Yen for change

© Reuters. FILE PHOTO: Banknotes of Japanese yen are seen in this illustration picture taken September 22, 2022. REUTERS/Florence Lo/Illustration

A look at the day ahead in U.S. and global markets from Mike Dolan.

World markets head into the final full week of 2022 slightly punch drunk from this month's latest salvo of central bank interest rate rises - but with one wary eye on the only G7 country that has done nothing yet.

As the U.S. Federal Reserve and monetary authorities across the Western world have pushed up borrowing rates all year to rein in inflation, the Bank of Japan still stands pat.

Doggedly persisting with an ultra-loose policy of sub-zero interest rates and bond buying that pins its long-term borrowing costs to the floor too - despite inflation rising to near twice the 2% target - the BoJ's biggest battle all year has been shoring up the resulting weakness of the yen.

But even though the BoJ is unlikely to change that stance at this week's policy meeting, some change appears to be afoot next year as central bank chief Haruhiko Kuroda ends his second five-year term in April. The yen rose and Japanese stocks fell on Monday after reports the government could soon revise a joint statement with the BoJ over the latter's inflation target, potentially paving the way for a tweak in the BOJ's ultra-loose monetary policy.

In numbers due for release on Thursday, Japan's core consumer price inflation rate is expected to have ticked up to 3.7% last month.

GRAPHIC - Bank of Japan holds fire for now

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The yen's rise depressed the dollar across the board, even as U.S. Treasury yields ticked higher following the Fed's relatively hawkish soundings since its rate hike last week.

That said, futures markets still aren't buying Fed policymaker indications that official rates will go above 5% and stay there all next year. The implied terminal rate for May remains at 4.83%, with almost a half point of rate cuts still priced between then and the end of 2023.

The reason for that is simply fears the economy will weaken rapidly - as the latest business surveys suggest - and force the Fed to stall and reverse.

After closing at their worst levels in over a month on Friday, U.S. stocks are set for a steadier open today.

Troubles in the world's second-largest economy don't help the year-end mood however.

China's business confidence fell to its lowest since January 2013, a survey by World Economics showed on Monday, reflecting the impact of surging COVID-19 cases on economic activity with the abrupt lifting of many pandemic control measures.

Shanghai and Hong Kong stocks were deep in the red on Monday, though markets were steadier in Europe after a torrid last week and amid some signs the pervasive business gloom in Germany may be lifting a bit. The double-edged sword there is that it may just embolden the European Central Bank's new-found hawkishness.

For U.S. markets, the week's incoming economic numbers will be dominated by housing and construction - a particularly weak part of the economy this year. Readings on the Fed's favoured PCE measure of inflation rounds out the week.

Elsewhere, Twitter CEO Elon Musk launched a poll on the social media platform on Sunday asking whether he should step down as head of the company, adding that he would abide by the poll results. The most recent results have a majority saying he should go.

In the ailing crypto world, insurers are denying or limiting coverage to clients with exposure to bankrupt crypto exchange FTX, leaving digital currency traders and exchanges uninsured for any losses from hacks, theft or lawsuits.

Key developments that may provide direction to U.S. markets later on Monday:

* U.S. Dec NAHB housing market index

* Bank of Japan starts two-day policy meeting

* European Central Bank Vice-President Luis de Guindos speaks

GRAPHIC - Global housing price outlook

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GRAPHIC - Flash PMI

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(By Mike Dolan, editing by Susan Fenton mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)