US STOCKS-Trade tensions push Wall St lower, rate cut hopes limit losses

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* U.S. consumer prices barely rise in May
* Banks fall as prospects of rate cut rise
* Expectations low for Trump-Xi talks, preparations limited
* Defensive utilities gain most among S&P sectors
* Indexes off: Dow 0.14%, S&P 0.17%, Nasdaq 0.36%

(Updates to early afternoon)
By Shreyashi Sanyal
June 12 (Reuters) - Wall Street's main indexes dipped on
Wednesday over worries of a prolonged U.S.-China trade war after
Washington toughened its stance, but losses were cushioned by a
muted reading on inflation that backed the case for an interest
rate cut.
A report from the Labor Department showed U.S. consumer
prices rose 0.1% in May, in line with expectations of economists
polled by Reuters, pointing to moderate inflation. "These numbers will add some fuel to the case made by the
markets and many analysts that the Fed should cut rates," said
Robert Frick, corporate economist at Navy Federal Credit Union
in Vienna, Virginia.
Fresh worries erupted on the trade front after President
Donald Trump said he was holding up a deal with China and had no
interest in moving ahead unless Beijing agrees to four or five
major points. With under three weeks to go before proposed talks between
the United States and Chinese leaders, sources say there has
been little preparation for a meeting even as the health of the
world economy is at stake. Trump also said a potential trade deal could be reached with
China, but again threatened to increase tariffs on Chinese goods
if they do not make a deal. "The trade fears have come back and will continue to make
investors nervous at least until the G20 summit. The fact
remains that the two countries are not very close to making a
deal," said Rick Meckler, partner, Cherry Lane Investments, New
Vernon, New Jersey.
Hopes that the Federal Reserve will act to counter a slowing
global economy due to escalating trade war have spurred a rally
in stocks this month, with the S&P 500 index .SPX rising 4.7%
so far in June.
Fed policymakers will meet on June 18-19 and markets have
priced in at least two rate cuts by the end of 2019. Fed fund
futures FEDWATCH imply around an 80% chance of an easing in
rates as soon as July.
Banking stocks .SPXBK , which tend to benefit from a higher
interest rate environment, slipped 1.19%. The broader financial
sector .SPSY fell 0.84%.
At 13:05 p.m. ET the Dow Jones Industrial Average .DJI was
down 36.00 points, or 0.14%, at 26,012.51, the S&P 500 .SPX
was down 4.88 points, or 0.17%, at 2,880.84 and the Nasdaq
Composite .IXIC was down 27.77 points, or 0.36%, at 7,794.79.
Facebook Inc FB.O shares declined 1.93% after the Wall
Street Journal reported that the social media giant uncovered
emails that appear to show Chief Executive Officer Mark
Zuckerberg's connection to potentially problematic privacy
practices at the company.
Semiconductor stocks, which get a sizeable portion of
revenue from China, declined, with the Philadelphia
Semiconductor index .SOX dropping 1.91%.
Micron Technology Inc MU.O , Applied Materials Inc AMAT.O
and Lam Research Corp LRCX.O fell about 5% and were the top
losers among S&P 500 companies.
The energy index .SPNY slid 1.24%, the most among the 11
S&P sectors, as crude prices fell more than 2%. O/R
In a bright spot, the defensive utilities sector .SPLRCU
gained 1.31%.
Declining issues outnumbered advancers for a 1.20-to-1 ratio
on the NYSE and a 1.11-to-1 ratio on the Nasdaq.
The S&P index recorded 21 new 52-week highs and two new
lows, while the Nasdaq recorded 26 new highs and 85 new lows.