Morning Bid: Yen bulls charge ahead after Tokyo inflation data

A look at the day ahead in European and global markets from Stella Qiu

It was supposed to be a quiet post-Thanksgiving session in Asia but hotter-than-expected CPI readings for Tokyo emboldened investors to chase after the yen, which is on track for its best week in four months.

The yen surged as much as 1.1% to its strongest in six weeks, breaking below the 150-per-dollar threshold as traders ramped up bets on a rate hike by the Bank of Japan next month. Swaps now imply a 60% chance for a quarter-point hike to 0.5%, which would be the highest rate since 2008.

With angst over deflation largely replaced by concerns over the depreciating yen, there is a window for the BOJ to take another step towards normalising rates. Although the central bank triggered a mini market meltdown the last time it raised rates, investors are better prepared this time around.

Nasdaq futures gained 0.5% in Asia, while 10-year Treasury yields hit a one-year low of 4.238% as the cash market reopened in Tokyo.

Chinese stocks outperformed in Asia, with blue chips jumping 2% ahead of the release of official surveys on the manufacturing and services sectors on Saturday. The expectation is that the vast factory sector likely continued to expand in November, albeit at a tepid pace.

Europe is looking ahead to a subdued open, with EUROSTOXX 50 futures up 0.1%. The major risk event is euro zone inflation data due later in the day. Economists are expecting a 2.3% reading for headline inflation, picking up from 2.0% in October. The risk seems to be on the downside after German inflation proved surprisingly subdued.

Traders have fully priced in a 25-bps rate cut by the European Central Bank in December, and a benign reading on inflation could shift the dial to an outsized 50 bp move, which is currently priced at just a 19% probability.

Investors in French bonds have bigger worries, given doubts about the current government’s prospects for survival. Although French PM Michel Barnier dropped plans to raise electricity taxes, the far-right National Rally warned this concession was insufficient to avoid a no-confidence vote as early as next week that could bring down the government.

French bond spreads widened nearly to parity with Greece, a sign of investor alarm over France’s seemingly intractable debt problems.

All of that marks the end of a wildly busy November, when Donald Trump’s victory in the U.S. presidential election sent the dollar, bond yields and bitcoin soaring.

December is shaping up to be another action-packed month, with the Fed, ECB and BOJ set to debate their next moves in policy, and President-elect Trump posting to social media.

Key developments that could influence markets on Friday:

— France CPI, euro zone CPI for November

— Germany unemployment rate

(By Stella Qiu; Editing by Edmund Klamann)