Markets in turmoil over taper fears

■ Mixed US data leads to new fears over when Fed will start tapering stimulus
■ Dollar dives from one week high as uncertainty stalks trading desks
■ FTSE 100 suffers worst day in almost two months after retail sales rise
GLOBAL markets were sent reeling yesterday, as strong US economic data reignited fears that the Fed will shrink its massive programme of monetary stimulus earlier than had been expected.
Fresh figures showed the number of new people filing for US jobless benefits last week plunged to a six-year low, while inflation rose 0.2 per cent between June and July, edging up to the Federal Reserve’s two per cent target.
The move signals that the American economy is gathering pace, making it more likely that the quantitative easing (QE) programme may be trimmed soon.
The Dow Jones industrial average dropped by 1.5 per cent to end on 15,112.19 at the close, the biggest dive for two months.
The number of initial jobless claims across the US was 320,000, the lowest weekly figure since 2007.
“This data will have only strengthened the view at the Fed that it is time to start dialling back its policy support,” said Paul Dales of Capital Economics.
The prospect of Fed chairman Ben Bernanke tapering asset purchases has loomed for months, but an unexpectedly quick upswing for the US economy shortened the odds that he will start to reduce the Fed’s $85bn monthly stimulus. Tapering, or lowering the size of QE, could begin as early as next month.
The dollar also fell to an eight-week low against the pound yesterday, with 10-year US Treasuries posting the highest yields seen in two years, climbing above 2.8 per cent.
Despite growing at a slightly slower pace than in July, both the Philadelphia and Empire State manufacturing indices posted gains in their August statements.
In the UK, official data showed a three per cent jump in retail sales between July 2012 and last month, the fastest rise in two and a half years. With markets already unconvinced that the Bank of England can keep interest rates down for three years, a healthy boost to UK retail is unlikely to convince investors that the Bank’s forward guidance plan will hold until 2016. The FTSE 100 fell 1.6 per cent, ending on 6,483.34 its worst one-day performance since new Bank of England governor Mark Carney took office at the start of last month.