GLOBAL MARKETS-Stocks fall, dollar and yields gain after U.S. inflation data

World stock market indexes dropped while the U.S. dollar hit three-month peaks and Treasury yields climbed on Tuesday after data showed U.S. inflation slowed less than expected in January. Around 145 basis points of cuts were priced in at the start of February, but strong economic data has caused investors to dial down their expectations. U.S. crude ticked up 0.82% to $77.55 a barrel.

World stock market indexes dropped while the U.S. dollar hit three-month peaks and Treasury yields climbed on Tuesday after data showed U.S. inflation slowed less than expected in January. The U.S. consumer price index report reinforced expectations that the Federal Reserve will hold interest rates steady in March.

Investors reined in bets on how much the Fed will cut rates this year. "Markets are taking it pretty hard because it puts a nail in the coffin of early (March) Fed rate cuts," said Carol Schleif, chief investment officer at BMO Family Office in Minneapolis, Minnesota. "It's evidence of a still-sturdy economy. There's still inflation to be wrung out of the system."

The Dow Jones Industrial Average fell 523.80 points, or 1.35%, to 38,273.58; the S&P 500 lost 70.53 points, or 1.40%, to 4,951.31; and the Nasdaq Composite lost 279.58 points, or 1.75%, to 15,662.96. U.S. stocks have been trading at record highs, boosted by the big technology companies and expectations the Fed will soon cut rates.

The MSCI world equity index, which tracks shares in 49 nations, lost 1.21%. The Europe-wide Stoxx 600 index was last down 1.2%, having traded 0.47% lower before the data. The consumer price index increased 0.3% last month after gaining 0.2% in December, the Labor Department's Bureau of Labor Statistics said on Tuesday. Annual revisions to the CPI data published last Friday were mixed, but generally showed inflation was on a downward trend after surging in 2022.

Economists polled by Reuters had forecast the CPI gaining 0.2% on the month and rising 2.9% year-on-year. The inflation rate has fallen from a peak of 9.1% in June 2022, causing the Fed to call time on rate hikes and start thinking about cuts.

The greenback surged to 150.58 yen, a three-month peak. The dollar was last up 0.72% against the yen at 150.42, while the euro was down 0.5% on the day at $1.0718. The dollar index, which tracks the greenback against a basket of currencies of other major trading partners, also touched a three-month high after the data, and was last up 0.5% at 104.68.

The yield on benchmark 10-year Treasury notes rose to 4.2691% compared with its U.S. close of 4.17% on Monday. Investors on Tuesday were pricing in around 94 basis points of cuts from the Fed by the end of the year, down from around 112 before the data.

They saw a 40% chance of the first cut coming by May, compared with 71% previously, according to money market pricing. Around 145 basis points of cuts were priced in at the start of February, but strong economic data has caused investors to dial down their expectations.

U.S. crude ticked up 0.82% to $77.55 a barrel. Brent crude rose to $82.57 per barrel. Spot gold prices fell 0.97% to $2,000.19 an ounce.