San Francisco Frontiers - Stocks fall, dollar gains as rate cut outlook dims

A forecast-beating report Tuesday on US consumer confidence was the latest evidence that the economy is not slowing fast enough to allow the Federal Reserve to cut borrowing costs any time soon.

Then a higher-than-expected inflation report in Australia early Wednesday soured the mood in Asian trading.

The dollar gained on the higher for longer rates outlook.

US Treasury yields -- a proxy for interest rates -- moved higher after there was weak demand for notes at a Treasury auction Tuesday.

"The rise in yields reflects sticky inflation concerns and higher interest rate expectations after stronger-than-expected U.S. consumer confidence data yesterday and following hawkish commentary from Federal Reserve officials," said Fiona Cincotta, a market analyst at StoneX.

All three major US indexes were lower in midday trading in New York.

American Airlines shares slumped 15 percent after cutting its earnings outlook on weaker travel demand. Marathon Oil shares jumped 8 percent after fellow US energy giant ConocoPhillips announced it will acquire it in an all-stock transaction valued at $22.5 billion. ConocoPhillips dropped 4 percent.

The next major US indicator is Friday's Personal Consumption Index, the Federal Reserve's favourite inflation index.

"Friday's PCE report will be the most important release this week," said Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research.

"We believe inflation is sticky and not stuck, but a slower pace of disinflation could end up resulting in fewer rate cuts down the road," he said.

US central bank official Neel Kashkari warned Tuesday that decision-makers had not ruled out a possible hike if they continue to struggle to bring prices down to their two percent target.

His comments come after several other Fed officials have recently said they were cautious about cutting too soon and wanted to see more data proving inflation was coming back down to two percent.

Friday also sees eurozone inflation data for May, and a further cooling would reaffirm expectations of a June rate reduction from the European Central Bank.

Data on Wednesday showed inflation in Germany, Europe's biggest economy, accelerated to 2.4 percent in May, though analysts said it was due to one-off factors and it would not affect the ECB's rate-cut move.

Still the main stock markets in Europe all closed lower, following on from weak markets in Asia and New York's gloomy opening.

Among individual stocks, Anglo American shares fell 5.2 percent in London after the mining giant rejected a request from BHP to extend a Wednesday deadline for takeover talks, with BHP saying later it would not be making another offer.

Expectations that interest rates could drop earlier in Europe than in the US helped firm up the dollar against most of its peers.

In commodity trading, oil prices initially rose for what would have been the fourth day after a bulk carrier was attacked in the Red Sea, a key waterway for tankers shipping crude. But prices later retreated.

- Key figures around 1545 GMT -

New York - Dow: DOWN 0.9 percent at 38,518.58

New York - S&P 500: DOWN 0.6 percent at 5,273.03

New York - Nasdaq Composite: DOWN 0.4 percent at 16,944.46

London - FTSE 100: DOWN 0.9 percent at 8,183.70 points (close)

Paris - CAC 40: DOWN 1.5 percent at 7,935.03 (close)

Frankfurt - DAX: DOWN 1.1 percent at 18,473.29 (close)

EURO STOXX 50: DOWN 1.3 percent at 4,963.20 (close)

Tokyo - Nikkei 225: DOWN 0.8 percent at 38,556.87 (close)

Hong Kong - Hang Seng Index: DOWN 1.8 percent at 18,477.01 (close)

Shanghai - Composite: UP 0.1 percent at 3,111.02 (close)

Dollar/yen: UP at 157.61 from 157.14 yen on Tuesday

Euro/dollar: DOWN at $1.0811 from $1.0862

Pound/dollar: DOWN at $1.2717 from $1.2763

Euro/pound: DOWN at 85.07 from 85.09 pence

West Texas Intermediate: DOWN 0.4 percent at $79.41 per barrel

Brent North Sea Crude: DOWN 0.6 percent at $83.70 per barrel

R.Baker--SFF