By Kevin Buckland
OTTAWA, Aug 4 (Reuters) - Wall Street stocks slipped on Thursday while Treasury yields eased with oil as recession worries intensified among investors following the Bank of England's warning of a drawn-out downturn, which nudged sterling to a one-week low.
The S&P 500 .SPX lost 0.42% to 4,137 as of 14:43 GMT, following its close at a two-month high in the previous session. The Dow .DJI dropped 0.42% to 32,676, and the Nasdaq .NDX fell 0.49% to 13,188, retreating from a three-month peak.
The two-year Treasury yield US2YR=RR eased 5.9 basis points to 3.0488%, while the 10-year yield US10YR=RR slipped 7.2 basis points to 2.6756%.
The gap between them went as wide as negative 39.2 basis points, renewing a 2000 low. An inverted curve is often viewed as portending a recession.
The monthly U.S. non-farm payrolls report will be closely watched on Friday, after data early Thursday showed a tick up in jobless claims.
"Expectations that we're headed for a recession are clear, and the clearest signal is coming from the Treasury market," said Edward Moya, senior market analyst at OANDA in New York.
"Things are looking worse abroad, and there's an expectation that we're going to see more economic weakness going into year-end, and it's hard to be optimistic on equities."
The Bank of England delivered a bigger, half-point rate rise earlier in the day, joining the Federal Reserve and other central banks in an accelerated race to catch inflation. But the hike was widely expected, and investors were more focused on the central bank's warning that a lengthy recession is on the way.
Sterling GBP=D3 sank 0.27% to $1.2115, after earlier dipping to $1.2065 for the first time since July 29. The euro added 0.5% to 0.84135 against the British pound EURGBP=D3, and rose as high as 0.8429 at one point for the first time since July 26.
British gilt yields GB10YT=RR fell sharply, with euro zone bond yields extending their fall after the BoE statement.
European stocks were steadier though, helped by strong earnings.
The STOXX .STOXX index of leading European companies eked out a 0.13% gain, while the FTSE .FTSE was about flat.
"The main surprise seems to be the somewhat downbeat economic forecasts that we have also been given," said Stuart Cole, head macro economist at Equiti Capital.
"That is somewhat worse than what we had seen in May, where the outlook was for one or two difficult quarters of low or negative growth, and then a recovery."
The greenback was mostly weaker against other peers amid lower U.S. yields, with the dollar index =USD - which measures the currency against six major counterparts including sterling, the euro and the yen - slipping 0.27% to 106.18.
The dollar dropped 0.33% to 133.405 yen JPY=EBS, with the currency pair particularly sensitive to long-term Treasury yields.
Crude oil resumed declines, as traders weighed the worsening economic outlook against tight supply. O/R
Brent crude LCOc1 futures were down 79 cents, or 0.8%, to $95.99 a barrel, while West Texas Intermediate (WTI) crude CLc1 futures fell 43 cents, a 0.4% decline, at $90.23.
Spot gold XAU= jumped 1.22% to $1,786 an ounce, helped by lower U.S. yields and a weaker dollar.
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(Reporting by Kevin Buckland; Additional reporting by Huw Jones; Editing by Kim Coghill, Mark Potter and Susan Fenton)
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