By Herbert Lash
NEW YORK (Reuters) -U.S. stocks closed mostly flat and the dollar rose on Monday after strong jobs data last week pointed to the Federal Reserve hiking interest rates in May, while the yen eased after Japan's new central bank governor vowed to maintain ultra-loose policy.
Gold prices slipped below the key $2,000 level due to a resurgent dollar, while Treasury yields edged higher on growing market expectations that the Fed will hike rates when policymakers conclude a two-day meeting on May 3.
Consumer price index data on Wednesday will encourage the market to see a rate hike next month, but more important reports on Thursday and Friday will show the extent of emergency funding for banks, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
"My sense is that the labor market and CPI would favor the Fed raising rates again. However, what has made the market have second thoughts is the extent of the tightening of lending."
"We saw in the last two weeks there's a record decline in commercial and industry loans," Chandler said.
Futures show a 71.7% likelihood that the Fed will raise rates by 25 basis points to a range of 5.0%-5.25% next month, CME Group's (NASDAQ:CME) FedWatch tool shows.
But recession worries have risen as commercial lending fell after the sudden collapse of Silicon Valley Bank in March tightened credit conditions among U.S. banks. The Fed's emergency lending program has eased some of those concerns.
Fed lending to banks over the past four weeks has increased more than $400 billion and offset nearly two-thirds of the quantitative tightening that began a year ago, said Joe LaVorgna, chief U.S. economist at SMBC Nikko Securities in New York.
"To the extent the market has all this liquidity sloshing around, people get more confident that the Fed is going to be there to save us in some capacity," LaVorgna said. "The market is going to stay bid, it won't go down."
Traders also are betting that the Fed will cut rates in the second half to ward off an economic downturn, but the two-year Treasury note's 4% rate and what will likely be a 5% Fed target rate is a "huge discrepancy" that cannot continue, LaVorgna said.
Minutes of the Fed's policy meeting in March are also scheduled to be released on Wednesday.
Trading was light as markets were closed in Europe, Australia and Hong Kong for Easter.
The dollar index rose 0.52% and the two-year Treasury yield, which typically moves in step with interest rate expectations, added 4.2 basis points to 4.014%.
On Wall Street, the Dow Jones Industrial Average rose 0.3%, the S&P 500 gained 0.10% and the Nasdaq Composite dropped 0.03%. MSCI's gauge of stocks across the globe closed down 0.11%.
The dollar extended gains against the yen to 133.87, the highest since March 15, on receding expectations of a near-term tweak to Japan's ultra-loose monetary policy.
Japan's new central bank Governor Kazuo Ueda said it was appropriate to maintain the bank's policy for now as inflation has yet to hit 2% as a trend, suggesting he will be in no rush to dial back its massive stimulus.
The yen was weakened 1.08% at 133.57 per dollar.
Asian shares were little changed. MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.04%.
In China, shares slipped, with the blue chip CSI300 Index 0.32% lower and the Shanghai Composite Index easing 0.16% on rising geopolitical tensions around the Taiwan Strait.
China announced three days of drills on Saturday, after Taiwan's President Tsai Ing-wen returned to Taipei following a meeting in Los Angeles with U.S. House of Representatives Speaker Kevin McCarthy.
U.S. gold futures settled down 1.1% at $1,989.10 an ounce.
U.S. crude fell 96 cents to settle at $79.74 a barrel and Brent settled down 94 cents at $84.18 a barrel.