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The Dow and S&P 500 edged lower on Monday, dragged down by investor worries over the timing of interest rate cuts by the Federal Reserve after stronger-than-expected manufacturing data pushed Treasury yields higher. The TSX was able to finish slightly in the green, thanks to a rally in the energy and materials sectors, and set a fresh record closing high.

The Institute for Supply Management (ISM) said its manufacturing PMI increased to 50.3 last month, the highest and first reading above 50 since September 2022, from 47.8 in February. It suggested the U.S. manufacturing sector, which has been battered by higher interest rates, was recovering.

“If the economy is still somewhat strong and now that PMI data is starting to move up, that just suggests there could be some upside pressure in yields,” said Keith Lerner, chief market strategist at Truist Wealth in Atlanta.

Benchmark 10-year and two-year U.S. Treasury yields jumped to two-week peaks following the manufacturing data, and that pushed Canadian bond yields higher as well. By late afternoon, Canada’s two-year and five-year bond yields were both up about 13 basis points to their highest levels since mid-March.

“We would prefer a stronger economy with less rate cuts than a weaker economy with more rate cuts, but, on a short term basis, the narrative has moved to about three rate cuts,” Lerner added.

Key Fed officials - Governor Christopher Waller and Atlanta President Raphael Bostic - have said their preference is for fewer than three cuts this year.

Investors will get more clarity on the U.S. central bank’s thinking this week, with 13 of 19 Fed officials speaking. Also, the U.S. and Canadian monthly jobs reports are due on Friday.

The U.S. rate futures market was pricing in a 58% chance of a rate cut in June, down from about 64% a week ago, according to the CME’s FedWatch tool.

Money markets are putting equal odds on whether the Bank of Canada will start cutting interest rates in June. They are pricing in about 70 per cent odds of a cut by July. A total of 50 basis points of cuts are priced in by October.

The Dow Jones Industrial Average fell 240.52 points, or 0.60%, to 39,566.85, the S&P 500 lost 10.58 points, or 0.20%, to 5,243.77 and the Nasdaq Composite gained 17.37 points, or 0.11%, to 16,396.83.

The majority of S&P 500 sectors were lower, with the real estate, healthcare, and utilities among the worst hit. The energy sector gained along with stronger crude oil prices. An index of semiconductors jumped 1.2%.

Among the day’s decliners, AT&T shares slipped 0.6% after the U.S. telecoms giant announced a massive data leak that affected current and former account holders.

The S&P/TSX composite index closed at 22,185.25, up 18.22 points or 0.08%. While most sectors were lower, the energy sector rose about 1% and the materials sector gained 1.5%.

“I wouldn’t be surprised to see some back and fill but the path of least resistance is up because we have decent growth but slowing inflation, so interest rates shouldn’t really be a big problem,” said Joseph Abramson, co-chief investment officer at Northland Wealth Management.

“The key issue is the action beneath the surface, where we’re still driven by this narrow group and so the sectors that Canada tends to have more exposure to, the banks and energy and materials, still participate but in all likelihood underperform,” Abramson said.

The TSX has gained 5.9% since the start of the year, trailing a gain of nearly 10% for the S&P 500 which has been aided by optimism over AI-related stocks.

Ballard Power Systems was a standout. Its shares surged 18% after the fuel cell maker announced its largest ever order.

Private equity firm Advent International has agreed to buy Nuvei in an all-cash deal that values the Ryan Reynolds-backed payments technology firm at $6.3 billion. Nuvei’s shares added 2.7%.

Financials were a drag, falling 0.6%, while the utilities group was down 0.8% as bond yields climbed following data that showed growth in the U.S. manufacturing sector.

Volume on U.S. exchanges was 10.22 billion shares, compared with the 12 billion average for the full session over the last 20 trading days. Declining issues outnumbered advancing ones on the NYSE by a 1.90-to-1 ratio; on Nasdaq, a 1.73-to-1 ratio favored decliners. The S&P 500 posted 36 new 52-week highs and 2 new lows; the Nasdaq Composite recorded 97 new highs and 74 new lows.

Reuters, Globe staff

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