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Aug 17 (Reuters) – Global equities fell and US Treasury yields rose on Wednesday after the Federal Reserve’s meeting minutes showed that officials were ready to slow the pace of interest rate hikes in tandem with signals of a slowdown in inflation.

In their July meeting minutes released on Wednesday, Fed officials said the pace of future rate hikes would depend on incoming economic data, as well as assessments of how the economy was adapting to the higher rates already approved.

After the release of the minutes, traders of futures tied to the Fed’s policy rate saw a half-percentage-point rate hike as more likely in September given recent economic data showing a moderation in inflation. US consumer prices were flat while producer prices fell in July.

“Overall, the minutes read a bit dovish,” said Sean Bandazian, senior investment analyst for Cornerstone Wealth in Charlotte, North Carolina.

“There was a lot of language about slowdowns in different areas but also several mentions about how strong the labor market is. They are keenly aware that there are several areas of the economy that are slowing. Let’s remember that these minutes are a bit stale – they are from a meeting that was prior to the decelerated CPI and an extraordinarily strong jobs report that came in for July.”

MSCI’s gauge of stocks in 50 countries across the globe shed 0.62%. In Europe, stocks closed down nearly 1%, breaking a five-day winning streak after data showed U.K. inflation exceeded 10%.

US Treasury yields advanced on lingering inflation concerns even as some investors saw minutes of the US Federal Reserve’s July meeting as officials’ taking a less aggressive stance on inflation.

Benchmark 10-year yields dipped about two basis points after the minutes were released while two-year note yields fell by about five basis points from 3.335% to 3.285%. Still, they closed higher, at 2.894% and 3.293%, respectively.

“The report read dovish and in the post minutes, yields have fallen, risk assets and equities moved higher and a lot of that comes from a bit of repricing in the September odds for a 50 basis point hike versus 75 basis point hike. It’s now skewed to the markets believing there’d be a 50 basis point hike,” Bandazian added.

On Wall Street, major indexes sharply cut their losses after the release of the minutes although stocks still closed down driven by a selloff in equities in technology, consumer discretionary, industrials and communication services.

The Dow Jones Industrial Average fell 0.5% to 33,980.32, the S&P 500 lost 0.72% to 4,274.04 and the Nasdaq Composite dropped 1.25% to 12,938.12.

Oil edged 1% higher after earlier hitting a six-month low on Wednesday, as a steeper-than-expected draw down in US crude stocks outweighed concerns over rising output, Russian exports and recession fears.

Brent crude was up 1.35% at USD 93.59, up a barrel, while US West Texas Intermediate (WTI) crude rose 1.71% to USD 88.01 per barrel.

The US dollar pared its gains following the Fed’s meeting minutes. The dollar index =USD rose 0.141%, with the euro up 0.08% to USD 1.0178.

Gold prices rebounded but were still lower. Spot gold dropped 0.8% to USD 1,760.88 an ounce, while US gold futures fell 0.30% to USD 1,767.80 an ounce.

(Reporting by Chibuike Oguh in New York; Editing by Richard Chang, Barbara Lewis and Diane Craft)

ORLANDO, Fla., Aug 17 (Reuters) – A dismal batch of indicators this week significantly darkened the economic clouds over China, but there is a clear silver lining for Wall Street and world markets: falling oil prices.

As the slowdown in the world’s largest crude importer pushes oil lower, inflation pressures have eased, giving the US Federal Reserve more leeway to ease up on its aggressive interest rate-hiking campaign and engineer the economic ‘soft landing’ it desperately desires.

Of course, there is a potential growth shock for the rest of the world that could intensify recession fears in the United States and elsewhere. Risk assets would struggle in a recession.

But investors’ glass is half full, and has been for around two months since the Fed’s June policy meeting and what increasingly appears to be the recent high in oil and ‘peak inflation’.

Brent crude fell 3% on Monday after Beijing’s data dump to its lowest since before Russia’s invasion of Ukraine in February, and Wall Street closed comfortably in the green. Oil fell a further 3% on Tuesday and the S&P 500 and Dow both rose to fresh four-month highs.

The inverse correlation between oil and Wall Street is the tightest it has been since March. When oil falls, the S&P 500 rises.

Cheaper oil has put markets in a sweet spot, and as Brian Jacobsen, senior investment strategist at Allspring Global Investments notes, the equity rally has been accompanied by an equally steady recovery in credit markets.

But he cautions that it could soon sour.

“At what point does it reflect demand destruction setting in? Demand destruction is not a good ingredient for a continued equity market rally,” Jacobsen warns.

Jacobsen reckons USD 85 a barrel is an important area. A break below could represent a less benign relationship between oil, inflation, demand and economic activity.

Brent’s decline of around 25% since June 14 has been accompanied lock step with a growing belief that the United States has reached ‘peak inflation’. A range of consumer and producer price indicators, and consumer inflation expectation surveys, all point in this direction.

POSITIVE SUPPLY SHOCK

Since its trough on June 17, the S&P 500 has rebounded nearly 20%, the VIX volatility index is under 20 for the first time since April, and high yield US credit spreads have tightened around 175 basis points.

Alan Ruskin at Deutsche Bank notes that in ‘normal times’ a steep decline in China’s economic performance would have a deeply negative impact on global activity. It accounts for over 40% of global demand in iron ore, coal, copper, aluminum, steel, nickel, and pork.

But the slowdown could also turn into a positive supply shock – weaker demand from China leading to lower commodity prices and reduced bottlenecks. Softer commodity prices are already easing inflation pressures and inflation expectations.

“Initially at least, the aggregate impact on global risk will be a positive, as global assets take their lead from the knock-on impact to US markets in particular. This favorable risk influence is stronger now, precisely because it fits with the … ‘peak inflation’ thematic,” Ruskin wrote this week.

This relatively benign ‘Goldilocks’ scenario – falling oil prices, easing inflationary pressures, rising risk assets – could get another fillip if a US-Iran nuclear deal is struck, which would allow more Iranian oil exports.

But these arguments and scenarios are circular. Even lower oil, higher stocks, and narrower credit spreads would ease overall financial conditions without fail. This is exactly what the Fed is trying to avoid, and Jerome Powell and co might be tempted to push rates even further into restrictive territory.

That’s when ‘demand destruction’ fears would likely start to dominate investors’ thinking. We might get there, but we are certainly not yet.

(By Jamie McGeever; the opinions expressed here are those of the author, a columnist for Reuters)

Aug 17 (Reuters) – World shares edged up on Wednesday taking comfort from strong US retail earnings even though the UK’s highest inflation since 1982 and a rate hike in New Zealand reminded investors of the challenges facing the global economy.

MSCI’s benchmark for global stocks was up 0.1% by 0829 GMT, extending its July recovery, although concerns over high inflation and policy tightening kept a lid on gains.

European shares were barely changed after a positive open. The MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.2%, off earlier highs.

Wall Street looked set for a weaker start after strong gains on Tuesday following stronger-than-expected results from Walmart and Home Depot which bolstered views on the health of consumers. S&P 500 futures were down 0.3%.

But British consumer price inflation jumping more than expected to 10.1% in July highlighted growing pressures on households while cementing expectations of another 50 basis point (bps) rate hike at the next Bank of England meeting.

After an initial spike on the data, sterling pared some gains and was last up 0.1% against the dollar.

“Higher inflation should trigger a more aggressive monetary policy response from the Bank of England – a bullish signal for sterling,” said Matthew Ryan, Head of Market Strategy at Ebury.

“On the other hand, however, higher prices present a clear downside risk to economic activity, and raise the possibility of a potentially prolonged UK recession, which is clearly bearish for GBP,” he added.

Shares in New Zealand were flat. After an initial spike the kiwi dollar turned negative after the country’s central bank announced a fourth consecutive 50-bps rate hike without giving hints of slowing down.

The hike was in line with forecasts, but Imre Speizer, head of NZ market strategy at Westpac, said the tone of RBNZ’s statement was more hawkish than expected.

“Clearly they’re a bit more worried about wage inflation and a very tight labour market, that’s been a big recent development,” Speizer said.

In foreign exchange markets, the dollar index gained 0.15% to 106.64 ahead of the release of minutes from the Federal Reserve’s latest meeting which investors will scrutinize for more clues on its policy tightening outlook.

The index, which tracks the greenback against six main peers, has recovered most of the ground it lost last week after a cooler-than-expected US inflation reading but remains well off its mid-July top.

In Europe, yields rose as the UK inflation data shifted investors’ focus back to potential further monetary tightening in the euro area. German 10-year bond yields rose 6 bps to 1.43%, their highest since July 22. Ten-year Treasury yields rose 4 bps to 2.865%.

Oil prices stayed near 6-month lows as worries over a global economic recession lingered, although an unexpectedly large drop in US stocks provided support earlier in the day.

Brent crude was down 0.3% at USD 92.06 a barrel while US West Texas Intermediate crude was flat at USD 86.5.

Spot gold traded in a narrow range and was last down around 0.2% at USD 1,7712.5 an ounce.

(Reporting by Danilo Masoni and Sam Byford in Tokyo; Editing by Nick Macfie)