NEW YORK, May 7 (Reuters) - Wall Street relinquished earlier gains on Tuesday, failing to follow their global counterparts higher as investors parsed the likelihood and timing of Federal Reserve rate cuts this year, while a weaker yen offset by a stronger euro pushed the dollar into positive territory.
The S&P 500 and the Dow were essentially unchanged, while the tech-laden Nasdaq was slightly lower.
Benchmark Treasury yields softened and the dollar rose modestly, its gains held in balance by a strong euro and a weak yen.
"It's a quiet day, the major averages are flat, and there’s some profit taking," said Tim Ghriskey, senior portfolio strategist Ingalls & Snyder in New York. "The focus remains on the Fed but the Fed is pretty clear that there’s little that’s happening any time soon."
A weaker-than-expected U.S. jobs report on Friday in the wake of the prior week's GDP reading, which showed the slowest growth in nearly two years, provoked a dovish outlook pivot among investors regarding how soon and by how much the Federal Reserve will cut rates.
Traders are now pricing in 45 basis points of Fed rate cuts by the end of 2024, with a first cut possibly in September, according to LSEG's rate probability app. Traders had recently priced in just one cut due to sticky inflation data.
But potentially stalled progress on inflation means monetary policy may be less restrictive than officials believe, Minneapolis Fed President Neel Kashkari said in an essay that raises the possibility that prices are "settling" at a level above the Fed's 2% target.
"There is a camp out there that the Fed should declare job done with inflation at three percent and live with that but I doubt that would occur," Ghriskey added. "Is the right inflation number 2% or 3%? An argument could be made for each but the Fed has made it clear that 2% is their target."
The Dow Jones Industrial Average rose 2.87 points, or 0.01%, to 38,855.14, the S&P 500 gained 1.49 points, or 0.03%, to 5,182.23 and the Nasdaq Composite dropped 29.82 points, or 0.18%, to 16,319.43.
European shares closed at record levels, buoyed by upbeat earnings from the financial sector as well as rate cut optimism.
The pan-European STOXX 600 index rose 1.14% and MSCI's gauge of stocks across the globe gained 0.16%.
Emerging market stocks rose 0.06%. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.16% higher, while Japan's Nikkei rose 1.57%.
The dollar reversed an early drop and was last higher against a basket of world currencies, strengthening against the yen even after new warnings from Japanese officials about their willingness to prop up their currency.
The dollar index rose 0.35%, with the euro down 0.18% to $1.0749.
The Japanese yen weakened 0.52% versus the greenback at 154.72 per dollar, while sterling was last trading at $1.2504, down 0.45% on the day.
Treasury yields slipped as traders focused on absorbing $125 billion in new supply this week, while a parade of Federal Reserve officials is queued up to speak on prospects for a 2024 policy pivot.
Benchmark 10-year notes last rose 7/32 in price to yield 4.461%, from 4.489% late on Monday.
The 30-year bond last rose 18/32 in price to yield 4.6055%, from 4.642% late on Monday.
Oil prices were nearly unchanged as investors juggled easing supply concerns and signs of weakening demand.
U.S. crude edged down 0.13% to settle at $78.38 per barrel, while Brent 83.31 settled at $83.16 per barrel, down 0.20% on the day.down 0.02%
Gold slipped, giving up the previous session's gains as traders remained focused on the likelihood and timing of Fed rate cuts.
Spot gold dropped 0.4% to $2,314.22 an ounce.
Disney (DIS.US)