Wall Street muted on mixed inflation messages



(Updates to afternoon U.S. trading)

* U.S. stocks inch down following Friday sell-off

* Treasury yields decline

* Oil rises 1.5%, off multi-month lows

By Lawrence Delevingne

Aug 8 (Reuters) - U.S. stocks were mostly flat on Monday, the dollar weakened and U.S. government bond yields fell as investors weighed mixed messages on inflation and how aggressive the Federal Reserve will be in combating it.

On Wall Street, The Dow Jones Industrial Average .DJI was virtually flat, while the S&P 500 .SPX lost 0.2% and the Nasdaq Composite .IXIC dropped 0.2%

Of note was Nvidia Corp NVDA.O , whose stock declined around 8% after the chip designer warned on Monday that its second-quarter revenue would drop by 19% from the prior quarter on weakness in its gaming business.

The broad Euro STOXX 600 .STOXX rose about 0.75% on Monday, led by cyclical and growth stocks, helping it recover losses from Friday. But the MSCI world equity index .MIWD00000PUS , which tracks shares in 47 countries, added just 0.05%.

Higher rates remained squarely in focus for investors.

"The rise in inflation and the Fed's reaction to it has been a real headwind for valuations this year," Morgan Stanley strategists wrote in a note on Monday. "However, it's also been a tailwind for earnings. Now, we are on the other side of that mountain, and operating leverage is rolling over likely more than the consensus expects."

Indeed, business investment appeared to be an early victim of red-hot U.S. inflation and rising interest rates, according to new U.S. government data.

The strong U.S. jobs data raised the stakes for the July U.S. consumer prices report due on Wednesday, which could see a further acceleration in inflation.

At the same time, U.S. consumers' expectations for where inflation will be in a year and three years dropped sharply in July, a New York Federal Reserve survey showed on Monday.

Fed funds futures traders are now pricing for a 67.5% chance of another 75-basis-point rate increase in September, and for the Fed funds rate to rise to 3.65% by March, from 2.33% now. FEDWATCH

"We see inflation staying above the Fed’s 2% target through next year," BlackRock Investment Institute strategists wrote in a note on Monday. "We think the Fed will keep responding to calls to tame inflation until it acknowledges how that would stall growth."

Benchmark 10-year note yields US10YT=RR fell to 2.766% on Monday, after getting as high as 2.869% on Friday, the highest since July 22. Two-year yields US2YT=RR were last at 3.215%, after reaching 3.331% on Friday, the highest since June 16.

DOLLAR EXCEPTIONALISM?

The U.S. dollar dipped around 0.2% versus a basket of six major currencies to 106.42 =USD , giving up some gains after strengthening on the jobs boom and the jump in yields.

Foreign exchange analysts were bullish on the U.S. currency's prospects.

"Data like this will further any thoughts about 'U.S. exceptionalism' and is very positive for the USD against all currencies," said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank, referring to the U.S. jobs statistics.

The euro declined slightly to $1.018 EUR=EBS .

Bitcoin and other cryptocurrencies, which tend to act as a barometer for risk appetite, gained. Bitcoin BTC=BTSP was last up 3.2% at $23,920.

Gold broke higher on Monday as the dollar and Treasury yields retreated. Spot gold XAU= rose 0.7% to $1,787 per ounce, after dropping 1% in the previous session. U.S. gold futures GCv1 added 0.7 higher to $1,785.

Oil prices rebounded some on Monday, but were still near their lowest levels in months in volatile trading as positive economic data from China and the United States spurred hopes for demand growth despite recession fears.

U.S. crude CLc1 recently rose 1.55% to $90.39 per barrel and Brent LCOc1 was at $96.30, up 1.45% on the day.
Reporting by Lawrence Delevingne in Boston, Tom Wilson in London and Wayne Cole in Sydney; Editing by Andrew Heavens, Bernadette Baum, Jane Merriman, Peter Graff

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