-term outlook remains bullish, despite the mixed morning. However, US inflation figures due out on Friday will be key. Softer inflation aligned with the drop in services sector price inflation would likely lift sentiment and support a Santa Rally.

However, several downside risks linger, challenging the bullish short- and medium-term outlooks, including:

• Bank of Japan signals a higher-than-expected neutral rate.
• Strong US jobs data.
• Hotter US inflation.
• Fed downplays a Q1 2026 rate cut.

Conclusion: Short-Term Outlook Cautiously Bullish

In summary, rising bets on a Fed rate cut are likely to boost demand for US stock futures. However, traders should watch JGB yields, USD/JPY trends, and the Nikkei 225 for early signs of a yen carry trade unwind.

Lingering risks of an unwind coincide with rising bets on Fed rate cuts, signaling a potential pickup in market volatility ahead of the Fed and BoJ interest rate decisions. A dovish Fed rate cut and a dovish BoJ rate hike would set the stage for a breakout December.

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