San Francisco Frontiers - Stock markets down as US inflation eases slightly

Annual consumer inflation rose 4.9 percent last month, just a touch lower from 5.0 percent in March, official figures showed, despite strong efforts to rein in price increases.

While the latest number is a step in the right direction and marks the smallest annual rise in around two years, it remains well above pre-pandemic levels.

"Holding relatively firm at 4.9 percent, inflation is persisting despite the Fed's long-running campaign of rate hikes," said Srijan Katyal, global head of strategy and trading services at brokerage ADSS.

Following last week's Fed hike to interest rates and a forecast-beating jobs report for the world's biggest economy, cautious investors were waiting for the key US data for insights into the direction of US policymakers.

Inflation data is likely to play a key decision-making role in the US central bank's June policy meeting, according to market watchers.

"The sharp rise in the cost of borrowing has had a brutal impact on consumers and businesses and any relief on this front would be welcomed by the market -- even if it is just a rates pause rather than reduction in the near-term," said Russ Mould, investment director at AJ Bell.

The Fed has hinted at a possible pause in its long-running tightening cycle but observers warned that any sign inflation is creeping up would put pressure on officials to turn the screws further.

Stock markets in Europe slid after the release of the data, with Paris, London and Frankfurt all down at the close.

In New York, the Dow Jones climbed slightly on opening before declining in afternoon trading.

Major Asian indices also traded down Wednesday.

- Crunch talks -

While the US economy shows resilience, several indicators suggest it is easing, feeding concerns that it could be heading for a recession.

"The central bank has made it perfectly clear that returning inflation to target over the medium term remains the primary goal whatever the cost but we've now likely entered the uncomfortable period in which things are breaking, credit conditions are tightening considerably but the data isn't quite there yet," said Craig Erlam, senior market analyst at OANDA.

Adding to the headache for the Fed is the need to avoid causing more ructions in the finance sector after the recent upheaval that has seen three US regional lenders go under, one taken over by JPMorgan, and UBS buying Credit Suisse in the space of two months.

The lenders' troubles have been partly blamed on the rapid rate hikes since last year, meaning monetary policymakers have been forced to rethink their approach to bringing down inflation.

Dealers are also keeping tabs on developments in the talks to raise the US debt ceiling, with congressional leaders unable to reach an agreement on how to lift borrowing before a deadline to avoid a catastrophic default.

Crunch talks between President Joe Biden and key lawmakers from both parties Tuesday yielded no breakthrough, though they did decide to meet again Friday to hammer out a deal.

However, the way forward will be tough because the Republicans, who control the House of Representatives, said they would only raise the limit from its current $31.4 trillion maximum if spending curbs were enacted.

Still, Jason Wong, at the Bank of New Zealand, said traders were biding their time for now.

"I don't think there is likely to be any market reaction until we get closer to the X-date," he said.

It remains unclear when the government will run out of funds, but the Treasury has warned it could happen as early as June 1.

Elsewhere, shares of London-listed energy giant Shell rose after Britain's highest court ruled it was too late for pollution claims to be lodged over a huge oil spill more than one decade ago.

- Key figures around 1530 GMT -

New York - Dow: DOWN 0.2 percent at 33,481.30 points

EURO STOXX 50: DOWN 0.5 percent at 4,301.83

London - FTSE 100: DOWN 0.3 percent at 7,741.33 (close)

Frankfurt - DAX: DOWN 0.4 percent at 15,896.23 (close)

Paris - CAC 40: DOWN 0.5 percent at 7,361.20 (close)

Tokyo - Nikkei 225: DOWN 0.4 percent at 29,122.18 (close)

Hong Kong - Hang Seng Index: DOWN 0.5 percent at 19,762.20 (close)

Shanghai - Composite: DOWN 1.2 percent at 3,319.15 (close)

Euro/dollar: UP at $1.0974 from $1.0965 on Tuesday

Pound/dollar: UP at $1.2617 from $1.2622

Dollar/yen: DOWN at 134.58 yen from 135.22 yen

Euro/pound: UP at 86.98 pence from 86.84 pence

West Texas Intermediate: UP 0.8 percent at $73.71 per barrel

Brent North Sea crude: UP 0.9 percent at $77.28 per barrel

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H.Reyes--SFF