Stocks dip on Fed worry, yen climbs on Japan intervention hint

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By Chuck Mikolajczak

NEW YORK (Reuters) - A gauge of global stock markets was lower for a second straight day on Wednesday, as a reading on inflation did little to change expectations the U.S. Federal Reserve will remain aggressive in fighting inflation, while the yen jumped as Japan indicated it could move to buttress the weak currency.

MSCI's gauge of stocks across the globe saw its biggest one-day percentage decline in three months on Tuesday after inflation data for August showed consumer prices unexpectedly rose, locking in investor expectations for a rate hike of at least 75 basis points at the Fed's policy meeting next week and possibly even hiking by 100 basis points, according to CME's FedWatch Tool.

GRAPHIC: U.S. inflation https://graphics.reuters.com/USA-STOCKS/xmvjoaqxxpr/inflation.png

Wednesday's inflation data was more benign, showing producer prices declined for a second straight month in August as gasoline prices fell further, but was not enough for investors to reconsider the Fed's aggressive stance.

GRAPHIC: U.S. producer prices https://graphics.reuters.com/USA-STOCKS/gkvlgnqzypb/PPI.png

"(The Fed) will definitely go 75 because the market has already given them that pass and the data indicates that 75 is needed, if nothing else than for investor confidence that the Fed is going to get ahead of inflation," said Sam Stovall, chief investment strategist at CFRA in New York.

"The real question is do we have a soft landing, a mild recession or a deep recession, and that is what has yet to be decided."

Stocks on Wall Street were higher in choppy trade. However, Union Pacific (NYSE:UNP) shares were down 4.69% as U.S. Labor Secretary Marty Walsh was hosting talks in Washington on Wednesday with freight railroad and union officials aimed at heading off a rail shutdown that could happen as early as Friday. A shutdown would exacerbate supply chain issues and potentially lead to higher inflation.

The Dow Jones Industrial Average rose 118.41 points, or 0.38%, to 31,223.38; the S&P 500 gained 20.25 points, or 0.51%, to 3,952.94; and the Nasdaq Composite added 71.06 points, or 0.61%, to 11,704.64.

The pan-European STOXX 600 index lost 0All and MSCI's Alll Country World index shed 0.15%.

In currency markets, the yen was on pace for its biggest daily percentage gain against the greenback in about a month, pulling away from recent 24-year lows versus the dollar, after the Bank of Japan conducted a rate check with banks on Wednesday in apparent preparation to step in to tame sharp yen falls, although analysts said the strengthening was likely to be short-lived.

The Japanese yen strengthened 1.34% versus the greenback at 142.65 per dollar, while Sterling was last trading at $1.1578, up 0.76% on the day.

The dollar index fell 0.364%, with the euro up 0.22% to $0.9992.

Concerns about high inflation lingering and the Fed outlook kept upward pressure on U.S. Treasury yields. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 2.2 basis points at 3.778% after touching a fresh 15-year high at 3.834%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations and a reliable recession indicator when inverted, was at -37.6 basis points.

U.S. crude recently rose 1.95% to $89.01 per barrel and Brent was at $94.69, up 1.63% on the day.