Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com WALL STREET LUGES ITS WAY TO THE END OF ANOTHER RISK-OFF SESSION (1605 EST/2105 GMT) Wall Street extended its sell-off on Tuesday as warmer-than-expected inflation data put the Fed"s dovish stance on thin ice. Technology shares (.SPLRCT) led three major U.S. stock indexes lower, with the Nasdaq (.IXIC) ending the session down 1.1%. With today"s slide, the S&P 500 is 1.7% below its record closing high reached last Friday. Winners were few and far between, with financials (.SPSY) the sole gainer among the major S&P sectors. Banks (.SPXBK) in particular advanced nearly 1%. The Labor Department"s PPI report showed price growth accelerating for U.S. goods and services companies, posting the largest annual gain since the data was rejiggered over a decade ago read more . This state of affairs echoed in the NFIB"s Small Business Optimism index, which showed a record number of respondents planning to increase their prices in order to pass the pain along to the consumer. The data coincided with the Federal Reserve convening its two-day monetary policy meeting, at which a fly on the wall would be much more likely to hear the words "persistent" and "supply chain" than yesterday"s word du jour "transitory." Amid the ever-shifting pandemic panorama, Pfizer Inc (PFE.N) announced its COVID pill is nearly 90% effective in preventing hospitalization or death from the disease read more , but its vaccine to prevent COVID infection, developed with BioNTech (.BNTX.O), seemed to be less effective against the Omicron variant. Pfizer shares gained 0.7%. Investors now gird their loins for what could be an eventful hump-day tomorrow, as the Fed releases its post-meeting statement and Chairman Powell zooms through the expected Q&A. On the data front, import prices, business inventories and homebuilder sentiment reports will be of interest. But the Commerce Department"s retail sales print for November will likely hog the limelight, providing clues regarding consumer spending in the all-important holiday season. Economists polled by Reuters expect a monthly increase of 0.8%, a deceleration from October"s more robust 1.7% growth. Here"s your closing snapshot: Closing snapshot Closing snapshot (Stephen Culp) ***** LOOSEN UP ON THOSE EARNINGS OUTLOOK NERVES (1354 EST/1854 GMT) As analysts and strategists point their attention to 2022, the Wells Fargo"s investment strategy committee was out with a note late on Monday suggesting that everybody should chill out and be a bit less pessimistic. Looking at historical patterns, they found that while analysts in general do a fairly good job at predicting earnings their accuracy suffers during recessions and immediately afterwards. In recessions analysts - maybe not realizing they are in a recession - tend to overshoot on estimates. And right after a recession, estimates tend to undershoot until the cycle matures, according to Wells. It is seeing a similar trend in this cycle except "that the magnitude of underestimating earnings is the largest ever recorded" because Covid and supply chain problems has made analysts "more pessimistic than normal." Analysts are "overweighting" those risks, in particular in industrials, financials and information technology which Wells sees as having a favorable outlook. It sees a steepening yield curve, a resurgence of share repurchases, continued tech spending and elevated new goods orders all providing earnings with a nice tailwind. So the committee is predicting a record year for S&P 500 earnings in 2022 and its estimate for $235 earnings per share. This doesn"t look shabby at all compared with the $222.85 EPS expected by analyst estimates gathered by Refinitiv. (Sinéad Carew, Caroline Valetkevitch) ***** IT CAME FROM DC: WHAT WALL STREET CAN EXPECT (OR NOT) FROM WASHINGTON IN 2022 (1245 EST/1745 GMT) With the books closing on yet another volatile year chock-full of surprises and unknowns, market participants are turning their gaze beyond the Federal Reserve to Capitol Hill for clues as what to expect in the new year. The Cowen Washington Research group provides a summary of what investors might be on the lookout for once the ball drops and President Biden completes his first year at the helm. Lead analyst Eric Assaraf is quick to point out that 2021, between the infrastructure bill and the American Rescue Plan, lawmakers pumped more than $3 trillion in fiscal spending into the economy. "(The) speed, scope and scale for fiscal policy under Biden is unprecedented," Assaraf writes. And the party isn"t quite over. The "Bring Back Better" (BBB) reconciliation package, the passage of which now has a deadline coinciding with Biden"s February State of the Union address, is expected to add a $1.85 trillion cherry to the top of the fiscal aid cake, according to the note. Beyond that, Assaraf sees "likely gridlock/fiscal drag for 2 years post midterms." At a sector level, Cowen makes the following observances: ** Aerospace/defense: shifting foreign policy under the Biden administration presents medium-term risk for the sector, particularly in the area of foreign sales of defense goods. ** Financials: a fresh crop of Biden-appointed regulators likely "will crack down on the concentration of economic power," affecting M&A activity in the space, as will appointments to the Fed. ** Healthcare: while Assaraf sees drug pricing revisions outside the BBB as "unlikely," he believes lobbyists will continue to seek changes to government negotiation policies between now and when price cuts are scheduled to begin in 2025. Additionally, legislation could result in "permanent telehealth, an accelerated coverage pathway, and lab test reform." ** Sustainable/ESG: Cowen sees U.S.-based solar manufacturers and electric auto assembly benefiting from tariff extensions as Biden"s environmental focus shifts from legislation to regulation ** Media/tech/telecom: Assaraf believes if the heavy-hitters can hold antitrust legislation at bay until August, that can is likely kicked down the road until 2025. Biden himself is the wild card here. If the President gets personally involved, likelihood of passage grows from 40% to 65%, he writes. (Stephen Culp) ***** COVID VARIANTS, LIQUIDITY BOOM UNWIND, FUELING VOLATILITY (1215 EST/1715 GMT) In his latest market deliberations this week, Robert Doll, chief investment officer at Crossmark Global Investments, is noting that volatility has picked up in financial markets, primarily driven by COVID-19 variants, coupled with signs that the liquidity boom will start to unwind next year. As for this week"s FOMC Meeting, Doll is expecting the "speech of QE tapering to notch higher." With this, he says the likelihood of earlier rate hikes in 2022 has increased. Eventually, Doll also expects the uptrend at the short-end of the U.S. yield curve to spill over to the long end, leading to higher yields there too. According to Doll, further patience is needed to assess the severity of the Omicron threat. Meanwhile, he expects the inflationary backdrop to persist. Overall, he says Crossmark remains "mildly constructive" in their investment stance, mostly due to a bearish weighting in bonds rather than an aggressive tilt toward equities. In the end, he believes the cyclical rise in "inflation will persist and eventually put upward pressure on long-term bond yields and force central banks to turn less accommodative." However, he adds that such an end point likely lies beyond 2022, given lingering COVID concerns, entrenched reflationary biases at central banks, and still behaving bond markets. (Terence Gabriel) ***** FED AND TECH, NOT A NICE MIX FOR EUROPE (1153 EST/1653 GMT) It was a choppy session from the start, but things really started to go downhill for Europe once the U.S. PPI data came out. Fears of faster Fed tapering and future rate hikes are typically bad news for growth stocks and today was no exception. The STOXX 600 ended the day down over 0.8% with the tech sector dropping 2.4%, mirroring a drop for the Nasdaq. As one would expect in these circumstances, it was a much better day for banks and miners which rose 0.8% and 1.3% respectively. So far though, European equity markets are up about 1.4% in December, which of course doesn"t qualify for a Santa rally but it"s probably an outcome many investors would sign up for right now. There"s a lot at stake in terms of central bank action with the Fed, the BoE and the ECB all lined up for the next couple of days. Of course, there"s a sense policy makers won"t rock a boat facing another COVID-19 storm, but in any event, some volatility seems inevitable cruising forward. (Julien Ponthus) ***** FUND DEMAND DROP POSES RISK FOR U.S. TREASURIES (1112 EST/1612 GMT) A record more than $500 billion net decline in U.S. Treasuries held by investment funds in the third quarter raises the risk of higher rates and volatility in 2022, particularly as the Federal Reserve shrinks its purchases of the government"s debt, according to John Canavan, lead analyst at Oxford Economics. The decline, which was concentrated in Treasury bills held by money market funds, came as outstanding bill supply was slashed, investment funds" U.S. bond and note holdings were about flat, and the Fed remained a big purchaser of Treasuries, Canavan wrote in a report on Monday. He added that "the market will need to find other sources of support going forward, as the Fed has already begun to taper (quantitative easing), and we expect purchases will end by March 2022." Foreign investors own the biggest share of Treasuries. However, foreign allotments in Treasury auctions, while strong, have not compensated for a sharp drop in allotments to investment funds over the past few months, which helped fuel a volatility rise since mid-September, Canavan noted. "As markets contend with sticky inflation and investors position themselves for increased Fed policy rates, we expect the fall in investment fund demand and the additional decline in demand from the Federal Reserve will sustain the increased volatility through early 2022," the report said, adding that should pressure rates higher with the benchmark 10-year yield rising to around 1.75% in 2022"s first quarter. (Karen Pierog) ***** ROASTING ON AN OPEN FIRE: PRODUCERS, SMALL BUSINESS, FED FEEL INFLATION HEAT (1045 EST/1545 GMT) Welcome to Fed Tuesday, where inflation is hot and the Federal Reserve is feeling the heat. And with the polar icecaps melting, the mercury is also on the rise at Santa"s Workshop in the North Pole, according to November"s PPI print. The Labor Department"s producer prices report (PPI) (USPPFD=ECI), a gauge of the prices U.S. goods-producers get for their wares at the factory door, came in significantly hotter than analysts expected, unexpectedly accelerating to 0.8% from 0.6% and well above the 0.5% consensus. read more Year-over-year, the headline print jumped to a sweltering 9.8%, while the core number (which strips out food, energy and trade services) gained 0.6 percentage points to 6.9%. "Price metrics have been running well above target for much longer than anticipated," says Rubeela Farooqi, chief U.S. economist at High Frequency Economics. These data support the Fed’s switch to a faster taper that will likely precede a quicker tightening of policy next year. As seen in the graphic below, core PPI, along with other major indicators, has been launched into orbit, sailing well above the Federal Reserve"s average annual 2% inflation target. The picture it paints provides a rather clear rationale for the Fed to stop batting the word "transitory" around like a shuttlecock in its monetary policy game of badminton. Inflation Inflation And, increasingly, U.S. businesses are planning on passing those prices along to the consumer. While the National Federation of Independent Business" (NFIB) Optimism index (USOPIN=ECI) inched up 0.2 points to a reading of 98.4 last month, you"d never know it from accompanying NFIB press release. "The outlook for business conditions is not encouraging to small business owners as lawmakers propose additional mandates and tax increases," writes Bill Dunkelberg, NFIB"s chief economist. "Owners are also pessimistic as many continue managing challenges like rampant inflation and supply chain disruptions that are impacting their businesses right now." And the typical respondent is putting their money where their mouth is, namely on the consumer"s plate. As Lydia Boussour, lead U.S. economist at Oxford Economics points out: "Small firms continue to pass along higher prices onto consumers," Boussour says. "The share of firms raising prices – a leading indicator of core inflation – jumped 6 points to a new record 59%. And in a sign that high inflation is not going away any time soon, the share of firms planning to raise prices climbed to a new record." The uptick in the Optimism index was attributable to a slight easing in the inability to find qualified workers and an increase in inventories. It should be noted that the NFIB is a politically active membership organization. Inflation Inflation Wall Street fluctuated in morning trading, with the market-leading tech associated stocks weighing on all three major U.S. stock indexes. The Dow flipped nominally into negative territory, its losses mitigated by financials. Value stocks (.IVX) are a pale green, while growth stocks (.IGX) are resolutely lower. (Stephen Culp) ***** AND THEN IT WAS TUESDAY: S&P 500 EXTENDS ITS SELL-OFF (1001 EST/1501 GMT) U.S. stocks wobbled in early trading on Tuesday, as the latest in a string of hot inflation reports appeared to raise concerns over just how soon the Fed will whisk the punch bowl away. That said, all three major stock indexes are off initial lows, with the blue-chip Dow flipping green as producer prices came in well above consensus read more , just as the Federal Reserve is convening its two-day monetary policy meeting, during which inflationary concerns were likely to take center stage. Value stocks (.IVX) are off to a better session than growth (.IGX) and the biggest drags on the S&P 500 and the Nasdaq, once again, are the market leading tech-plus megacaps. Apple Inc (AAPL.O) is the exception, resuming its trudge toward reaching the $3 trillion market cap milestone. Meanwhile, in Washington, lawmakers were expected to vote on raising the federal government"s debt limit, ending a months-long stalemate. read more Here"s your opening snapshot: Opening snapshot Opening snapshot (Stephen Culp) ***** MIGHT MICRO-CAP MELTDOWN LEAD TO S&P 500 MISHAP? (0900 EST/1400 GMT) Despite a stellar-start to the 2021, micro-caps have struggled to keep pace for much of the year. The iShares Micro-cap ETF (IWC.P) peaked in mid-March, and is posting a 15% year-to-date gain vs the SPDR S&P 500 ETF Trust"s (SPY.P) 25% rise. Of note, on a weekly basis, the IWC/SPY ratio peaked in mid-March just shy of a 15-year resistance line: SPY12142021 SPY12142021 Perhaps not surprisingly, it was also around this time, that the retail-driven meme-stock mania was its most intense. Highly speculative stocks, like micro-caps, tend to have greater volatility and are thus inherently riskier than larger-cap shares. They can, therefore, be especially sensitive to the key drivers of liquidity and psychology. Recently, the performance disparity between the IWC and SPY has been particularly acute. Since November 8, the IWC has lost more than 13%, while the SPY is off just 0.6%, having just recorded a fresh record close last Friday. With this, the IWC/SPY ratio has plunged to its lowest level since November 2020. Meanwhile, the severity of the ratio"s decline from its peak has been especially sharp. In fact, in the time since the IWC topped in relative strength vs the SPY, the ratio"s 40-week rate-of-change has collapsed to an all-time low. It now remains to be seen if the micro-cap ship can be righted in the midst of tax-loss season and building fear-of-the-Fed. However, of concern for the S&P 500, from 2007 to 2020, the five biggest SPY declines from record-high territory were all preceded by protracted IWC/SPY ratio divergence. (Terence Gabriel) ***** FOR TUESDAY"S LIVE MARKETS" POSTS PRIOR TO 0900 EST/1400 GMT - CLICK HERE: read more Terence Gabriel is a Reuters market analyst. The views expressed are his own Our Standards: The Thomson Reuters Trust Principles.