While you were sleeping: Yellen cements hike bets, oil shares crash

US stocks and bonds were lower after Federal Reserve chairwoman Janet Yellen cemented expectations the central bank is gearing up to lift its target interest rate for the first time since 2009 at a meeting later this month.

Energy stocks crashed as crude oil futures slumped below $US40 a barrel for the first time since August 26. 

At the Wall Street close, the Dow Jones Industrial Average was down 158.68 points, or 0.9%, at 17,729.68, shedding most of its gains from the previous session.

"On balance, economic and financial information received since our October meeting has been consistent with our expectations of continued improvement in the labour market," Ms Yellen told the Economic Club of Washington.

"And, as I have noted, continuing improvement in the labour market helps strengthen confidence that inflation will move back to our 2% objective over the medium term.

"That said, between today and the next FOMC [Federal Open Market Committee] meeting, we will receive additional data that bear on the economic outlook," she said.

The key nonfarm payrolls report is due on Friday, which is expected to show US employers added 200,000 jobs in November.

An ADP Research Institute report on Wednesday showed US companies hired a higher-than-expected 217,000 workers in November, up from a revised 196,000 increase in October.

The FOMC begins its next two-day meeting on December 15.

Ms Yellen also warned of the risk of keeping the federal funds rate near zero.

"Were the FOMC to delay the start of policy normalisation for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals," she said.

"Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.

"Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability."

Bond yields rise
US Treasurys dropped, sending yields on the 10-year note five basis points higher to 2.19%.

"She's plainly making a case for the start of normalisation of interest rates," United Nations Federal Credit Union New York-based chief investment officer Christopher Sullivan told Bloomberg.

 The Standard & Poor's 500 Index declined 1.1% and the Nasdaq Composite Index dropped 0.6% to 5123.22.

"Ms Yellen gave a fairly positive assessment of the economy that would be consistent with the Fed raising rates at their December meeting," BNP Paribas currency strategist Vassili Serebriakov told Reuters

Ms Yellen is set to testify to US lawmakers on Thursday.

Exxon Mobil, down 2.9%, and Chevron, down 2.4%, helped propel the Dow lower. Oil settled at $US39.94 a barrel in futures trading after data showed a big increase in stockpiles, adding to a world glut of crude.

In corporate news, Yahoo shares 5.8% as its board considers selling off the company’s flagging Internet businesses and how to make the most of its stake in Chinese e-commerce firm Alibaba,

The Wall Street Journal reported several potential suitors are emerging.

Qualcomm rose 5.2% after signing a licensing deal with one of China’s biggest handset makers, a sign of progress in easing the chip maker’s struggles in that country.

European markets
In Europe, the Stoxx 600 Index finished the day with a decline of almost 0.1% from the previous close. France's CAC 40 Index slipped 0.2%, while Germany's DAX Index shed 0.6%. The UK's FTSE 100 Index rose 0.4%.

A report showed inflation in the eurozone unexpectedly remained unchanged in November, underpinning expectations European Central Bank president Mario Draghi will announce additional stimulus after the central bank's meeting on Thursday.

"It's all about central banks now, but there's still substantial upside for the markets," Denmark-based Saxo Bank chief investment officer Teis Knuthsen told Bloomberg.

"The problem is that Mr Draghi has to deliver something quite big. Markets don't just want a rate cut, they're also looking for an extension of QE in terms of volume, asset classes and also timeline. He needs to give us that combo."

UPDATED to reflect Wall Street close (10am NZ time)

(BusinessDesk)