Trade tensions weigh on Wall St., hopes of rate cut limit losses

Wall Street’s main indexes dropped on Wednesday on worries of a prolonged U.S.-China trade war after Washington hardened its stance, but losses were cushioned by a muted reading on inflation that backed the case for an interest rate cut.

Data showed consumer prices edged up 0.1% in May, in line with expectations of economists polled by Reuters and pointed to moderate inflation. Excluding the volatile food and energy components, the CPI nudged up 0.1%.

“These numbers will add some fuel to the case made by the markets and many analysts that the Fed should cut rates,” said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia.

Fresh worries erupted on the trade front after President Donald Trump said he was holding up a deal with China and had no interest in moving ahead unless Beijing agrees to four or five major points.

With under three weeks to go before proposed talks between the United States and Chinese leaders, sources say there has been little preparation for a meeting even as the health of the world economy is at stake.

“This is a market that would love to see us get back to the negotiating table. The longer these trade tensions last, the most damage it’ll do to the economy, and therefore to earnings,” said Art Hogan, chief market strategist at National Securities in New York.

Hopes that the Federal Reserve will act to counter a slowing global economy due to escalating trade war have spurred a rally in stocks this month, with the S&P 500 index up 4.6% so far in June.

Fed policymakers will meet on June 18-19 and markets have priced in at least two rate cuts by the end of 2019. Fed fund futures imply around an 80% chance of an easing as soon as July.

Banking stocks, which tend to benefit from a higher interest rate environment, slipped 1.05%. The broader financial sector fell 0.8%.