By Sinéad Carew
(Reuters) - Wall Street indexes closed slightly lower and the dollar gained with Treasury yields as investors digested Monday's data and waited for the U.S. Federal Reserve's interest rate decision due on Wednesday as well as key upcoming economic data and quarterly earnings reports.
Crude oil prices were lower as weak economic data from China and expectations of another Fed interest rate hike on Wednesday outweighed support from OPEC+ supply cuts due this month.
U.S. Treasury 10-year yields added to gains throughout the session, adding to a boost from the release of economic data Monday. U.S. manufacturing pulled off of a three-year low in April as new orders improved slightly and employment rebounded, but activity remained depressed amid higher borrowing costs and tight credit.
Also, U.S. construction spending increased more than expected in March, boosted by investment in non-residential structures, but single-family homebuilding remained depressed.
Matt Stucky, senior portfolio manager at Northwestern (NASDAQ:NWE) Mutual Wealth Management Co, saw Monday's data solidifying widely held expectations for the Fed to increase interest rates by 25 basis points in May and increasing the probability for a June hike.
"Now May is a done deal and June is in play. Strength in the data does mean the Fed is likely to continue its restrictive policy," said Stucky, who worries that the longer the Fed has tighter policies in place, the harder it will be on the economy.
"The higher the Fed has to increase interest rates and the longer they have to keep them there, we increase the risk of a recession and the risk of a deeper and longer-lasting recession," he said.
As a result, Stucky was surprised that the equity market did not react more negatively on Monday, even with support from JPMorgan Chase & Co (NYSE:JPM)'s deal to buy most of the assets of First Republic Bank (NYSE:FRC) after regulators seized the troubled lender, marking the third major U.S. bank failure in two months.
The Dow Jones Industrial Average fell 46.46 points, or 0.14%, to 34,051.7; the S&P 500 lost 1.61 points, or 0.04%, to 4,167.87; and the Nasdaq Composite dropped 13.99 points, or 0.11%, to 12,212.60.
MSCI's gauge of stocks across the globe shed 0.08%, while emerging market stocks lost 0.03%.
While some overseas markets were closed for the May 1 holiday, U.S. investors were gearing up for earnings reports such as Apple Inc (NASDAQ:AAPL)'s, due Thursday, and data including April's U.S. nonfarm payrolls report due out on Friday.
Robert Pavlik, senior portfolio manager at Dakota Wealth in Fairfield, Connecticut, said there's still "good reason to sit back and remain on hold until we get through this week."
"You've a whole stew of data coming out this week. You don't know if the cioppino is going to be hot, mild or somewhere in between, which is why you have the market hanging around this unchanged level," he said.
Monday's data gave the dollar a boost. The dollar index, which measures the greenback against a basket of major currencies, rose 0.393%, with the euro down 0.44% to $1.0971.
The Japanese yen weakened 0.87% versus the greenback to 137.50 per dollar, while Sterling was last trading at $1.2491, down 0.64% on the day. The Mexican peso gained 0.38% versus the U.S. dollar to 17.93.
In Treasuries, benchmark 10-year notes were up 12.4 basis points to 3.576%, from 3.452% late on Friday. The 30-year bond was last up 14 basis points to yield 3.8172%, from 3.677%. The 2-year note was last was up 7.5 basis points to yield 4.1386%, from 4.064%.
Weak economic data from China was also in focus with the manufacturing purchasing managers' index (PMI) declining to 49.2 from 51.9 in March for the world's second biggest economy. A score below the 50-point mark indicates a contraction.
U.S. crude settled down 1.46% at $75.66 per barrel and Brent ended at $79.31, down 1.3% on the day.
Gold prices edged lower as the dollar rose after better-than-expected U.S. manufacturing data.
Spot gold dropped 0.4% to $1,981.19 an ounce. U.S. gold futures fell 0.50% to $1,980.20 an ounce.