The maneuvers of Wall Street traders sent both US bonds and stocks lower on Monday, as strong economic data reinforced the view that the Federal Reserve is not yet ready to declare victory over inflation.

Treasurys came under pressure again amid speculation that optimism about deflation may have been too optimistic. The Institute for Supply Management's services index hit a four-month high while prices rose, another sign that the world's largest economy remains on solid footing. The news rocked a trading day when investors were already digesting cautious views from some Fed speakers, including Jerome Powell.

"Absent a major shock, we think policy easing in 2024 will be more dovish than the market expects," said Marko Kolanovic, a strategist at jpmorgan Chase & Co.

The 10-year yield climbed 14 basis points to 4.16 per cent, while the two-year yield was near 4.5 per cent. The Fed swap has all but eliminated the possibility of a rate hike in March, and the chance of a rate cut in May has also diminished. The dollar hit its strongest level since November.

At the close, the Dow Jones industrial average was down 274.30 points, or 0.71 percent, at 38,380.12. The S&P 500 fell 15.80 points, or 0.32 percent, to 4942.81. The Nasdaq was down 31.28 points, or 0.20%, at 15,597.68.

The S&P 500 is well off its session lows as shares of Nvidia rose. Mounting pressure from top US regulators has led to a surprise decision by New York Community Bank to slash its dividend and stockpile cash in case commercial real estate loans turn sour, according to people with direct knowledge of the situation.

In an interview with CBS '60 Minutes that aired over the weekend, Powell reiterated that policymakers would likely wait until after March to cut interest rates. Minneapolis Fed President Neel Kashkari said officials have time to evaluate incoming data before easing policy, while Chicago Fed President Austan Goolsbee reiterated his desire to see more favorable inflation data.

For Macquarie analyst Thierry Wizman, the shift in the market's assessment of when the Fed will start cutting interest rates appears to be correct. "Given the Fed's cautious approach, we have always seen June as a more likely month for a rate cut. However, what concerns us is whether the continued strength of the US labor market in January means that the US consumer will remain strong, reversing the deflationary trend and extending tight monetary policy indefinitely."

The ISM's overall services index rose to 53.4 last month. The index has remained above the 50 level for a year, indicating expansion. The latest figures beat all estimates in a Bloomberg survey of economists. The group's material price measure rose sharply, suggesting costs were rising at a faster pace.

LPL Financial analyst Jeffrey Roach said the big jump in prices paid largely reflected increased transportation costs. He added that if Red Sea conditions improve, investors should expect prices to recover.

HSBC analyst Dominic Bunning said: "The continued strength of the US economy relative to most G10 economies is one of the key reasons why we have held an opposing consensus bullish view on the US dollar since September 2023. In our view, strong activity data will make it difficult for the Fed to be confident that inflation is fully contained. As a result, we think it's easier to price rates up than down in the U.S. right now."

BMO Capital Markets analyst Ian Lyngen said: "Given this set of trends over the past few quarters, we are comfortable with the Fed's assessment that the regional banking crisis has been contained and that there has not been any contagion to the broader banking system, which gives us a fuller picture of last week's New York Central bank headlines and reinforces investors' view that this may be just an exceptional event," he said. The lack of any systemic impact."

With the S&P 500 coming off its best run in nearly 40 years, the road gets tougher for investors as the calendar turns to February. It was the third-worst month for the index in the past 30 years, behind September and August, according to data compiled by Bloomberg.

The S&P 500 has surged nearly 20 percent since October to its first new high in two years, and now there are good reasons to worry: the latest batch of big tech earnings provided a reality check on the hype around artificial intelligence; Feverish speculation that the Fed will start easing next month has cooled; Valuations remain high relative to historical valuations, which remind some strategists of the dot-com bubble.

Nationwide economist Mark Hackett said: "It's worth asking ourselves, at least in the short term, are we pricing in too much good news? In the past two years, especially in election years, there has tended to be a drop from February to March. Coupled with rising sentiment and positioning, I expect sideways to slightly negative moves over the next six to eight weeks as we move through seasonal volatility. After that, I remain optimistic about the long-term outlook for this year."

Bill Gross says he's betting that parts of the interest rate curve will return to a more normal pattern, eliminating the inversions that remain even after the Federal Reserve stops raising interest rates. He will buy the September 2024 contract tied to the secured overnight funding rate and sell the September 2025 contract.

At the same time, the Fed said US banks reported tighter credit standards in the fourth quarter under the Senior Loan Officer Opinion Survey of Bank Lending Practices, known as SLOOS, although the proportion of those tightening standards declined from the previous period.

The report suggests that the severe credit crunch feared after the collapse of four regional banks last year has not materialised. The economy has remained resilient even as high borrowing costs have weighed on households more broadly as the Federal Reserve has raised interest rates to 20-year highs.