Wall Street notches record closing highs on cooler inflation data

By Stephen Culp

NEW YORK (Reuters) -The Nasdaq and the S&P 500 recorded their fourth consecutive record closing highs on Thursday and U.S. Treasury yields touched their lowest levels since early April as investors reconciled cooler-than-expected inflation data with tempered rate-cut expectations from the Federal Reserve.

The dollar gained ground against a basket of world currencies as the Fed's hawkishness and possibility of a Europe-China tariff war sent European stocks sharply lower.

The blue-chip Dow was modestly lower at the closing bell.

The Labor Department's data showed producer prices came in significantly lower than analysts had expected, dipping 0.2% in May on a monthly basis, while rising 2.2% year-on-year, or 20 basis points above the Fed's 2% annual inflation target.

In another report, initial jobless claims touched a 10-month high.

The data followed Wednesday's cooler-than-expected CPI report and the Fed's revised dot plot, which lowered rate-cut expectations this year from three to one.

"After solid gains, markets are kind of taking a pause after the big news day yesterday and that's not a bad thing," said Ryan Detrick, chief market strategist at Carson Group in Omaha, Nebraska. "We call this the calm after the storm - we’re consolidating some of the really big gains we've seen in the first half of June.

Despite the Fed's hawkish dot plot revision, expectations that the U.S. central bank could implement its first rate cut as soon as September are on the rise.

Financial markets now see a 60.5% likelihood of a 25-basis-point reduction to the Fed funds target rate in September, according to CME's FedWatch tool.

"The Fed might talk a little hawkish, but they’re also data dependent," Detrick added. "And with today's PPI data also showing improvement, the market is taking the opinion that the Fed might change their mildly hawkish tune fairly soon with continued improvement on inflation data."

The Dow Jones Industrial Average fell 65.17 points, or 0.17%, to 38,647.04, the S&P 500 gained 12.71 points, or 0.23%, to 5,433.74 and the Nasdaq Composite added 59.12 points, or 0.34%, at 17,667.56.

European shares closed sharply lower, weighed by auto stocks as investors fretted over Beijing's response to the European Union's new tariffs on electric vehicles imported from China.

The pan-European STOXX 600 index lost 1.31% and MSCI's gauge of stocks across the globe shed 0.27%.

Emerging market stocks rose 0.64%. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.67% higher, while Japan's Nikkei lost 0.40%.

U.S. 10-year Treasury yields dipped after the soft economic data.

Benchmark 10-year notes last rose 13/32 in price to yield 4.2442%, from 4.295% late on Wednesday.

The 30-year bond last rose 27/32 in price to yield 4.4%, from 4.45% late on Wednesday.

The dollar index rose 0.53%, with the euro down 0.64% to $1.0738.

The Japanese yen weakened 0.22% versus the greenback at 157.09 per dollar, while Sterling was last trading at $1.2761, down 0.27% on the day.

Oil prices settled slightly higher in a day of up-and-down trade, as rising supply and the delayed rate cuts from the Fed were offset by the economic data.

U.S. crude rose 0.15% to settle at $78.62 per barrel, while Brent settled at $82.75 per barrel, up 0.18% on the day.

Gold prices moved lower in opposition to the dollar in following the weaker-than-expected PPI report.

Spot gold dropped 0.8% to $2,303.15 an ounce.

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(Reporting by Stephen Culp; Additional reporting by Marc Jones in London; Editing by Richard Chang, Leslie Adler and Lisa Shumaker)