How Deep Is the Cut? By Reuters

Central bank leaders are set to gather in Jackson Hole for their annual retreat, while U.S. Democrats are poised to select their presidential candidate amidst fluctuating energy markets influenced by Middle Eastern and Russia-Ukraine tensions. Additionally, global purchasing managers’ indexes (PMIs) are expected to be released.

Here’s an overview of the upcoming week in financial markets.

1. Jackson Hole Conference

Central bankers from around the world will meet in Jackson Hole, Wyoming, starting Thursday for the Federal Reserve’s annual conference, focusing on future monetary policy. This year’s discussions will center on labor markets, marking a shift from last year’s emphasis on inflation.

Federal Reserve Chair Jerome Powell will have the opportunity to refine his message ahead of the September monetary policy meeting. Most market observers anticipate that the Fed will begin cutting rates next month, following an extended period of high rates intended to control inflation.

The extent of potential rate cuts remains uncertain, particularly after recent troubling economic data, including rising unemployment figures, led investors to increase expectations for a 50 basis point reduction in September.

2. Mixed Economic Signals

The global growth outlook adds another layer of complexity to the market landscape. Investors are grappling with a weakening business activity against a backdrop of persistent inflation that exceeds central banks’ targets.

The upcoming PMIs, scheduled for release on Thursday, will offer vital insights into economic conditions. While July’s PMIs indicated a slowdown in economic activity alongside continuing inflation, they highlight the dilemma facing central banks.

Specifically, U.S. manufacturing activity has declined, and European data from Germany has trended negatively, suggesting economic contraction in the region. Additionally, manufacturing input prices in advanced economies reached an 18-month high, indicating inflationary pressures that will influence future rate cut decisions. A repetition of July’s weak PMI trends could lead to more gradual monetary easing than the markets are hoping for.

3. Rising Tensions Over Interest Rates

The Bank of Japan’s unexpected shift from a dovish to a hawkish stance has drawn criticism from lawmakers following a surprise rate hike at the end of July and hints of more increases on the horizon.

This shift contributed to a significant decline in Japanese stocks, marking the largest drop since Black Monday in 1987, alongside a volatile yen. Lawmakers are expected to question Bank of Japan Governor Kazuo Ueda and others about the rate change amid pressures to stabilize the yen leading up to this decision.

Encouragingly, recent economic indicators have suggested stronger growth and a rebound in consumer spending, providing some support for the BOJ’s actions. A more critical examination will follow the release of consumer price data on the same day as a special parliamentary session discussing these developments.

4. Democratic National Convention

As the U.S. presidential race gains momentum, the Democrats aim to build support for Vice President Kamala Harris at the party’s convention in Chicago. Since her late entry into the race after President Biden stepped aside, Harris has energized the party and closed the gap with Republican candidate Donald Trump in some polls.

The four-day convention, set to begin on Monday, will feature speeches from prominent Democratic figures intended to rally support for Harris. With the competition becoming increasingly tight, investors are keen to hear more about her policy stances. Harris has emphasized her commitment to preserving the Federal Reserve’s independence, a view that contrasts with that of the Republican nominee.

5. Global Energy Market Dynamics

Recent developments have led to considerable volatility in global energy markets, with tensions in the Middle East and concerns about potential Russian gas supply disruptions impacting prices. As worries grow over conflict potentially affecting supply, international crude prices have surged past $80 a barrel.

At the same time, demand uncertainties, especially regarding China, have tempered oil’s upward momentum. Furthermore, European wholesale gas prices have experienced significant fluctuations due to fears surrounding potential interruptions in Russian gas supplies through Ukraine.

Investor sentiment remains wary as ongoing military actions near Russia’s Sudzha, where gas flows to Ukraine, could halt transit operations before an existing agreement with Gazprom concludes.