Volkswacht Bodensee - Stock markets retreat as US inflation clouds rates outlook

Investors widely expect a cut next month to bolster the world's largest economy after Fed chief Jerome Powell signalled last week the risks of labour market weakness in the world's top economy.

But the personal consumption expenditures (PCE) price index held steady at 2.6 percent in July, above the Fed's two-percent target, with the core reading that strips out food and energy accelerating slightly to 2.9 percent.

"The bad news is, inflation is continuing to inch higher, which isn't really the environment the Fed likely wants to cut in," said Bret Kenwell, an analyst at eToro.

Although a September cut of 25 basis points is probably still on the cards, "it may be hard for them to move as quickly or aggressively as they'd like with inflation moving higher", he said.

Wall Street's main indexes fell at the open on Friday, after the Dow and S&P 500 closed at all-time highs on Thursday.

Wall Street will be closed Monday for the Labor Day holiday.

In Europe, German data showed that unemployment in Europe's biggest economy topped three million in August for the first time in more than a decade.

Battered by high energy costs and fierce Chinese competition, German manufacturers were struggling even before US President Donald Trump erected new tariff walls.

Separate figures showed that German inflation rose in August for the first time this year at 2.2 percent, which could lessen the chances for further European Central Bank rate cuts.

"As far as the European Central Bank is concerned, today's German inflation data will catch the hawks' attention, as it bolsters the argument for a high bar to yet another ECB rate cut," said Carsten Brzeski, an economist at ING.

Inflation slowed in France and Italy this month, however, and held steady in Spain.

In Britain, an influential think tank said Friday that the Labour government could raise billions of pounds by imposing a windfall tax on banks in the UK.

The biggest fallers on London's top-tier FTSE 100 index were lenders NatWest and Lloyds, which each shed around five percent in midday deals.

The report by the Institute for Public Policy Research suggested that banks could be targeted in the Labour government's autumn budget.

"Any such rumours are likely to have an exaggerated impact given the government's obvious need to raise more income in an attempt to mitigate its financial difficulties," said Richard Hunter, head of markets at Interactive Investor.

- Key figures at around 1340 GMT -

New York - Dow: DOWN 0.2 percent at 45,548.41 points

New York - S&P 500: DOWN 0.3 percent at 6,485.66

New York - Nasdaq: DOWN 0.5 percent at 21,593.04

London - FTSE 100: FLAT at 9,214.78

Paris - CAC 40: DOWN 0.3 percent at 7,7742.41

Frankfurt - DAX: DOWN 0.1 percent at 24,024.81

Tokyo - Nikkei 225: DOWN 0.3 percent at 42,718.47 (close)

Hong Kong - Hang Seng Index: UP 0.8 percent at 25,189.34

Shanghai - Composite: UP 0.4 percent at 3,857.93 (close)

New York - S&P 500: UP 0.3 percent at 6,501.86 (close)

Euro/dollar: DOWN at 1.1657 from $1.1680 on Thursday

Pound/dollar: DOWN at $1.3461 at from $1.3508

Dollar/yen: UP at 147.22 yen from 146.97 yen

Euro/pound: UP at 86.62 at from 86.46 pence

West Texas Intermediate: DOWN 0.3 percent at $64.39 per barrel

Brent North Sea Crude: DOWN 0.3 percent at $67.79 per barrel

burs-bcp/js/lth

G.Frei--VB