Weekly Financial Markets Outlook

(Reuters) – Central bank chiefs congregate in Jackson Hole for their annual retreat, U.S. Democrats choose their presidential candidate, and energy markets ricochet due to a confluence of Middle East and Russia-Ukraine tensions, while global PMIs are due.

Here’s your guide to the week ahead in financial markets from Ira Iosebashvili and Lewis Krauskopf in New York, Naomi Rovnick and Nina Chestney in London, and Kevin Buckland in Tokyo.

1. JACKSON HOLE

Central bankers from around the globe gather in Jackson Hole, Wyoming, from Thursday for the Fed’s annual conference to chart the way forward for monetary policy. This year, the focus is on labor markets, shifting from last year’s inflation theme.

U.S. Fed chief Jerome Powell will refine his message before the September monetary policy meeting. Most market participants anticipate the Fed to start cutting rates next month after maintaining elevated levels to combat inflation.

However, the extent and depth of the cuts remain uncertain, as recent alarming economic data, including unemployment figures, have led investors to bet on a 50 basis point cut in September.

2. MIXED PICTURE

The outlook for global growth presents another challenge. Markets are grappling to determine the economic outlook amid softening business activity and persistent inflation exceeding central banks’ target levels.

Purchasing Managers’ Indices (PMIs), available on Thursday, provide real-time snapshots of economic activity. July’s PMIs indicated an economic slowdown coupled with persistent inflation, showcasing the predicament central banks face.

U.S. manufacturing activity has weakened, and disappointing numbers from Germany signal contraction in Europe’s economic powerhouse. However, manufacturers’ input prices in advanced economies have reached an 18-month high.

Inflation will significantly influence future rate cuts’ timing and depth. If July’s unfavorable PMI trends recur, monetary easing may progress slower than market expectations.

3. IRATE OVER RATES

The Bank of Japan’s sudden shift from an ultra-dovish to ultra-hawkish stance has attracted scrutiny from lawmakers following its unexpected rate hike at the end of July.

The outcome was the sharpest decline in Japanese stocks since the infamous Black Monday in 1987, coinciding with a destabilizing rise in the yen against the dollar.

Politicians will question BOJ Governor Kazuo Ueda and other officials on August 23, but they should recall that some senior figures previously urged the central bank to help counter the yen’s significant weakness before the hike.

Recent macroeconomic indicators favor the BOJ, reporting stronger-than-expected growth amid a consumption recovery. A bigger test looms during a special parliamentary session with the release of the latest consumer price figures.

4. DEMOCRATS ON DISPLAY

The U.S. presidential race intensifies as Democrats aim to generate momentum for Vice President Kamala Harris’s candidacy at the party’s convention in Chicago.

In the wake of President Joe Biden’s withdrawal, Harris has energized Democrats and overtaken Republican candidate Donald Trump in certain opinion polls, even leading in some betting markets ahead of the November 5 vote.

The four-day convention begins on Monday, featuring high-profile Democrats scheduled to speak in support of Harris. The race remains tight, and investors are eager to learn more about her policy positions.

Harris emphasizes her commitment to Fed independence, contrasting sharply with the Republican nominee’s belief that presidents should influence Fed decisions.

5. TENSIONS

A myriad of risk factors has recently affected global energy markets, and the volatility shows no sign of easing. Concerns about escalating conflict in the Middle East have pushed international crude prices above $80 a barrel.

Simultaneously, fears regarding demand strength, particularly from China, are somewhat limiting oil’s growth.

European wholesale gas prices have also been unstable, with concerns about potential Russian gas supply disruptions along routes through Ukraine exacerbating Middle Eastern worries.

Market anxieties are heightened by heavy fighting near the Russian town of Sudzha, where Russian gas flows into Ukraine could abruptly cease before the expiration of a five-year contract with Russia’s Gazprom.

(Graphics by Pasit Kongkunakornkul, Sumanta Sen, Vineet Sachdev; Compiled by Karin Strohecker; Editing by Jan Harvey)