US stocks slip as yields move higher on strong manufacturing data

"The ISM manufacturing index surprised everyone by moving into growth territory for the first time since late 2022 with production jumping, new orders rising and inflation pressures increasing," said James Knightley, chief international economist at ING.

"Markets interpreted that as reducing the chances of meaningful Fed rate cuts, but construction was much weaker and there are a lot of jobs numbers still to come."

The yield on the 10-year benchmark U.S. Treasury note rose to 4.3311%, touching its highest level in two weeks and weighing on rate-sensitive stocks.

Investors pared their rate cut bets, with money markets pricing in about a 56% chance of at least a 25 basis point cut in June, compared with nearly 66% earlier in the day, according to the CME Group's FedWatch tool.

Markets also digested the Commerce Department's data on Friday that showed the personal consumption expenditures (PCE) price index - the Fed's preferred inflation gauge - rose 0.3% in February, compared with the estimates of a 0.4% increase, according to economists polled by Reuters.

Fed Chair Jerome Powell said on Friday that the latest U.S. inflation data was "along the lines of what we would like to see," but said since the economy was on a "strong" footing, "that means we don't need to be in a hurry to cut."

Megacap growth stocks - whose cash flows are typically discounted in a higher interest rate regime - were mixed, with Alphabet up 2.7% and notching a fresh record high, while Tesla, Apple and Nvidia slipped between 0.6% and 2.0%.

Most major S&P 500 sectors were trading lower, with rate-sensitive sectors such as real estate and utilities among the worst hit.

The sessions' losses follow the benchmark S&P 500's best first quarter since 2019 last week, driven by optimism around artificial intelligence, robust earnings and hopes of a soft landing - where inflation moderates without causing an economic slowdown.

At 12:27 p.m. ET, the Industrial Average was down 254.12 points, or 0.64%, at 39,553.25, the S&P 500 was down 15.74 points, or 0.30%, at 5,238.61, and the Composite was down 8.33 points, or 0.05%, at 16,371.12.

The Philadelphia Semiconductor Index gained 1.5%, with chipmakers like Micron Technology, and Marvell Technology rising 7.1% and 3.6%, respectively.

AT&T fell 1.2% after the wireless carrier said it was investigating a data leak that could have impacted nearly 73 million current and former accounts.

Declining issues outnumbered advancers for a 2.15-to-1 ratio on the NYSE and for a 1.97-to-1 ratio on the Nasdaq.

The S&P index recorded 32 new 52-week highs and 1 new lows, while the Nasdaq recorded 77 new highs and 57 new lows.