By Barani Krishnan
NEW YORK (Reuters) - Treasury yields hit three-month highs and U.S. stocks closed down for a fifth straight day on Thursday as robust economic and labor market data raised expectations of an imminent cutback in the Federal Reserve's stimulus.
With the U.S. jobs report for November due on Friday, caution gripped investors ahead of what is expected to be the most crucial data to indicate when the Fed would begin tapering its monthly purchases of $85 billion in Treasuries and mortgage-backed securities.
"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 December 17-18, its last policy meeting of the year.
The Dow Jones industrial average ended down 68.26 points, or 0.43 percent, at 15,821.51. The Standard & Poor's 500 Index was down 7.78 points, or 0.43 percent, at 1,785.03. The Nasdaq Composite Index was down 4.84 points, or 0.12 percent, at 4,033.17.
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 foreign exchange market, the ECB meeting overshadowed 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 trim its bond purchases.
The U.S. government reported that initial claims for unemployment benefits dropped in the latest week to 298,000, declining for a third straight week and below expectations of 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. It was a sharp revision from the 2.8 percent pace reported earlier and exceeded the 3.0 percent estimate of economists polled by Reuters.
"This data is spilling into a market that doesn't know how to react to good and bad (economic) news," said Drew Wilson, an analyst at Fenimore Asset Management in Cobleskill, New York.
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 on 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.
A measure of world stock markets slipped after Japan's Nikkei index had its second sharpest fall for the week. Gold also tumbled. The precious metal, like equities, has enjoyed a boost from the Fed's stimulus over the past three years.
The benchmark 10-year U.S. Treasury note was down 9/32 in price, its yield at a three-month high of 2.8735 percent.
The euro rose 0.5 percent to $1.3665, having climbed as high as $1.3674, 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.
The pan-European FTSEEurofirst 300 closed down 0.96 percent at 1,261.30.
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.
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 markets, spot gold fell 1 percent to below $1,230 an ounce after Wednesday's 1.7 percent rally.
U.S. crude added 18 cents to settle at $97.38, 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 fell 0 cents to $110.98.
(Editing by Leslie Adler, Bernadette Baum and Dan Grebler)
