Wall St watches as ball in Yellen court

Trader Robert McQuade, right, works on the floor of the New York Stock Exchange. File photo / AP

Federal Reserve policymakers are poised to meet this week just days after Bank of England Governor Mark Carney served an apparent ace: investors should prepare themselves for higher UK interest rates sooner than expected.

That warning came as a wake-up call to many investors and stands in stark contrast to the message from Fed officials who've been at pains to downplay expectations about the first increase in US rates, even as growth in the world's biggest economy continues to accelerate.

It looks now as if Carney has taken the lead from Fed Chair Janet Yellen. Last Friday, the UK's FTSE 100 dropped 1 per cent and gilts fell, while sterling climbed, following the governor's comments.

"There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced," Carney said in a speech in London on Thursday night. "It could happen sooner than markets currently expect."

While most key data including from the labour market have recently show the US economy's resilience following a harsh winter, signs of weakness remain.

The American consumer hasn't yet regained full confidence about the future as shown by last week's US retail sales and consumer sentiment data, which followed hot on the heels of a downgrade by the World Bank of both global and US growth in 2014.

Still, there's a sense that pressure will start to rise more appreciably on the Fed to pave the way for at least a modest rate hike.

"You have a hawkish statement out of a central bank," Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group, referring to the Bank of England, told Bloomberg News. "That could mean the Fed may not be too far behind."

A two-day Federal Open Market Committee meeting begins on Tuesday, followed by quarterly projections and a press conference by Yellen on Wednesday. At the very least, the Fed will be expected to pare back again the pace of asset purchases it's been making to bolster the economy. Any rate mention will now take on even greater import.

Last week, the Dow Jones Industrial Average fell 0.88 per cent, the Standard & Poor's 500 Index shed 0.68 per cent, and the Nasdaq Composite index gave up 0.25 per cent. In Europe, the Stoxx 600 gave up 0.1 per cent.

Even so, Wall Street finished the last day of the week on a more positive note. On Friday, the Dow rose 0.25 per cent, the S&P 500 added 0.31 per cent, and the Nasdaq gained 0.30 per cent. Shares of Intel soared, up 6.8 per cent, after the company upgraded its revenue and gross margin forecast.

In the coming days economic data will include reports on the Empire State manufacturing survey, industrial production, housing market index, due Monday; the consumer price index and housing starts, due Tuesday; weekly jobless claims, Philadelphia Fed survey, and leading indicators, due Thursday; and Atlanta Fed business inflation expectations, due Friday.

A further escalation of violence in Iraq would also affect markets. Last week oil prices jumped more than 4 per cent. The potential of an all-out civil war has everyone on tenterhooks.

"The developments in Iraq will continue to be on investors' radars as a spike in oil prices always holds the potential to spook market participants," Mark Andersen, co-head of global asset allocation at UBS's wealth-management unit in Hong Kong, told Bloomberg News.

Yellen's ability to return Carney's serve will dominate markets the next few days.