Stocks declined amid concerns about inflation following a manufacturing report and a fresh wave of concerns in the financial sector.
The Institute for Supply Management reported its manufacturing-activity index unexpectedly rose in May to 49.6, just shy of the 50 mark, which indicates expansion. That was up from 48.6 in April. However, an inflation gauge in the report surged to its highest level since April 2004.
"Manufacturers find themselves caught between rising costs and weakening demand in many industries," the ISM said. "Exports continue strong due to the weak dollar -- without the weak dollar the story would be much more negative in manufacturing."
Meanwhile, construction spending slipped 0.4 percent in April, but came in better than expected. Conditions continued to deteriorate in the residential sector but private spending outside of home building -- on everything from lodging to offices and factories -- improved for a third straight month.
Fears over the health of the financial sector returned to the market as U.S. private equity group Texas Pacificagreed to buy a 23 percent stakein Bradford & Bingley, providing a much-needed boost for the troubled UK lender as conditions in the UK mortgage market deteriorate.
In the U.S., Wachovia announced that it had ousted embattled CEO Ken Thompson, who had been under fire as the fourth-largest U.S. bank suffered through a series of credit-related problems. Wachovia said Chairman Lanty Smith will serve as interim CEO until a successor is found.
In still more financial news, General Electric, CNBC's parent company, said GE Commercial Finance will acquire Banco Santander's Italian commercial bank Interbanca. The Spanish bank agreed to buy GE Money's businesses in Germany, Finland and Austria, and its card and auto businesses in the U.K.
Over the weekend, a fire at GE's Universal Studios damaged well-known movie sets and a popular "King Kong" attraction before being brought largely under control after 12 hours.
Investors will look at major auto makers, which are expected to post steep declines when they report May sales on Tuesday.
Shares of General Motors , however, rose after a weekend report in Barron's that said GM shares could triple over the next few years.
And in the pharmaceutical industry, adding cancer drug Erbitux, manufactured by ImClone Systems , to standard chemotherapy helped advanced lung cancer patients live just a month longer than chemo alone, a study found.
Shares of Harris Corp. tumbled after the defense-communications and information-technology company said it is not for sale and is not pursuing a merger. The announcement, which broke weeks of speculation, was uncharacteristic as the company doesn't usually respond to rumors. But CEO Howard Lance said the company felt obligated to issue a statement as the rumors could be damaging to the company and fuel speculation in its stock. Shares had risen more than 6 percent on Friday after a report in the Wall Street Journal suggested that preliminary bids were in the low $70s per share.
This Week:
MONDAY: ISM manufacturing index; construction spending; Fed's Lockhart speaks
TUESDAY: Auto sales; factory orders; Bernanke speaks; Earnings from Toll Brothers, Hovnanian; Montana, New Mexico primaries
WEDNESDAY: MBA mortgage applications; productivity; ISM services index; crude inventories; Bernanke, Lockhart speaks
THURSDAY: Jobless claims; Fed's Plosser speaks; Earnings from Nat Semi
FRIDAY: Jobs report; wholesale trade; consumer credit; Fed's Evans, Bullard speak
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