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Yields slip, stocks struggle as economic fears grow

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By Herbert Lash

NEW YORK (Reuters) - U.S. stocks closed mixed on Monday as downbeat Chinese and New York state data kindled recession fears, but the 10-year Treasury note's yield staying firmly under 3% spurred hopes the Federal Reserve will prudently hike interest rate hikes.

Chinese retail and factory activity fell sharply in April as COVID-19 lockdowns severely disrupted supply chains while New York's factory output slumped in May for the third time this year amid a collapse in new orders and shipments.

The Chinese data cast a long shadow over the world's second-largest economy while the steep drop in New York manufacturing could be an early signal of the impact of the Fed's plans to tighten monetary policy to tackle rapidly rising inflation.

MSCI's gauge of stocks across the globe closed down 0.21% and Treasury yields fell, with the benchmark 10-year note down 4.7 basis points at 2.886% after hitting 3.2% a week ago. Some see the decline since then as a sign the market has priced in all or most of the Fed's expected rate hikes.

"The most important thing happening in the market right now is the fact that the 10-year yield has held below 3%," said Tom Hayes, chairman and managing member of Great Hill Capital LLC.

Five Fed officials slated to speak on Tuesday also is key considering the market's recent tumble, he said.

"Usually when you're near a low in the market and you got five Fed speakers, they're generally not there to talk the market down," Hayes said.

With earnings growth turning positive and a more reasonable price-to-earnings ratio, stocks are more attractive, he said.

The pan-European STOXX 600 index ended flat, up 0.04%, with declining German and French indices closing lower and Britain's FTSE 100 rising on the day.

Emerging market stocks rose 0.30% and on Wall Street, the Dow Jones Industrial Average rose 0.08%, but the S&P 500 lost 0.39% and the Nasdaq Composite dropped 1.2%.

China remains an issue, as does Europe, especially eastern Europe and Putin's threats toward Finnish and Swedish plans to join NATO, said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder.

"When you see big up days, I'm not surprised to see some profit-taking on the subsequent day," Ghriskey said, referring to Friday's rally on Wall Street. "We're simply seeing a reaction to recent strength. There are various factors driving the market, but in general, none of them are very positive."

Goldman Sachs raised its 2022 earnings per share growth forecast to 8% from more than 5%, but cut its year-end target for the S&P 500 to 4,300 from 4,700 on interest rate and growth fears.

Former Goldman Chief Executive Lloyd Blankfein said on Sunday he believes the U.S. economy is at risk of possibly going into a recession as the Fed continues to raise rates to tackle rising inflation.

The dollar was down slightly after hitting a 20-year peak last week.

The dollar index fell 0.316%, with the euro up 0.18% at $1.0431 and the Japanese yen 0.09% firmer at 129.07 per dollar.

The dollar is likely to strengthen because of the macro economic outlook, whose fundamentals don't look good, said Bipan Rai, North America head of FX Strategy at CIBC Capital Markets.

"From a risk-off perspective, that should still support the dollar against most currencies," Rai said.

But the dollar is consolidating after recent strength and could see more range-bound trading sessions, he said.

The euro was near its lowest since 2017. European Central Bank policymaker Francois Villeroy de Galhau said the euro's weakness could threaten the central bank's efforts to steer inflation toward its target.

Gold rose slightly as declining Treasury yields offset headwinds from a relatively firm dollar that, along with the prospect of interest rate hikes, had pushed bullion to a more than 3-1/2 month low.

U.S. gold futures settled up 0.3% at $1,814 an ounce.

Oil rose as the European Union stepped closer to an import ban on Russian crude and traders viewed signs that the COVID-19 pandemic was receding in the hardest-hit areas of China, suggesting a significant demand recovery was in the works.

U.S. crude futures settled up $3.71 at $114.20 a barrel, while Brent rose $2.69 to settle at $114.24 a barrel.

Bitcoin last fell 5.21% to $29,664.88.

European government bond yields rose, with Germany's 10-year yield down 0.9 basis points at 0.943% - below the roughly eight-year high of 1.19% it reached last Monday.

The ECB will likely decide at its next meeting to end its stimulus program in July and raise interest rates "very soon" after that, ECB policymaker Pablo Hernandez de Cos said on Saturday.

(Reporting by Herbert Lash; additional reporting by Elizabeth Howcroft in London; editing by Ed Osmond, Chizu Nomiyama, Jonathan Oatis and Richard Chang)

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