Stocks end nearly flat, dollar firms before Fed rate decision

By Isla Binnie

NEW YORK (Reuters) -U.S. stock markets ended nearly flat after hitting record highs on Tuesday and the dollar stood firm as strong economic data allayed slowdown fears and investors braced for the Federal Reserve's expected move to cut interest rates for the first time in more than four years.

Signs of a slowing job market over the summer and more recent media reports had contributed in the past week to betting the Federal Reserve would move more drastically than usual at its meeting on Wednesday and shave off half a percentage point, to head off any weakness.

Data on Tuesday showed U.S. retail sales rose in August and production at factories rebounded. Stronger data could theoretically weaken the case for a more aggressive cut.

"That points to a healthy state of the economy," said Peter Cardillo, chief market economist at Spartan Capital Securities. Cardillo expects Fed Chair Jerome Powell to cut rates by 25 basis points on Wednesday, and would be looking for clues to future moves.

"He might hint the Fed could be more aggressive in the coming meetings ... I think they start off being cautious," he said.

Across the broader market, traders are still betting on a 63% probability that the Fed will cut rates by 50 basis points on Wednesday and a 37% probability of a 25 basis-point cut, according to CME Group's FedWatch tool.

The S&P 500 rose to an all-time intraday high at one point in the session, but flattened in afternoon trading and closed 0.03% higher at 5,634.58. The Dow Jones Industrial Average fell 0.04%, to 41,606.18.

The tech-heavy Nasdaq Composite bucked the Wall Street trend to close 0.20% higher at 17,628.06, while MSCI's All-World index rose 0.04% to 828.72.

"What you're seeing in this afternoon's trading is the way we pulled off of the all-time high ... because tomorrow somebody's going to be disappointed," said Russell Price, chief economist at Ameriprise Financial Services in Troy, Michigan.

STRONGER DOLLAR

The dollar perked up from its recent lows against most major currencies and stayed higher throughout the day. The index, which measures the greenback against a basket of currencies, rose 0.28% to 100.98.

Beyond the United States, the Bank of England (BoE) and the Bank of Japan (BOJ) also meet this week to discuss monetary policy, but unlike the Fed are expected to keep rates on hold.

The dollar kept strengthening against the Japanese yen, gaining 1.19% to 142.29.

The two-year U.S. Treasury yield, which typically reflects near-term rate expectations, rose 4.4 basis points to 3.5986%, having fallen to a two-year low of 3.528% in the previous session.

The benchmark 10-year yield rose 2.3 basis points to 3.644%, from 3.621% late on Monday. [US/]

In Asia, China's sputtering economic recovery continued to weigh on sentiment after data over the weekend showed the country's industrial output growth slowed to a five-month low in August, while retail sales and new home prices weakened further.

Oil prices rose as the industry continued to survey the impact of Hurricane Francine on output in the U.S. Gulf of Mexico.

U.S. crude settled 1.57% higher at $71.19 a barrel. Brent finished the day at $73.7 per barrel, up 1.31%.

Spot gold slid 0.51% to $2,569.51 an ounce, having touched a record high on Monday. [GOL/]

(Reporting by Isla Binnie in New YorkAdditional reporting by Samuel Indyk in LondonEditing by Jonathan Oatis and Matthew Lewis)