Could Rising Japanese Yields Rattle Markets Once Again?

KCM Trade | Market Commentary | Tim Waterer

Trading in the final month of 2025 is now underway. While December has historically been a strong month for stocks, we could still see the kind of sharp sentiment swings that were common in November. This is largely due to two major central bank meetings that have the potential to move global markets. The Federal Reserve is scheduled to meet on December 9–10, with a rate cut widely expected, while the Bank of Japan could take a different path when it meets later in the month on December 18–19, potentially adjusting Japanese interest rates in the opposite direction.

With Japanese inflation already above the target level of 2% for 44 months in a row, it would appear that the conditions are now right for the Bank of Japan to hike rates-a prospect to which Governor Ueda hinted in remarks at the beginning of the week. The market is already reacting to the possibility: yields on Japanese Government Bonds are rising as investors bet on a smaller U.S.-Japanese yield differential. The yield on 10-year JGBs has jumped to 1.88%, its highest since June 2008, reflecting this changing expectation.

BOJ rate hikes have a history of alarming global markets. The most recent example was late July and early August 2024, as tighter BOJ policy sparked a global rout that saw the Nikkei tumble 12% in a single session on August 5. A rate hike this month wouldn't necessarily prompt a similar sell-off, and the BOJ may ultimately decide to leave rates on hold. However, if JGB yields continue to rise, this could lead to broader market risks by pushing traders to carry trades and dragging on overall risk sentiment. In short, diverging policy paths between the Fed and the BOJ have disrupted markets before, and history can repeat if a BOJ rate hike follows a Fed rate cut.

In commodities, gold had a run higher to start the week but failed to overcome resistance in the $4270-$4280 region. And with prices at levels not seen since October, profit taking then kicked in ahead of key US jobs and inflation data still to come this week. The bullish outlook remains intact for gold, but it is largely predicated on the arrival of lower US interest rates. As such, ADP jobs data and the Core PCE Price Index will influence gold's near-term direction. If the labour environment remains soft and inflation stays benign, this would allow the Fed to keep on its current dovish policy course. This scenario aligns well with any upside ambitions in the gold price. Moderate support waits at $4066, ahead of sturdier support at $3990. Resistance between $4270-$4280 would first need to be overcome for gold to reclaim the $4300 level.

With the US-Russia peace talks on the table over Ukraine, a decisive break higher or lower remains elusive. In fact, traders don't know whether Russian oil will return to the global market with the peace talks still ongoing, without a clear outcome yet. This makes the oil break to the top difficult until we get a clear understanding of how the peace talks progress. Whilst OPEC+'s decision to hold oil supply at current levels through Q1 2026 is providing some support to prices. US crude trades around $58.50, ahead of support at $57.90 and below resistance at $59.30.

With the Fed members now in their media ‘blackout’ span ahead of the December meetup, it is the economic data that will do the talking in regard to the likelihood of a rate cut. On the labour market front, this week we will get ADP private payroll figures, Challenger job cuts, and jobless claim figures, while the Core PCE Price Index (due Friday) will be the focal point for gauging inflation. Markets currently expect the Fed to deliver a rate cut this month, but any upside surprise in either employment or inflation data could still derail those expectations.

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