After a mainly positive week for Wall Street, investors are looking for guidance from new Fed chief Ben Bernanke and mulling a potentially worrisome bond market scenario.
The Dow Jones Industrial Average climbed 1.2 percent in the week to Friday, to close at 10,919.05 and the broader-market Standard & Poor's 500 index edged up 0.23 percent to 1,266.99.
The tech-heavy NASDAQ composite was essentially flat for the week, losing a fraction of a point to 2,261.99.
Analysts said that the market may be in a holding pattern ahead of Bernanke's testimony before Congress on Wednesday, with investors looking for insight on his view of inflation trends and the implications for Fed policy.
Briefing.com analyst Tim Rogers said he expects from Bernanke "plainer English than [former Fed chairman Alan] Greenspan's rhetorical camouflage."
But he did not expect any tip about monetary policy despite angst on Wall Street about whether the Fed would push rates up high enough to choke off economic growth.
"Expect Bernanke to be somewhat vague on detail and hold to the broader lines of offsetting inflation pressures while maintaining economic growth," Rogers said.
Economist Avery Shenfeld at CIBC World Markets said Bernanke needs to establish his inflation-fighting credentials.
"Bernanke will want to put the message out that he's no less a champion of stable prices than Greenspan," the economist said.
But a key concern emerging for Wall Street is the so-called inversion of the bond market, with short-term rates exceeding those of long-term bonds.
Banks typically fund long-term loans with short-term borrowings. With yields inverted, it makes it difficult for banks to make money and thus makes them less inclined to lend. This often signals an economic slowdown or recession.
While Greenspan and others have argued that the bond market "conundrum" was not a sign of impending economic woes, some analysts are not so confident.
"The behavior of the bond market is similar to that of the two previous pre-recession periods," Robert Brusca of FAO Economics said.
"The bottom line is that the economy is at risk and the yield curve is not to be ignored," he said.
The bond market dilemma and views on Bernanke are intertwined, Lehman Brothers economists said in a research note.
"The bond market has its doubts about Bernanke," the economists wrote, recalling an episode in which Bernanke suggested dropping cash from a helicopter to fight the threat of deflation.
But despite the dovish image of the new Fed chief, the Lehman economists say "there are plenty of hawkish noises coming from |Bernanke," which could mean more rate hikes than expected.
Kent Engelke, strategist at Anderson and Strudwick, said talk of sharply higher interest rates worries Wall Street, which evidenced by the bond market sees a benign inflation picture.
"Can we envision a scenario that the central bank threatens economic growth because it is fighting the wrong battle where the general environment is really disinflationary?" he asked.
"We think this is a possibility ... Obviously if the Federal Reserve continues to increase interest rates at the current pace, economic activity will wither. The yield curve is slightly inverted and as we have written many times an inverted yield has a 100 percent correlation to a slowing economy. Why should it be different today?" Engelke said.
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