As we flip the calendar into December, markets appear to be inching forward but without a full-throttle sprint. The mood: tentative.
Stocks have been trading higher in early December sessions. U.S. Treasury yields have drifted lower. The dollar has softened. These moves reflect cautious optimism instead of a bold directional call. Investors see softer unemployment claims and a potential rebound in payrolls, but also acknowledge the elevated pace of layoffs and weak hiring intentions.
Labor & Labor Sentiment: “No fire, no hire.”
Initial jobless claims dropped sharply to 191,000 in the week ended November 29, which is the lowest level in over three years. Yet, by the same token, announced layoffs remain unusually elevated: November saw 71,321 planned cuts, even though that’s down 53 % from October. And while job-cut announcements this year reached 1.171 million — a 54 % increase over the same period last year — hiring intentions remain weak by many accounts.
This combination creates a labor picture that feels frozen in place. Companies are trimming and restructuring but they are not triggering a wave of immediate unemployment claims. Hiring, meanwhile, remains tepid. Think “paused,” not “percolating.”
Manufacturing and Business Activity: A Slow, Uneven Climb
The manufacturing side of the economy is not collapsing, but it is not driving growth either. As reported, factory orders in September rose only 0.2%.
AI-linked spending continues to support pockets of the industrial economy, yet the broader trend looks sluggish. Tariffs and global uncertainty are still restraining production. The result is a sector that is improving in small increments rather than building real momentum.
What Comes Next
With mixed labor signals and a manufacturing sector stuck in low gear, investors are watching the Federal Reserve with increased sensitivity. Economic uncertainty has grown after the record 43-day government shutdown that delayed or canceled key releases. The October employment and CPI reports never occurred because data collection was impossible and could not be reconstructed.
The most important catalysts in the coming two weeks are the delayed BLS employment report on December 16 and any new Fed communication surrounding the final policy meeting of the year. Some FOMC members publicly oppose further rate cuts. Others on the Board of Governors prefer additional easing. The divide creates an uncertain outlook for December.
The latest PCE Price Index came in at 2.8 percent year-over-year, matching expectations and rising slightly from the previous reading of 2.7 percent. This suggests that inflation pressures remain modest but persistent. Since the PCE is the Federal Reserve's preferred inflation metric, the unchanged reading may support hopes for a rate cut if upcoming economic data, such as labor and consumer demand, remain soft.
"It feels like we are at the dawn of a new age—an age your generation will shape and see come to its full maturity. By the end of your careers, many of you will take on tasks and accomplish feats you cannot even imagine at this moment, and AI technology may well be part of that progress.”
— Philip N. Jefferson, Vice Chair of the Board of Governors of the Federal Reserve, Nov 7, 2025.
Tokyo Drift: Why the "Great Japanese Unwind" May Be Overhyped
By Ben Ashby
In August 2024, global markets experienced a sudden, violent shudder. A modest rate hike by the Bank of Japan (BOJ) sent the Yen spiking 10%, triggering one of the worst selloffs in Japanese equity history and sending shockwaves through Wall Street. The culprit? The unwinding of the "Yen Carry Trade."
For decades, Japan has been the world’s ATM—the most reliable provider of cheap funding. With interest rates near zero, investors borrowed Yen to buy higher-yielding assets abroad, from US Treasuries to tech stocks. The prevailing fear among US investors is that, as Japanese rates finally rise, this massive liquidity engine will reverse. The "Bear Thesis" is simple and terrifying: Japanese yields go up, money rushes home, and global asset prices collapse.
However, this linear "A-leads-to-B" thinking misses the mark. Financial markets are complex systems, not simple circuits. While the risks are real, the mechanics of the Japanese financial system suggest a sudden catastrophe is less likely than a slow, manageable grind. Here is why the "Great Unwind" might not happen the way doomsayers predict.
The "Hedged Yield" Paradox
The first misunderstanding concerns how Japanese institutions actually invest. The bears assume that if Japanese bond yields rise, US bonds and other assets become less attractive. But Japanese insurers and banks rarely buy US Treasuries on a naked basis; they hedge currency risk to some degree.
The cost of this hedging is driven by short-term interest rate differentials. Paradoxically, if the BOJ raises rates while the Fed holds steady, the interest rate gap narrows, and the cost of hedging falls. This could create a counterintuitive outcome: as Japanese rates rise, the net yield (after hedging) on US assets might actually improve, making them more attractive, not less. The signal that "Japan is normalizing" could easily be drowned out by the reality that hedging US debt has become cheaper.
The Duration Trap
There is also a structural mismatch that prevents wholesale capital repatriation. Japanese life insurers hold liabilities that stretch out 20 to 30 years. They need long-term assets to match these obligations.
The problem? The domestic market in Japan cannot satisfy this demand. The BOJ owns a massive chunk of the bond market, and there is insufficient supply of long-dated Japanese Government Bonds (JGBs) to absorb the trillions of Yen currently invested abroad. Even if a Japanese insurer wanted to bring its money home, it would be swapping a 30-year US Treasury for a 10-year JGB with inadequate duration. Until Japan’s fiscal policy changes drastically, these institutions are structurally forced to lend to the United States.
The Retail Ballast
The bears also fundamentally misunderstand the changing face of the Japanese retail investor. For years, the market has fixated on "Mrs. Watanabe"—the metaphorical housewife trading FX on high margin. This demographic is indeed flighty; in August 2024, they were forced to liquidate leveraged positions, accelerating the Yen’s spike.
But while Mrs. Watanabe panics, a new, far larger whale has entered the pool: the NISA investor.
In January 2024, the Japanese government massively expanded the Nippon Individual Savings Account (NISA) program, incentivizing households to shift their $14 trillion in cash savings into the stock market. Unlike the day-trading FX crowd, these are long-term, structural investors. And crucially, they don't want to own Japanese assets at present.
Since the program's expansion, Japanese retail investors have been pouring approximately ¥1 trillion ($6.2 billion) per month into foreign investments, primarily US and global equity funds. This is "sticky" money—monthly automated contributions that are largely insensitive to short-term currency swings.
This creates a permanent structural bid for foreign assets that directly counteracts the repatriation thesis. Every time a speculator sells USD to buy Yen, a Japanese salaryman’s NISA account automatically sells Yen to buy USD. The bears see a tsunami of repatriation; they miss the steady, relentless current of retail capital flowing the other way.
The Power of Inertia
Furthermore, we cannot ignore the accounting realities that govern bank behavior. Many Japanese institutions hold foreign bonds that are currently underwater (trading below purchase price) due to the global rise in rates.
Under Held-to-Maturity (HTM) accounting rules, these losses are ignored as long as the bonds are not sold. This is common practice with US banks, too. In fact, US banks are currently sitting on $337 billion of unrealized bond losses themselves. If these banks were to sell their US Treasuries to repatriate cash to Japan, they would immediately crystallize those losses, damaging their balance sheets and capital ratios. Doing nothing is safer for management than taking action. This creates powerful inertia—a "do-nothing equilibrium" in the hope that things improve —that prevents panic selling.
The Central Bank "Put"
Finally, we must remember that central banks prioritize financial stability above all else. We saw this clearly in August 2024: the moment the markets revolted, the BOJ blinked, with Deputy Governor Uchida pledging no further hikes amidst instability.
The system has circuit breakers. If a disorderly unwind threatens the global financial plumbing, expect coordinated intervention. The BOJ manages the global cost of capital, and it is unlikely to tolerate a spike in yields that would blow up its own domestic banks.
Conclusion: Drift, Not Crash
The Yen Carry Trade is indeed a critical part of the global financial architecture, and its nature is changing, though its unwinding poses risks. However, the transmission mechanism is clogged by accounting rules, duration shortages, and commercial and behavioral incentives.
For US investors, the likely scenario is not a “sudden phase transition”—a crash, in other words—but a gradual adjustment over the next decade. The "widowmaker" trade of shorting Japanese bonds has failed for decades because it bets on a breakage that authorities work tirelessly to prevent.
Rather than fearing a sudden collapse, keep an eye on the "plumbing"—specifically the cross-currency basis and hedged yields. Until those indicators flash red, the flow of Japanese capital is likely—at best—to drift, rather than crash.
Disclosure: This material is for informational purposes only and should not be considered investment advice. An investor should consult with their financial professional before making any investment decisions. The opinions contained herein are subject to change without notice and do not necessarily reflect the opinions of Rayliant Investment Research. Indices cannot be invested in directly and are unmanaged.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.
WEEK AHEAD
December 8-12, 2025
We maintain the tactical signal at 9. Despite tentative indicators, the overall backdrop is unchanged.
December Opens — Cautious Hopes, Not Charge Guns
As we flip the calendar into December, markets appear to be inching forward but without a full-throttle sprint. The mood: tentative.
Stocks have been trading higher in early December sessions. U.S. Treasury yields have drifted lower. The dollar has softened. These moves reflect cautious optimism instead of a bold directional call. Investors see softer unemployment claims and a potential rebound in payrolls, but also acknowledge the elevated pace of layoffs and weak hiring intentions.
Labor & Labor Sentiment: “No fire, no hire.”
Initial jobless claims dropped sharply to 191,000 in the week ended November 29, which is the lowest level in over three years. Yet, by the same token, announced layoffs remain unusually elevated: November saw 71,321 planned cuts, even though that’s down 53 % from October. And while job-cut announcements this year reached 1.171 million — a 54 % increase over the same period last year — hiring intentions remain weak by many accounts.
This combination creates a labor picture that feels frozen in place. Companies are trimming and restructuring but they are not triggering a wave of immediate unemployment claims. Hiring, meanwhile, remains tepid. Think “paused,” not “percolating.”
Manufacturing and Business Activity: A Slow, Uneven Climb
The manufacturing side of the economy is not collapsing, but it is not driving growth either. As reported, factory orders in September rose only 0.2%.
AI-linked spending continues to support pockets of the industrial economy, yet the broader trend looks sluggish. Tariffs and global uncertainty are still restraining production. The result is a sector that is improving in small increments rather than building real momentum.
What Comes Next
With mixed labor signals and a manufacturing sector stuck in low gear, investors are watching the Federal Reserve with increased sensitivity. Economic uncertainty has grown after the record 43-day government shutdown that delayed or canceled key releases. The October employment and CPI reports never occurred because data collection was impossible and could not be reconstructed.
The most important catalysts in the coming two weeks are the delayed BLS employment report on December 16 and any new Fed communication surrounding the final policy meeting of the year. Some FOMC members publicly oppose further rate cuts. Others on the Board of Governors prefer additional easing. The divide creates an uncertain outlook for December.
The latest PCE Price Index came in at 2.8 percent year-over-year, matching expectations and rising slightly from the previous reading of 2.7 percent. This suggests that inflation pressures remain modest but persistent. Since the PCE is the Federal Reserve's preferred inflation metric, the unchanged reading may support hopes for a rate cut if upcoming economic data, such as labor and consumer demand, remain soft.
Tokyo Drift: Why the "Great Japanese Unwind" May Be Overhyped
By Ben Ashby
The "Hedged Yield" Paradox
The Duration Trap
The Retail Ballast
The Power of Inertia
The Central Bank "Put"
Conclusion: Drift, Not Crash
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.