Wall Street slips as Fed mulls policy, economic data disappoints

By Pete Schroeder

WASHINGTON (Reuters) -Wall Street took a step back from record highs Tuesday, as investors weighed whether higher inflation readings might nudge the U.S. Federal Reserve closer to tapering monetary stimulus.

With the Fed kicking off a two-day policy meeting today, investors are balancing the central bank's insistence inflation will be transitory with fresh data showing prices growing faster than expected.

In separate reports, U.S. economic data showed an acceleration in producer prices in May as supply chains try to keep up with surging demand with the pandemic easing, while retail sales dropped more than expected as consumers turned their attention back to service industries.

The readings have investors wondering if the Fed may come out of its meeting Wednesday with any indication it is tweaking its go-slow approach.

"Rising prices are expected to subside as the supply side of the economy recovers to meet demand and inventories are restocked, but accomplishing that will not be as easy as flipping a switch," said Jim Baird, chief investment officer at Plante Moran Financial Advisors. "It will take some time for that gap to be filled. In the meantime, upward pressure on prices are likely to continue."

The central bank is not expected to announce any plans to ease back on its bond purchases until August, but investors are looking for any indication the Fed has begun discussing such an exit. Nearly 60% of economists in a Reuters poll expect a taper announcement will come in the next quarter, despite a patchy recovery in the job market.

"To a large extent, high US inflation has to do with the massive US fiscal stimulus. Inflation has been increasing in most of G10, but the US clearly stands out," wrote Bank of America (NYSE:BAC) Securities analysts in a note. "Assuming that some of the recent increase in inflation is indeed sustained, we would argue that the Fed will react to it, supporting the USD later this year."

After markets reached new highs in Europe, U.S. markets eased following the economic reports. U.S. Treasury yields also dipped, while the dollar ticked up.

The MSCI world equity index, which tracks shares in 45 nations, fell 0.86 points or 0.12%.

The Dow Jones Industrial Average was down 114.95 points, or 0.33% in afternoon trading, while the S&P 500 lost 9 points, or 0.21%, and the Nasdaq Composite dropped 89.10 points, or 0.63%.

OIL GAINS

Oil prices hit their highest levels since 2019 during trading Tuesday on an expected demand surge that should accompany increased travel as pandemic restrictions ease.

Brent crude was last up $1.09, or up 1.5%, at $73.95 a barrel. U.S. crude was last up $1.16, or 1.64%, at $72.04 per barrel. It previously hit a session high of $72.16 a barrel, the highest level seen since October 2018.

In currency markets, the dollar hit a one-month high against a basket of currencies Tuesday on the back of the fresh economic data. The dollar index =USD, which measures the greenback against a basket of six currencies, was 0.06% higher at 90.544, after rising as high as 90.677, its highest since May 14.

Spot gold prices fell $9.585 or 0.51%, to $1,856.41 an ounce, while U.S. gold futures were down 0.4% at $1,857.60. [GOL/]

Benchmark 10-year yields were 1.4939%, slightly lower than Monday, when they rebounded from Friday's three-month low.

(Reporting Pete Schroeder in Washington; Editing by Kim Coghill, Alex Richardson, Barbara Lewis and Peter Graff)