Sell-off as markets expect early Fed move

Expectations of an early move by the US Federal Reserve to slow its support for the US economy firmed yesterday after the release of data showing a strengthening labour market and higher inflation.

The data triggered a sell-off in equity and bond markets with investors bracing for a so-called “tapering” of the massive purchases of bonds by the Fed that have helped prop up the economy since the financial crisis by keeping interest rates low. The yield on the benchmark 10-year treasury rose past 2.75 per cent for the first time since July 2011, breaching a ceiling it had set during two previous bouts of Fed tapering talk over the past six weeks.

Higher borrowing costs Equities were sold off amid concern that those higher borrowing costs will damp economic activity, compounded by disappointing outlooks from Cisco and Walmart. By lunchtime, the S&P 500 was down 1.3 per cent to a one-month low.

First-time claims for jobless benefits dropped last week to 320,000 – their lowest level since September 2007, before the financial crisis and recession took hold. The decline was much steeper than expected by economists, offering evidence that the US jobs market is healing at a steady pace and might even be accelerating.

Volatile costs
Consumer prices – excluding volatile energy and food costs – ticked up by 0.2 per cent in July and are up 1.7 per cent over the past year, according to a separate US labour department report. This brings inflation closer to the Fed's 2 per cent target, defusing worries that it remains too low for tapering of its quantitative easing programme to start.

"The fading of the downward pressure on core inflation and the fall in initial jobless claims to a six-year low . . . will have only strengthened the view at the Fed that it is time to start dialling back its policy support," said Paul Dales, a senior economist at Capital Economics in London.

The market reaction to the data was swift, with interest rates jumping to reflect the likelihood of the Fed moving earlier and faster to curtail its bond buying.– Copyright The Financial Times Limited 2013