German Ifo index set to improve sentiment, BoJ meeting in focus

Following a recent period of weakness, European stock markets are expected to open marginally higher on Monday, with the focus on the German Ifo business climate index as an indicator of the health of the Eurozone's dominant economy.

As the prospect of more interest rate hikes lies ahead, along with the looming possibility of weaker economic growth, sentiment has been dampened. However, investors will be hoping for some improvement from the German Ifo business climate index for December later in the day. In addition, the report comes just after PMI data from last week indicated that the decline in German economic activity may be more moderate than previously thought, pointing to the possibility of a shallower recession than previously anticipated within the bloc.

Last central bank meeting of the year

As investors will be watching the Bank of Japan's (BOJ) announcement on Tuesday, it is widely expected that the bank will hold rates unchanged but will signal the unwinding of its ultra-loose monetary policy between March and October next year, which will be sooner than expected in current projections.

As the economy grapples with a tanking yen and surging import costs, some analysts are questioning whether one of the world's most dovish central banks can maintain its meagre interest rates in the face of a slumping yen and sharp rises in import prices. Additionally, at the same time, inflation reached a high not seen in more than 40 years. There was a slight uptick in analyst forecasts for Japan's inflation for each quarter until April-June 2023, with core consumer prices now expected to increase by 2.8% in the current fiscal year and by 1.8% in the fiscal year of 2023, respectively.

USD/JPY is currently consolidating between 138.300 and 134.500, below its 200-day exponential moving average (EMA). Furthermore, expectations that the BoJ will unwind its ultra-dovish stance have contributed to a strengthening of the yen against the other G10 currencies, which can encourage bears to challenge the 134.500 support level again.

Events of the week

In the rest of the week, a great deal of attention will be paid to earnings reports and economic data releases in anticipation of insights into whether or not the Federal Reserve's recent interest rate-hiking campaign will result in a recession in the US. Among the key releases coming up in the next few days will be the release of housing starts data on Tuesday and the release of the minutes from the Federal Reserve's latest meeting on Wednesday. On Friday, the release of the December employment report will also be closely watched for signs regarding the health of the US economy. Market participants will also be paying attention to any comments from the Federal Reserve about its plans for future interest-rate hikes.

S&P 500's worst year since 2008

There have been many concerns about the possibility of a recession and weak profit margins in US banks recently, which has resulted in their shares performing poorly in December. This month, the S&P 500 banks index has declined 11% so far, with shares of Bank of America falling 16%, Wells Fargo falling 14%, and JPMorgan Chase falling 6%. The S&P 500 banks index is now down 24 percent in 2022 as investor concerns have been raised that the Federal Reserve's efforts to reduce inflation through monetary policy tightening will also stifle economic growth. It is on track to have its largest annual percentage drop since 2008, with the S&P 500 banks index down 24 percent.