US STOCKS-Trade tensions weigh on Wall St, hopes of rate cut 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
* Indexes down: Dow 0.18%, S&P 0.23%, Nasdaq 0.43%

(Updates prices, comments)
By Shreyashi Sanyal
June 12 (Reuters) - Wall Street's main indexes dropped on
Wednesday on worries of a prolonged U.S.-China trade war after
Washington hardened its stance, but losses were cushioned by a
muted reading on inflation that backed the case for an interest
rate cut.
Data showed consumer prices edged up 0.1% in May, in line
with expectations of economists polled by Reuters and pointed to
moderate inflation. Excluding the volatile food and energy
components, the CPI nudged up 0.1%. "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. "This is a market that would love to see us get back to the
negotiating table. The longer these trade tensions last, the
most damage it'll do to the economy, and therefore to earnings,"
said Art Hogan, chief market strategist at National Securities
in New York.
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 up 4.6% 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 as
soon as July.
Banking stocks .SPXBK , which tend to benefit from a higher
interest rate environment, slipped 1.05%. The broader financial
sector .SPSY fell 0.8%.
At 11:18 a.m. ET the Dow Jones Industrial Average .DJI was
down 48.15 points, or 0.18%, at 26,000.36, the S&P 500 .SPX
was down 6.50 points, or 0.23%, at 2,879.22 and the Nasdaq
Composite .IXIC was down 33.78 points, or 0.43%, at 7,788.79.
Semiconductor stocks, which get a sizeable portion of
revenue from China, declined, with the Philadelphia
Semiconductor index .SOX dropping 1.86%.
Micron Technology Inc MU.O , Applied Materials Inc AMAT.O
and Lam Research Corp LRCX.O fell between 4% and 5% and were
top losers among S&P 500 companies.
Adding pressure on the main indexes were declines in shares
of oil majors Exxon Mobil Corp XOM.N and Chevron Corp CVX.N
as crude prices fell nearly 2%. The energy index .SPNY fell
0.94%, the most among the 11 S&P sector. O/R
Declining issues outnumbered advancers for a 1.32-to-1 ratio
on the NYSE and a 1.40-to-1 ratio on the Nasdaq.
The S&P index recorded 20 new 52-week highs and two new
lows, while the Nasdaq recorded 19 new highs and 70 new lows.