The factors affecting the market tonight are not complicated, just these three: Japan's early elections, the Fed Chair's subpoena controversy, and December inflation data.

Starting with Japan. Governor Sano of the Bank of Japan is planning to dissolve the House of Representatives and call for a re-election. On the surface, it looks like a personnel change, but essentially it’s a reshuffling of the parliament. She aims to push a more aggressive version of Abenomics, but since the current parliament is stuck, this election is about replacing it with a more obedient legislative body. The market has already begun to respond: Japanese stocks are rising, Japanese bonds are falling, yields are climbing, and the yen has hit a new high since January 2025. This trend is interesting, but honestly, it’s not the main event yet; it’s just gradually seeping in.

The real core issue still revolves around Powell’s situation.

Last night, risk assets digested some expectations, but the bond market and safe-haven assets are still reacting. So far, several members of the Senate Finance Committee, Bessent, and central bank governors from various countries have publicly expressed dissatisfaction. Trump, under pressure, wants to shift blame onto the prosecutors, which looks likely to involve procedural steps—or a tug-of-war. The key point is that the initiative isn’t entirely in Trump’s hands, and Powell has rarely responded so directly. The market is now concerned whether he can hold out until May, or even remain as a board member after stepping down as Chair. If that happens, inflation will continue to suppress easing expectations. This part of the market has not been fully priced in yet; we need to wait until US stocks open to see the real reaction of interest rates and financial assets.

Next is the December inflation data.

The industry is already preparing for inflation in the first quarter of 2026. NY Fed President Williams expects inflation to return to the 2.75% to 3% range in the first half of the year, mainly due to tariffs. Powell also mentioned that the impact of tariffs on inflation usually becomes most apparent 9 to 12 months later, which coincides with the first quarter. Plus, service sector prices need to be re-priced, facing upward pressure on service inflation, and long-term interest rates have already reflected this concern.

I tend to see tonight’s December inflation data as a calibration for the first quarter’s market trend. If the data remains sticky but doesn’t continue to rise, the previous pessimistic expectations will be revised; if it continues to exert pressure, the rate cut expectations for the first quarter will be further lowered. Currently, January rate cuts are basically ruled out, and the entire 2026 rate cut space is about 50 basis points.

The key points tonight are—whether Powell’s situation is still fermenting, and the impact of inflation data on the interest rate market. The overall environment is indeed unfriendly, but as long as no new pitfalls emerge, there are still trading opportunities ahead. It all depends on how the market prices it now.