Shares churn, close down; yields fall after U.S. inflation data

By Sinéad Carew

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

U.S. equity had indexes churned higher and lower during the session as investors picked through U.S. inflation data for clues about the Federal Reserve's rate hiking path.

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.

While some investors were encouraged by the year-over-year improvement, others noted inflation was still red hot and that this was highlighted by oil futures rally.

"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 326.63 points, or 1.02%, to 31,834.11, the S&P 500 lost 65.87 points, or 1.65%, to 3,935.18 and the Nasdaq Composite dropped 373.44 points, or 3.18%, to 11,364.24.

The S&P closed at its lowest level since March 25 2021 and 18% below its Jan. 3 record finish. Nasdaq lagged its peers sharply as interest rate-sensitive growth sectors, technology and consumer discretionary, underperformed the rest of the market also closing down more than 3%.

MSCI's gauge of stocks across the globe shed 0.88%, registering its lowest close since November 2020.

Earlier, Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis was taking the glass-half-full view pointing out that inflation, while still high, appeared to be starting to moderate.

"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.

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

The dollar index, which measures the greenback against a basket of major currencies, was 0.067%, with the euro down 0.13% to $1.0513.

The Japanese yen strengthened 0.35% versus the greenback at 129.97 per dollar, while Sterling was last trading at $1.2245, down 0.62% on the day.

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

Benchmark 10-year notes were last rising 20/32 in price to yield 2.9148%, from 2.993% late on Monday. The 30-year bond last rose 57/32 in price to yield 3.026%, from 3.129% while the 2-year note last fell 1/32 in price to yield 2.6371%, from 2.623%. [nL2N2X31QZ]

"The volatility of all the markets is really something, the whiplash aspect of the day," said Lou Brien, market strategist at DRW Trading. "You're seeing a bit of a flight to safety and maybe the idea that even with the CPI today that we're going to re-flatten the curve."

Oil prices rose on Wednesday after flows of Russian gas to Europe fell and Russia sanctioned some European gas companies, adding to uncertainty in world energy markets. [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/barrel up $5.05 or 4.93%.

Spot gold added 0.8% to $1,852.79 an ounce. [nL3N2X32VB]