GLOBAL MARKETS-Lingering inflation keeps Wall Street muted to end brutal quarter

BY Reuters | TREASURY | 09/30/22 02:01 PM EDT

(Updates to afternoon U.S. trading)

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Dollar flat, sterling ticks up after week of turmoil

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Treasury yields little changed

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Oil prices retreat

By Lawrence Delevingne

Sept 30 (Reuters) - Wall Street and global stocks made up little ground on Friday, with government bond yields and the dollar holding near recent peaks, as higher-than-expected inflation continued to weigh on markets.

Fresh personal consumption expenditures (PCE) price index data, tracked by the U.S. Federal Reserve as it considers more interest rate hikes, showed a rise of 0.3% last month after dipping 0.1% in July. Euro zone inflation hit a record high of 10% in September, surpassing forecasts for a 9.7% rise, flash inflation data showed.

Fed Vice Chair Lael Brainard said on Friday the U.S. central bank would need to maintain higher interest rates for some time as part of its effort to tame inflation and must guard against lowering rates prematurely.

Quincy Krosby, chief global strategist for LPL Financial in Charlottesville, Virginia, said the new price index data "did little to assuage fears that the campaign to curtail inflation is working as quickly as hoped by the market."

End-of-the-quarter re-balancing "will play a significant role in how the market ends a particularly volatile week," she added.

U.S. stocks were little changed in choppy trading. The Dow Jones Industrial Average fell 0.3%, the S&P 500 was flat, and the Nasdaq Composite added 0.31%.

The action on Friday caps a week of global market turmoil to end a difficult quarter that saw stocks and currency markets, already rocked by recession fears, sapped by dollar strength.

Asian shares outside of Japan fell 0.2% on Friday, down around 13% in September, their largest monthly loss since the start of the pandemic in 2020.

European shares saw some recovery, with Europe's STOXX 600 up 1.3%, but they notched a third consecutive quarter of losses on worried about the impact on global growth of central banks' hiking interest rates to counter inflation.

The MSCI world equity index, which tracks shares in 47 countries, was virtually flat on Friday, down nearly 9% for the month and 6.4% for the quarter.

"We do not expect a sustainable rally in stocks until the Fed sees clear and multiple months of evidence that inflation is trending down," Andy Tepper, a managing director at BNY Mellon Wealth Management in Wynnewood, Pennsylvania, said in an email.

European government bond yields fell, with Germany's 10-year yield down 4 basis points at 2.106%, compared to Wednesday's peak of 2.352%, which was an 11-year high.

Some U.S. Treasury yields also pulled back on Friday. The yield on 10-year Treasury notes was down 0.7 basis points to 3.740% and the two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.5 basis points at 4.155%. Thirty-year Treasury bonds rose 2.1 basis points to 3.742%.

David Madden, market analyst at Equiti Capital, said a pullback in government bond yields enabled stocks to edge up, but it was unlikely the start of a longer recovery.

"The big picture hasn't changed: Yields are an upward trend, inflation is still really high, interest rates are set to continue on the path of higher rates," he said.

The Bank of England will not raise interest rates before its next scheduled policy announcement on Nov. 3 despite a plummet in sterling, but would make big moves in November and December, a Reuters poll forecast.

European Central Bank policymakers have also voiced more support for a large rate hike.

The British pound, which was driven to all-time lows earlier this week on a combination of dollar strength and the government's plans for tax cuts funded by borrowing, rose 0.15% on the day. It remains on track for its worst quarter versus the dollar since 2008.

The dollar index was flat on the day after hitting a 20-year high on Wednesday. The dollar index has risen about 17% this year. COMMODITIES U.S. crude fell 1.59% to $79.94 per barrel, and Brent was at $88.05, down 0.5% on the day. Oil had been on track for its first weekly gain in five on Friday, underpinned by the possibility that OPEC+ will agree to cut crude output

Gold prices, which gained on Friday as the dollar weakened, were still on course for their worst quarter since March last year as central banks worldwide stick with aggressive monetary policies. Spot gold added 0.3% to $1,664.50 an ounce. U.S. gold futures gained 0.31% to $1,663.60 an ounce.

(Reporting by Lawrence Delevingne in Boston and Elizabeth Howcroft in London; Editing by Mark Potter, Angus MacSwan, William Maclean, Alex Richardson and Leslie Adler)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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