By Herbert Lash and Amanda Cooper
NEW YORK/LONDON (Reuters) -Global stocks slid from two-month highs and the safe-haven dollar steadied on Wednesday after stronger-than-expected U.S. retail sales clouded the inflation outlook and hopes that the Federal Reserve could ease its aggressive interest rate hikes.
Stocks overnight in Asia pared losses after Poland's president said a missile that hit his country was probably a stray Ukrainian defense projectile, dispelling fears that it came from Russia and could widen the Ukraine war.
U.S. equities were hurt by a dire holiday sales outlook from Target Corp. (NYSE:TGT) Investors took the opportunity after the recent softer inflation data to book profits given a vulnerable economic backdrop in Europe and China.
But concerns that better-than-expected U.S. retail sales last month could spur the American economy in coming months and then force the Fed to retain its aggressive rate posture in the face of cooler-than-expected inflation data over the past week.
"The softer inflation data took some wind out of the dollar's sails," said Joe Manimbo, senior market analyst at Convera in Washington.
"The dollar is steadier because we're having this residual, geopolitical skittishness as well as signs of a fairly sturdy U.S. economic backbone in the forms of U.S. retail sales."
Retail sales rose 1.3% in October, more than the 1.0% increase that economists polled by Reuters had forecast.
The dollar briefly pared losses on release of the retail sales data, but later fell against the euro to trade little changed against other major currencies.
The euro rose 0.42% to $1.0391, while the yen weakened 0.14% versus the dollar at 139.49.
Shares in Europe slid, with the STOXX 600 falling 1.0% to snap a four-day winning streak. The auto sector was hit by a report that Germany's Mercedes Benz cut its China electric vehicle prices as sales lagged. It's shares fell 6.2%.
MSCI's all-country world index fell 0.82%, just off a two-month high set on Tuesday.
On Wall Street, the Dow Jones Industrial Average fell 0.12%, the S&P 500 lost 0.83% and the Nasdaq Composite dropped 1.54%.
Long-dated Treasury yields fell and the inversion in key parts of the yield curve deepened after the strong retail sales report boosted expectations that the Fed will continue hiking rates, and in turn is more likely to hurt economic growth.
Goldman Sachs (NYSE:GS) said it was adding another 25 basis point hike by the Fed to its 2023 outlook, and raised its forecast for the peak fed funds rate to 5.0%-5.25% - higher than the market's current pricing of a peak target rate of 4.92%.
Goldman said it sees risks to its forecast tilted to the upside due to the possible need for more rate hikes to keep growth below potential, inflation will likely remain too high and policymakers may have to counter any premature easing.
Fed Governor Christopher Waller on Wednesday echoed concerns about inflation, saying it has raised wage pressures going forward in ways that could make it harder to lower the pace of price increases.
Yields fell further on the market's still mostly benign inflation outlook. The yield on 10-year Treasury notes slid 10.4 basis points to 3.695%.
The gap between yields on two- and 10-year notes, seen as a recession harbinger, deepened to -67.8 basis points.
"We still see the Fed on an aggressive path of raising rates to bring down inflation, which is still running way too hot," Manimbo said.
Oil prices fell more than 1% as Russian oil shipments via the Druzhba pipeline to Hungary restarted and rising COVID-19 cases in China weighed on sentiment.
U.S. crude slid $1.33 to settle at $85.59 barrel, while Brent settled down $1.00 at $92.86.
U.S. gold futures settled down about 0.1% to $1,775.80 an ounce.
Bitcoin fell 2.06% to $16,527.00, down about 19% on the month and about 65% year to date.