By Ellen Freilich
NEW YORK (Reuters) - U.S. stocks edged down on Thursday as a drop in jobless claims provided few clues on the Federal Reserve's policy decision next week while a drop in euro zone factory output data stalled an eight-day rise in world equity markets.
The dollar edged higher against the euro after the data on euro zone industrial output and the fall in first-time U.S. jobless claims, but it slipped versus the yen.
U.S. Treasuries prices rose as investors recovered from a mammoth week of new corporate bond and Treasuries supply and before the Treasury sells $13 billion in 30-year bonds, the final sale of $65 billion in new U.S. government debt this week.
Investors are focused on the Fed's policy meeting on Tuesday and Wednesday, with expectations growing that the U.S. central bank will begin to reduce its monthly bond purchases, but by less than previously thought.
Uncertainty about how much the Fed would reduce stimulus has grown with weaker-than-expected U.S. data, including jobs growth in August, and consumer spending, home building, new home sales, durable goods orders and industrial production in July.
A Reuters poll of economists on Monday found that most now see the Fed trimming its $85 billion monthly spending on bonds by about $10 billion, compared with estimates for a $15 billion reduction in a poll before the jobs report.
The shifting views have put pressure on the dollar, which hovered near two-week lows against a basket of major currencies on Thursday. U.S. Treasury yields have dipped to 2.875 percent from over 3 percent last week.
"But the fact of the matter remains, the direction is obviously towards tapering, which is really a good thing," said Gordon Charlop, a managing director at Rosenblatt Securities in New York. "That indicates that it worked. The question will be how measured will (the Fed) be and you have to think they are going to err on the side of caution. They will be very measured in their approach and won't do anything precipitous."
On Wall Street, a drop in initial jobless claims last week that far exceeded estimates had little effect because the data was skewed by technical problems. Claims fell to 292,000, the lowest level since 2006.
The S&P 500 has risen 3.4 percent over the prior seven sessions as concerns about a Western military strike against Syria have faded and sentiment has been buoyed by stronger-than-expected economic data from China.
The Dow Jones industrial average fell 6.79 points or 0.04 percent, to 15,319.81, the S&P 500 lost 2.58 points or 0.15 percent, to 1,686.55 and the Nasdaq Composite dropped 7.754 points or 0.21 percent, to 3,717.256.
Europe's broad FTSE Eurofirst 300 index was down 0.07 percent. The MSCI world equity index was down 0.13 percent.
SIGNS OF STRENGTH IN CREDIT MARKETS
Treasuries debt prices rose a day after the completion of Verizon's record-breaking corporate bond deal.
Verizon sold $49 billion worth of bonds, eclipsing the previous investment grade record of $17 billion by Apple in April, according to IFR, a Thomson Reuters service.
"The Verizon deal showed that financing is still available at these (interest rate) levels and that's encouraging for mergers and acquisitions and leveraged buyouts," said Jason Brady, managing director and portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico.
If the Fed next week adjusts its bond-buying program only modestly, that, too, will favor riskier assets, Brady said.
Euro/dollar and dollar/yen one-week implied volatilities - a gauge of how sharp price swings will be next week - have shot up as investors try to guess when and how fast the Fed will start to run down its monetary stimulus.
The one-week euro/dollar implied volatility traded near 7.85 percent, much higher than the equivalent one-month rate which was around 7.2 percent. The one-week dollar/yen implied volatility also traded much higher than the one-month level.
"Unless we get a significant new piece of information, we're going to be in this range-bound pattern, maybe with some bias for dollar weakness, as we wait for the Fed," said Vassili Serebriakov, FX strategist at BNP Paribas in New York.
The shifting views on the Fed's likely action have put pressure on the dollar, which hovered near two-week lows against a basket of major currencies on Thursday.
But the euro slipped against the dollar and European shares ended a run that had taken them near a five-year high when data showed a surprisingly large drop in industrial output across the currency bloc in July.
ASIAN RELIEF
Reduced expectations of the degree of Fed tapering eased pressure on emerging market currencies, which had been driven up as the cheap U.S. money was pumped into high-yielding stocks and bonds, and are now falling as these trades reverse.
Indonesia's central bank unveiled a surprise rate hike to help the rupiah recover from a 4-1/2-year low. Other Asian central banks were expected to wait for next week's Fed decision before taking any action.
MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.3 percent while the stronger yen and downbeat economic data helped push Japan's Nikkei stock average down 0.26 percent.
In fixed income markets anticipation of the Fed trimming its stimulus combined with concerns abut domestic politics drove up Italy's borrowing costs at an auction of 7.5 billion euros of new debt.
In commodities, copper slipped 1.62 percent to $7,053.50 a tonne. An improved outlook for China's economy and the reduced risk of a strike on Syria have helped bring copper prices off the three-year lows plumbed in late June.
Gold skidded to $1,331.96 an ounce, its weakest since mid-August, while Brent crude added about 0.8 percent to $112.41 as investors watched diplomatic efforts to place Syria's chemical weapons under international control stepped up.
Moves towards a diplomatic solution on Syria have also lent some support to financial markets.
U.S. Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov were meeting in Geneva on Thursday to try to agree on a strategy to eliminate the chemical arsenal.
(Additional reporting by Chuck Mikolajczak, Wanfeng Zhou and Karen Brettell in New York and Richard Hubbard in London; Editing by Leslie Adler)
