Shares turn red in volatile session, yields fall after U.S. inflation data

By Sinéad Carew

NEW YORK/MILAN (Reuters) - Wall Street stocks fell sharply with Treasury yields in Wednesday's volatile session as oil prices rallied and investors worried about the potential for an economic slowdown.

U.S. equity indexes churned higher and lower after U.S. data showed higher-than-expected core inflation, excluding items such as oil prices. Some investors appeared encouraged by the annual consumer price growth change to 8.3% in April from 8.5% in March even though it was above the 8.1% analyst estimate.

Similarly, bond yields climbed immediately after the report before then reversing course. Trading in the U.S. dollar was also volatile.

"This is all about concern about a recession. The inflation numbers we got this morning were not good, worse than expectations ... There's high food prices and increasing concern inflation numbers are going to be sticky on the high side," said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder.

The strategist also pointed to a flattening yield curve, referring the difference between long-term and short term Treasury yields as an ominous sign.

"We've a very flat yield curve that's been flirting with inversion. That scares traders about the prospects for a recession. There's too many investors out there who believe the Fed can engineer a soft landing. That looks increasingly doubtful."

The Dow Jones Industrial Average fell 154.12 points, or 0.48%, to 32,006.62, the S&P 500 lost 38.97 points, or 0.97%, to 3,962.08 and the Nasdaq Composite dropped 293.74 points, or 2.5%, to 11,443.93.

Nasdaq lagged its peers as interest rate-sensitive growth sectors, technology and consumer discretionary, underperformed the rest of the market.

Earlier, Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis, said the markets appeared emotional.

"At the end of the day we can get all excited about whether it's a little higher or a little lower but clearly the year-on- year inflation rate rolled over and looks like it peaked in March. It seems to have turned the corner," he said.

After the pan-European STOXX 600 index closed up 1.74%, MSCI's gauge of stocks around the globe shed 0.38%. On Tuesday, the global index had fallen to its lowest level since December 2020 on fears Fed tightening could significantly slow down the global economy.

The dollar index gained ground initially after the inflation news then fell but rose a bit in late trading.

In early trade, benchmark 10-year Treasury yields fell to their lowest levels in almost a week. But after the inflation data yields marched back up toward the three-year high of 3.203% hit on Monday.

Yields since lost some ground with Benchmark 10-year notes last rising 19/32 in price to yield 2.9187% down from 2.993% late on Monday. The 30-year bond last rose 48/32 in price to yield 3.042%, from 3.129%.

The 2-year note last fell 1/32 in price to yield 2.633%, from 2.623%.[nL2N2X31IH]

The Fed last week raised interest rates by 50 basis points and Chair Jerome Powell said two more such hikes were likely at the upcoming policy meetings. There has also been speculation in markets the U.S. central bank will need to move by 75 basis points at one meeting.

Oil prices jumped after plunging in the previous two sessions, buoyed by supply concerns as flows of Russian gas to Europe fell and the European Union worked on gaining support for a Russian oil embargo. [O/R]

U.S. crude oil futures settled at $105.71 per barrel, up $5.95 or 5.96% while Brent crude futures settle at $107.51/barrell up $5.05 or 4.93%.

Spot gold added 0.7% to $1,851.45 an ounce.