GLOBAL MARKETS-Treasury yield surge, Wall St down on Fed taper views

Thu Dec 5, 2013 11:55am EST

* GDP, jobless claims raise expectations of Fed taper

* Euro at 1-month high vs dollar after ECB holds rate steady

* European shares end down on Fed views, deflation fears

By Barani Krishnan

NEW YORK, Dec 5 (Reuters) - Treasury yields hit three-month highs and U.S. stocks edged lower on Thursday, under pressure for a fifth day, as robust data on the economy and the labor market raised expectations of an imminent cutback by the Federal Reserve of its stimulus.

With the all-important U.S. jobs report for November a day away, most markets were thinly traded as investors awaited what they hoped would be the clearest sign yet on when the Fed would begin tapering its monthly purchases of $85 billion in Treasuries and mortgage-backed securities.

The euro rose to a one-month high against the dollar after the European Central Bank left a key interest rate unchanged, disappointing some traders who had hoped for more aggressive easing measures in the euro zone.

In the forex market, the ECB meeting overshadowed the strong U.S. data.

European stocks hit seven-week lows as investors fretted about the risk of deflation in the euro zone and as the U.S. data fed expectations that the Fed will taper its bond purchases.

The benchmark 10-year U.S. Treasury note was down 6/32 in price, with its yield at a three-month high of 2.8625 percent.

"There are still people interpreting that the door is still open for a December taper" by the Fed, said Sean Murphy, a Treasuries trader at Societe Generale in New York. The Fed will meet on Dec. 17-18, its last policy meeting of the year.

The U.S. government reported that initial claims for unemployment benefits dropped to 298,000, declining for a third straight week and below expectations for a rise to 325,000.

In another sign of strength in the economy, the Commerce Department said gross domestic product grew at an annualized 3.6 percent rate in the third quarter, the fastest pace since the first quarter of 2012. The growth was a sharp revision from the 2.8 percent pace reported earlier and well above expectations by economists polled by Reuters for growth of 3.0 percent.

Atlanta Fed President Dennis Lockhart downplayed the GDP number in a speech to bankers and business people on Thursday. "The strong third quarter doesn't make a trend and ... doesn't drive me to the conclusion that we've had a breakout in terms of growth," he said, citing "pretty low" ongoing estimates for fourth-quarter growth.

Other data offered a less rosy picture of the economy. New orders for factory goods fell 0.9 percent in October after a 1.8 percent rise in the prior month as demand for aircraft and capital goods weakened, suggesting some cooling in manufacturing.

World stocks as indicated by the MSCI slipped after Japan's Nikkei index had its second sharpest fall for the week. Gold, whose gains, like stocks', have been heavily on the Fed's stimulus over the past three years, also tumbled.

The Dow Jones industrial average was down 58.89 points, or 0.37 percent, at 15,830.88. The Standard & Poor's 500 Index was down 7.35 points, or 0.41 percent, at 1,785.46. The Nasdaq Composite Index was down 9.81 points, or 0.24 percent, at 4,028.19.

The benchmark 10-year U.S. Treasury note was down 6/32 in price, with its yield at a three-month high of 2.8625 percent.

The euro rose 0.2 percent to $1.3622 EUR=, having climbed as high as $1.3650, according to Reuters data, the strongest since the end of October. Benchmark German government bond yields stabilized after hitting a six-week high on the rise in U.S. yields.

The ECB held its key interest rate at 0.25 percent at its last policy meeting of the year, choosing not to follow through on November's surprise cut.

ECB President Mario Draghi said euro zone inflation will stay well below target for the next two years and the ECB is ready to act if necessary to lift a listless economy.

"Clearly, they didn't make a move. They just briefly discussed the negative deposit rate and that was the real key," said Chris Tevere, senior currency strategist at Forex.com in New York. "Some people were pricing in that maybe they cut rates a little bit further and maybe they move to that before the end of the year.

"More importantly, it also doesn't look like it's in the imminent future either."

The pan-European FTSEEurofirst 300 closed down 0.9 percent at 1,262.18 points.

After suffering its biggest one-day fall in six weeks on Wednesday, the Nikkei ended down 1.5 percent, retreating further from this week's six-year closing high. Still, the Japanese bourse is up 8 percent since early November, and 46 percent on the year so far.

The dollar faded to below 103.00 yen, giving investors an excuse to book profits on the market's gains.

Elsewhere in forex, the Canadian dollar sagged to 3-1/2-year lows after the Bank of Canada issued a dovish policy statement, highlighting the risks of weakening inflation.

In commodities, spot gold edged back to below $1,233 an ounce, giving up some of Wednesday's 1.7 percent rally.

U.S. crude added 66 cents to $97.85, on top of a 1.2 percent rally on Wednesday after data showed domestic crude stocks fell by 5.6 million barrels, snapping 10 straight weeks of builds. Brent crude hovered at $111.75.

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