The Federal Open Market Committee could raise short-term interest rates for the first time in more than nine years at its two-day meeting, which begins Wednesday and culminates in a statement release and press conference Thursday.
Many economists see enough support from labor market conditions for the Fed to hike in September, while financial markets price in a small chance of a move.
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Treasury yields jumped, with the 10-year yield at 2.28 percent and the 2-year yield hitting a four-year high of 0.80 percent.
I "wouldn't read too much into that," said Gregory Peters, senior portfolio manager at Prudential Fixed Income. "I would be careful leading into the meeting to read too much into what the market is doing (right now)."
Analysts also noted positioning ahead of Thursday's decision.
"Today's actually the first day where we've seen a decent move in the 10-year and 30-year," said Kinahan, noting fed futures pricing in a low chance of a hike Thursday. "It's a big waiting game and I think the more important thing is, how do we want to be afterwards."
The dollar traded higher against major world currencies, with the euro dipping below $1.13 and the yen near 120.5 yen against the greenback.
August retail sales showed an increase of 0.2 percent, missing expectations of a 0.3 percent gain. Ex-autos, the figure increased 0.1 percent. July retail sales were revised up to 0.7 percent from 0.6 percent.
"Today's (retail sales) release will have little impact on the FOMC's policy meeting. It is roughly in line with expectations, confirming that consumer spending is increasing at a moderate pace," PNC Chief Economist Stuart Hoffman said in a note. "The FOMC is more likely than not to raise the federal funds rate target 25 basis points to 0.25 to 0.50 percent on Thursday, but the committee could decide to wait until later in the year to increase rates."
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In other economic news, July business inventories gained 0.1 percent. August industrial production data showed a decline of 0.4 percent, worse than the expected 0.2 percent drop.
The Empire State Manufacturing Survey came in at negative 14.7 for September, versus August's read of negative 14.9.
Stock index futures held higher, with the Dow futures up about 40 points, after initially fluctuating between slight gains and losses following the data releases.
Recent market volatility and concerns about the impact of weakness in China's economy — the second largest in the world — have tempered market expectations for a near-term rate rise.
In Asia, the Bank of Japan held monetary policy steady at the end of a two-day policy and remained optimistic about the domestic economy, while noting that slowing demand from emerging markets was hurting Japanese exports. The Shanghai Composite closed down 3.55 percent as concerns about China's economic outlook continued to take a toll.
European stock markets reversed losses to close higher, with the STOXX Europe 600 up nearly 1 percent.
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The Dow Jones Industrial Average closed up 228.89 points, or 1.40 percent, at 16,599.85, with Caterpillar leading advancers and Walt Disney the only decliner.
The Dow transports closed up 1.85 percent, with UPS jumping 3.6 percent to lead nearly all constituents higher. Alaska Air was the greatest laggard.
The S&P 500 closed up 25.06 points, or 1.28 percent, at 1,978.09, with industrials leading all 10 sectors higher.
The Nasdaq closed up 54.76 points, or 1.14 percent, at 4,860.52.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 22.5.
About seven stocks advanced for every three decliners on the New York Stock Exchange, with an exchange volume of 778 million and a composite volume of 3.2 billion in the close.
Gold futures settled down $5.00 at $1,102.60 an ounce.
On tap this week:
FOMC meeting begins
8:30 a.m.: CPI
10 a.m.: NAHB survey
4 p.m.: TIC data
Final day of FOMC meeting
8:30 a.m.: Initial claims
8:30 a.m.: Housing starts
8:30 a.m.: Current account
10 a.m.: Philadelphia Fed survey
2 p.m.: Fed statement
2:30 p.m.: Fed Chair Janet Yellen news briefing
10 a.m.: Leading indicators
1:30 p.m.: San Francisco Fed President John Williams on the economic outlook
3:30 p.m.: St. Louis Fed President James Bullard on the economy and monetary policy
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