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NEW YORK: US stocks fell on Monday after rallying the previous week, on caution ahead of a slew of economic data due this week that will likely put to test the narrative of the Federal Reserve cutting interest rates by early next year.

US stocks kicked off December on an upbeat note, extending gains from the previous month that were driven by robust earnings and expectations that the Fed was done with its rate-hiking campaign.

The benchmark S&P 500 registered its highest close of the year on Friday as remarks from Fed Chair Jerome Powell bolstered the peak rates view.

Pressuring equities on Monday were higher US Treasury yields, which made returns on stocks less attractive.

Megacap names including Nvidia, Meta Platforms and Apple fell between 1.8% and 3.3%.

Shares of Alaska Air Group dropped 15.8% after the carrier said on Sunday it would acquire peer Hawaiian Holdings for $1.9 billion, including debt. Hawaiian’s shares nearly tripled in value.

Traders have priced in the likelihood that the central bank will keep rates unchanged next week, with about 58% betting on rate cuts starting as soon as March 2024, according to the CME Group’s FedWatch tool.

However, some analysts have cautioned that markets have been too quick to price in lower interest rates.

“No one expects any more rate hikes at this point,” said Joe Saluzzi, partner and co-founder at Themis Trading in Chatham, New Jersey.

“I don’t see them cutting (rates) unless you start to see some really significant poor numbers coming into the economy, which we haven’t seen yet.” Analysts have, however, alluded to the possibility of a Santa Claus rally as equities rebound from a likely mid-December low due to tax loss harvesting - a process in which investors sell underperforming stocks to lock in tax benefits.

A number of economic reports through the week, including November’s non-farm payrolls report on Friday, will provide a gauge on the interest rate path as well as the potential for a “soft landing” - where the Fed manages to bring inflation under control, while averting a recession.

Adding to declines on Monday were renewed fears about a widening of the war between Israel and Hamas after an attack on three commercial vessels in the southern Red Sea. At 11:35 a.m. ET, the Dow Jones Industrial Average was down 177.00 points, or 0.49%, at 36,068.50, the S&P 500 was down 42.20 points, or 0.92%, at 4,552.43, and the Nasdaq Composite was down 205.15 points, or 1.43%, at 14,099.88.

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