By Wayne Cole and Dhara Ranasinghe
LONDON, Aug 31 (Reuters) - World stock markets looked set to end August on a cautious note on Monday as fresh fighting between the U.S. and Iran pushed oil prices higher, while borrowing costs in Germany and Japan hit fresh multi-year highs.
A 2% jump in oil prices added to concerns about persistent inflation and the risk of further interest rate increases from major central banks, following Federal Reserve Chairman Kevin Warsh's hawkish speech at Jackson Hole on Friday.
Japan's 2-year government bond yield rose to a 31-year high, while Germany's 2-year bond yield climbed to its highest level since July 2024..
Brent oil futures, trading above $90 a barrel, rose after U.S. forces struck two Iranian launchers on Larak Island on Sunday. Iran responded by attacking U.S. forces stationed in Jordan and said it had hit a tanker in the Strait of Hormuz.
President Donald Trump later posted that Kharg Island, Iran's main oil export terminal, was being "blown to smithereens," although there was no military confirmation.
Markets reacted by lifting the probability of a September Fed rate increase to 57%, sending short-term Treasury yields sharply higher and flattening the yield curve.
"We continue to expect that a hike won't come until December, though agree that the September meeting is live," said Michael Feroli, chief U.S. economist at JPMorgan.
"Moreover, regardless of the exact timing of hikes, Warsh's speech suggested a chair more willing to translate his concern about inflation into a policy tightening."
Barclays now expects the Fed to raise rates by 25 basis points in both September and December.
Europe's STOXX 600 index edged lower at the open, with trading volumes reduced by a UK public holiday. U.S. stock futures were flat to slightly weaker.
In Asia, Japan's Nikkei slipped 0.1%, while MSCI's world stock index was marginally lower.
Chinese blue chips recovered from early losses, although property developers remained under pressure after Beijing announced regulatory changes. A survey showed the official manufacturing purchasing managers' index rose to 49.8 in August from 49.2 in July, though services remained subdued.
RATE HIKE BETS
Friday's U.S. August payrolls report and consumer price data due on September 11 will be key to determining whether the Fed moves as early as next month.
Economists expect payrolls to increase by 58,000 after July's shock decline of 23,000, with unemployment holding at 4.1%. A significantly weaker outcome would likely be needed to materially reduce expectations of a September rate hike.
Inflation concerns are expected to prompt New Zealand's central bank to hike rates for a second straight meeting on Wednesday, while the Bank of Canada is expected to stay on hold amid concerns about the economic impact of a trade dispute with the United States.
Inflation and interest rates are also expected to dominate discussions when G20 finance ministers and central bankers meet in North Carolina on Monday and Tuesday.
In an interview with Reuters on Sunday, U.S. Treasury Secretary Scott Bessent said he planned to meet the head of the Bank of Japan amid speculation that it too could raise rates in September.
Analysts argue a series of hikes is needed to shore up the yen, which has again slid past 160 per dollar.
Asked about the yen, Bessent said the move was "pretty well contained", suggesting the slide was not disorderly enough to trigger a repeat of joint Japan-U.S. intervention.
Dollar/yen was last trading at 159.56, down around a quarter of a percent on the day.
Japanese bonds followed Friday's selloff in Treasuries as 10-year yields again hit their highest since 1996.
Two-year Treasury yields held at 4.34%, after jumping almost 12 basis points on Friday. Yields on 30-year bonds were more contained at 5.20%, with investors taking some comfort from Warsh's emphasis on fighting inflation.
The euro was a shade firmer at $1.1596, after weakening on Friday following Warsh's speech.
Euro zone inflation data this week is expected to cement market pricing for a September rate hike from the European Central Bank.
Elsewhere, gold slipped 0.3% to $4,437 an ounce, having shed 3.2% on Friday as bond yields spiked. [GOL/]
Still, it has gained roughly 10% in August — set for its biggest monthly jump since January.
(Reporting by Dhara Ranasinghe in London and Wayne Cole Sydney. Editing by Mark Potter)
