How Deep Is the Cut? By Reuters

Central bank leaders will gather in Jackson Hole for their annual meeting, U.S. Democrats will select their presidential candidate, and energy markets are experiencing volatility due to overlapping tensions in the Middle East and the Russia-Ukraine conflict. Additionally, global Purchasing Managers’ Indexes (PMIs) are set to be released.

Here’s a look at the week ahead in financial markets:

1. Jackson Hole Conference
   Central bankers from around the world will convene in Jackson Hole, Wyoming, starting Thursday for the Federal Reserve’s annual conference to discuss future monetary policy. This year’s discussions will focus on labor markets, diverging from last year’s emphasis on inflation.

Federal Reserve Chair Jerome Powell will have an opportunity to refine his message ahead of the September monetary policy meeting. Most investors expect the Fed to start lowering interest rates next month after maintaining elevated levels to manage inflation. The scale and depth of any rate cuts remain uncertain, particularly given recent concerning economic data, including rising unemployment rates, which has led investors to bet on a possible 50 basis point cut in September.

1. Mixed Economic Signals
   The global growth outlook adds complexity to the situation. Markets are fluctuating as they try to gauge the economic landscape, with signs of softening business activity while inflation remains above central bank targets. The upcoming PMIs, scheduled for release on Thursday, are expected to provide crucial insights into economic conditions. July’s PMIs indicated a slowdown amid persistent inflation, highlighting the challenges facing central banks.

In the U.S., manufacturing activity has shown signs of weakness, while Germany’s disappointing figures suggest that Europe’s economic engine is contracting. Input prices for manufacturers in advanced economies reached an 18-month high, and how inflation trends evolve will influence the timing and extent of future rate cuts.

1. Bank of Japan Pressures
   The Bank of Japan’s unexpected shift from a dovish to a hawkish stance has placed it under scrutiny from lawmakers, especially following its surprise rate hike at the end of July that hinted at further adjustments. This move led to significant turmoil in Japanese stock markets, marking the largest drop since the infamous Black Monday in 1987, as the yen fluctuated against the dollar.

Lawmakers are set to question Bank of Japan Governor Kazuo Ueda regarding the decision, despite prior encouragement for the central bank to address the yen’s previous weakness. Recent macroeconomic data, however, shows a stronger-than-anticipated rebound in growth amid a consumption recovery, potentially easing some critiques.

1. Democratic National Convention
   The race for the U.S. presidency is heating up, with Democrats focusing on mobilizing support for Vice President Kamala Harris at the party’s convention in Chicago. Since Harris’s late entry into the race following President Joe Biden’s withdrawal, she has energized the party and narrowed the lead of Republican candidate Donald Trump in several opinion polls.

The four-day convention begins on Monday, featuring speeches from prominent Democrats set to galvanize support for Harris. As the competition tightens, investors are keen to gain insight into her policy positions. Harris has emphasized her commitment to maintaining the Federal Reserve’s independence, which contrasts with the stance taken by her Republican opponent.

1. Energy Market Pressures
   A combination of risk factors has created instability in global energy markets, with rising international crude prices surpassing $80 per barrel due to fears of escalating conflict in the Middle East potentially disrupting supplies. Simultaneously, concerns regarding demand, particularly in China, have tempered oil price increases.

European wholesale gas prices have also seen volatility amid fears of possible Russian gas supply interruptions, particularly through transit routes in Ukraine. Markets are increasingly apprehensive about heavy combat near the Russian town of Sudzha, where gas flows to Ukraine occur, raising the prospect of sudden disruptions to transit flows before a crucial five-year agreement with Russia expires.