Yen for Change: A Reuters Report

A Look Ahead in U.S. and Global Markets

As we enter the final full week of 2022, global markets are feeling the effects of the recent surge in interest rates implemented by central banks. There’s a particular focus on Japan, the only G7 nation yet to respond to the global tightening of monetary policy.

Throughout the year, the U.S. Federal Reserve and other Western monetary authorities have raised borrowing costs to combat inflation. In stark contrast, the Bank of Japan (BoJ) has maintained an ultra-loose monetary stance, keeping interest rates below zero and engaging in extensive bond purchasing, despite inflation nearing double its 2% target. The BoJ’s primary challenge has been managing the depreciation of the yen, a situation they have been grappling with all year.

Although the BoJ is not expected to adjust its policy at this week’s meeting, hints of possible changes loom in the near future as central bank governor Haruhiko Kuroda concludes his second five-year term in April. Recent reports suggest that the government may soon modify its joint statement with the BoJ regarding its inflation target, signaling a potential shift in the bank’s monetary policy. Anticipation around this has led to a rise in the yen and a decline in Japanese stocks.

Japan’s core consumer price inflation rate, set to be released on Thursday, is projected to increase to 3.7% for last month.

The appreciation of the yen has placed downward pressure on the dollar, despite U.S. Treasury yields edging higher following the Fed’s hawkish statements since last week’s rate hike. Futures markets remain skeptical about Fed officials’ forecasts that official rates will exceed 5% for the entirety of next year. The implied terminal rate for May currently sits at 4.83%, with expectations of nearly half a point of rate cuts factored in between then and the end of 2023. This cautious outlook stems from concerns of a rapidly weakening economy, as indicated by recent business surveys.

After hitting their lowest points in over a month on Friday, U.S. stocks are poised for a steadier opening today. However, economic troubles in China dampen year-end sentiment. A recent survey revealed that business confidence in the country has dropped to its lowest level since January 2013, heavily influenced by rising COVID-19 cases following the abrupt relaxation of pandemic restrictions.

Equity markets in Shanghai and Hong Kong faced significant declines on Monday, whereas European markets showed resilience after a challenging previous week, with some signs that the pervasive gloom in Germany might be easing. This tentative optimism could potentially embolden the European Central Bank’s recent hawkish approach.

In the U.S., the forthcoming economic data will primarily focus on housing and construction, sectors that have struggled this year. The week’s key highlights will conclude with the release of the Fed’s preferred measure of inflation, the PCE index.

In other news, Twitter CEO Elon Musk recently initiated a poll on the platform, asking followers whether he should step down as the company’s head, committing to abide by the poll’s outcome, which currently indicates a majority in favor of his resignation.

In the cryptocurrency sphere, insurers are beginning to restrict coverage for those associated with the now-bankrupt FTX exchange, leaving many traders and exchanges without protection against potential losses stemming from hacks, theft, or legal actions.

Key developments to watch for direction in U.S. markets later today include:

• The U.S. December NAHB housing market index
• The Bank of Japan’s two-day policy meeting
• A scheduled speech by European Central Bank Vice-President Luis de Guindos