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U.S. stocks closed about 1 percent lower on Tuesday as investors eyed renewed strength in the U.S. dollar and mixed data that could strengthen the case for a rate hike. (Tweet This)
"Really when you take a look at the data, it was supportive of (Fed Chair Janet) Yellen's comments Friday—certainly more supportive of raising rates than not," said Paul Nolte, portfolio manager at Kingsview Asset Management. He also noted pressure on the energy sector from the strength of the dollar.
U.S. Federal Reserve Vice Chairman Stanley Fischer said Tuesday that markets should not be surprised by the timing or pace of rate hikes.
The Dow Jones industrial average had its worst day of the month, falling as much as 242 points as all blue chips fell.
The Dow transports continued their recent decline, off more than 1.5 percent as JetBlue led all constituents lower. The index's 50-day moving average fell below its 200-day moving average.
The Nasdaq and S&P had their worst day since May 5. The Nasdaq fell more than 1 percent as tech stocks traded lower. Information technology and energy led declines in the S&P 500, with First Solar and Hewlett-Packard the greatest laggards.
"I think the pressure today is coming from the stronger dollar," said Peter Cardillo, chief market economist at Rockwell Global Capital. "The focus this week is the yield curve and the stronger dollar."
Shorter-term bond yields crept higher on Tuesday, with the at 0.61 percent after touching a high of 0.65 percent. The 10-year Treasury note yield was 2.13 percent.
The afternoon auction of 2-year notes at a high yield of 0.648 percent was the highest since December.
The U.S. dollar continued to strengthen, up 1.3 percent on the day and reaching its highest level against the yen since July 2007. The euro traded below $1.09 for the first time since April 28.
HPM Partners Chief Investment Officer Ben Pace is bullish on the dollar and said the greenback's strength finds support from slight improvement in U.S. economic data and expectations of central bank tightening.
Traders mostly read Tuesday's indications of economic growth as supportive of an interest rate hike. On Friday, Fed Chair Janet Yellen suggested a hike would be appropriate this year if the economy improves. She noted that first quarter weakness was largely transitory, but that it would take several years for rates to return to normal.
U.S. Federal Reserve Vice Chairman Stanley Fischer said Monday in a speech in Israel that market watchers focus too much on the importance of the Fed's first interest rate hike since the process of returning to a more normal level will take a few years.
Richmond Fed President Jeffrey Lacker is scheduled to speak Tuesday evening.
Before the bell, durable goods for April showed a decline of 0.5 percent, roughly in-line with expectations. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 1.0 percent last month after an upwardly revised 1.5 percent increase in March.
Futures held lower after the report. The U.S. 2-year Treasury yield jumped to 0.64 percent, while the 10-year edged higher to 2.20 percent.
Strength in durable goods boosted the Atlanta Fed's GDP Now reading to 0.8 percent growth, up from 0.7 percent.
Housing data showed improvement. New home sales for April showed an increase of 6.8 percent to a seasonally adjusted annual rate of 517,000, up from the consensus 510,000.
The S&P/Case-Shiller composite index of 20 metropolitan areas gained 5 percent in March on a year-over-year basis, matching February's gain. The March reading topped a Reuters poll of economists that forecast a rise of 4.7 percent.
The Conference Board Consumer Confidence report was 95.4 in May, above the revised April read of 94.3.
Other data reports were less encouraging. Markit's Purchasing Managers Index for the services sectors fell for a third straight month in May to 56.4 from April's final read of 57.4.
The Dallas Manufacturing Index came in at negative 20.8 for May, below expectations and down from last month's read of negative 16 in April. Analysts attributed the poor report to continued weakness in the energy sector.
"The data is piling on here that the narrative is changing here on monetary policy," said Art Hogan, chief market strategist at Wunderlich Securities. "We want to see a stronger economy, yet anytime we get a whiff of good news (the market sells off). All of this (selling today) is in the context of very low volume."
U.S. markets were closed on Monday for Memorial Day. Markets in Germany, France and the U.K. were also closed for other holidays.
European stocks ended lower on Tuesday as investors digested mixed U.S. data and remained on edge over the Greece debt talks.
The country must make a 300 million euro payment to the International Monetary Fund on June 5 ahead of several other large payments due later in the month, for a total of 1.6 billion euros.
Officials said Greece could lump all the payments together into one and avoid default.
Earlier, several senior Greek officials said the country urgently needs aid in order to make the June 5 deadline, Reuters said. However, a senior German official said on Tuesday there was no reason to believe Greece would be in default after that date.
The closed down 21.86 points, or 1.03 percent, at 2,104.20, with energy and information technology leading all 10 sectors lower.
The Nasdaq closed down 56.61 points, or 1.11 percent, at 5,032.75.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiked 20 percent before coming off slightly to trade near 14. On Friday, the index dipped below 12 for the first time since early December.
About four stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 778 million and a composite volume of 3.2 billion in the close.
Crude oil futures for July delivery settled down $1.69, or 2.8 percent, to $58.03 a barrel on the New York Mercantile Exchange. Gold futures ended down $17.10 at $1,186.90 an ounce.
AutoZone said quarterly gross profit was 52.3 percent, a slight uptik from 52.0 percent for the same period last year. Same-store sales increased 2.3 percent for the quarter.
In other corporate news, Charter Communications said it would purchase Time Warner Cable for $55 billion, valuing each share around $195.71. The deal merges the second and third largest U.S. cable companies and creates a greater rival for Comcast Corp.
Qualcomm has struck a mobile technology partnership with automaker Daimler, involving the recharging of mobile devices as well as electric cars.
Apple named senior vice president of design Jony Ive to the newly created position of Chief Design Officer.
BlackBerry will lay off an unknown number of workers in its device business, according to Re/Code.
L Brands is one of the latest additions to Goldman Sachs' "conviction buy" list, calling the Victoria's Secret parent one of the highest quality growth companies in consumer retailing.
Twitter has held talks to acquire news app Flipboard in a stock deal that would value the news app at more than $1 billion, according to Re/Code.
—CNBC's Peter Schacknow contributed to this report.
Disclaimer: Comcast owns NBCUniversal, the parent company of CNBC and CNBC.com.
On tap this week:
7:10 p.m.: Richmond Fed President Jeffrey Lacker
1 p.m.: $35 billion 5-year note auction
2:20 a.m.: San Francisco Fed President John Williams in Singapore
8:30 a.m.: Initial claims
10 a.m.: Pending home sales
1 p.m.: $29 billion 7-year note auction
2:45 p.m.: Minnesota Fed President Narayana Kocherlakota
8:30 a.m.: Real GDP Q1 (second)
9:45 a.m.: Chicago PMI
10 a.m.: Consumer sentiment
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