Markets near record highs as Fed kicks off two-day policy meeting

By Thyagaraju Adinarayan, Alun John and Pete Schroeder

(Reuters) - Investors worldwide kept stocks close to record highs Tuesday, as they bet the U.S. Federal Reserve will resist a significant policy shift in the face of transitory inflation.

A majority of investors surveyed by BofA said inflation was transitory, a marked change from March, when worries about more sustained price rises had sent U.S. 10-year Treasury yields surging to nearly 1.8%.

With the yield now pinned below 1.5%, BofA expects the Fed to signal a dial back in stimulus by September. The central bank kicks off a two-day policy meeting Tuesday.

The MSCI world equity index, which tracks shares in 45 nations, remained unchanged to 721.1.

In early U.S. trading, the Dow Jones Industrial Average fell 49.49 points, or 0.14%, the S&P 500 lost 4.36 points, or 0.10%, and the Nasdaq Composite dropped 40.47 points, or 0.29%.

Economic data out of the U.S. Tuesday painted a murky picture of the economic recovery. Retail sales fell more than expected in May as consumers shifted spending to services that had once been inaccessible during the height of the pandemic.

In a separate report, the Labor Department said its producer price index for final demand increased 0.8% in May, up from a 0.6% increase in April and slightly ahead of economist forecasts.

But for now, investors seem to be sticking with the Fed's view any inflation is transitory, helping U.S. and European shares scale new highs, with the pan-regional STOXX 600 rising 0.3%, its eighth straight day of gains. (EU) (N)

"Markets seem to be in a tug-of-war over the past month between the understanding that we're having both great economic and earnings growth, juxtaposed with the fact that we need to get our head wrapped around what inflation looks like and what it will mean both to profit margins and to the Fed.

"Investors may be biding time until the Federal Reserve wraps up its two-day meeting on interest rates on Wednesday before deciding which way to commit their capital," wrote Art Hogan, chief market strategist at National Securities in New York.

Fed Chairman Jerome Powell will flesh out the Fed's thinking with a news conference Wednesday after its latest policy statement.

Traders around the world are looking for any hints about whether and when the Fed plans to taper its bond-buying programme as the U.S. economy bounces back from the pandemic fallout.

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.

In Asia, the MSCI's broadest index of Asia-Pacific shares outside Japan traded flat. Japan's Nikkei rose 1% and the Australian benchmark traded up 0.93%, but Chinese blue chips fell 1.1%.

China's markets were closed on Monday for a holiday, meaning this was their first response to a joint statement by the Group of Seven leaders that had scolded Beijing over a range of issues that China called a gross interference in the country's internal affairs.

DOLLAR STEADY

In currency markets, the dollar held its recent gains against major currencies. The dollar index rose 0.05 points or 0.06%, not far off the top of its recent range.

In the face of the strong dollar, spot gold was down slightly at $1,864.81 per ounce. [GOL/]

Benchmark 10-year yields were 1.5058%, little higher than Monday, when they rebounded from Friday's three-month low.

As for commodities, U.S. crude was up 0.8% to $71.47 a barrel. Brent crude rose to $73.76 a barrel as talks dragged on over the United States rejoining a nuclear agreement with Tehran, suggesting any surge in supply from Iran is some time away.

Even bitcoin was fairly quiet, fluctuating a little above $40,000.