US close: Stocks slip after Yellen comments signal rate rise

US stocks lost some confidence on Wednesday after Federal Reserve chair Janet Yellen and fellow rate setter Dennis Lockhart sent strong signals of a December hike.

The Dow Jones Industrial Average gave up some recent gains with an 0.89% fall to 17,729.68, while the S&P 500 dropped 1.1% to 2,079.51 and the Nasdaq composite by 0.64% to 5,123.22 points.

Speaking to the Economic Club of Washington, Yellen said economic data since October had been consistent with expectations for an improved job market, but left open the possibility that the data released before its next meeting – on 15-16 December - could still sway the Federal Open Market Committee either way.

“I currently judge that U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market,” Yellen said.

“Ongoing gains in the labor market, coupled with my judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2% as the disinflationary effects of declines in energy and import prices wane,” she added.

Leaving the door slightly ajar, she went on to say that data received before the next FOMC meeting will still need to be assessed before making the policy decision.

Economists said her comments sent strong signals for a December hike and gradual pace of rises thereafter.

Pantheon Macro chief economist Ian Shepherdson said the FOMC still needed to raise rates in December, in order to avoid having to tighten policy relatively abruptly and risk disrupting financial markets and perhaps even inadvertently push the economy into recession.

"So there it is: Hike now, to avoid faster, more risky hikes later," he said. "We look for 25 basis points this month and a further 50bp by mid-16."

Barclays agreed that the speech was consistent with its outlook for "a December rate hike and a gradual path of hikes thereafter".

Harm Bandholz, chief US economist at Unicredit Research, felt the : "In a nutshell: The Federal Reserve today has made another large step towards its first rate hike in 9.5 years."

Yellen's comments followed a speech from centrist FOMC member and Atlanta Fed president Lockhart who said the case for raising interest rates this month was “compelling”, adding he expected wage growth to gain momentum in the medium-term future.

"I think the economy is closing in on full employment,” he said in a speech in Fort Lauderdale.

"As we approach that condition, I would expect to see confirming evidence that labour markets have tightened up. Such evidence might come in the form of wage growth.

He noted that the trend in wage growth has been weak for some time, but "may be picking up".

Strong ADP report

On the macroeconomic front, according to ADP, the US private sector created 217,000 jobs in November, exceeding expectations for a 190,000 reading and up from an upwardly revised reading of 182,000 in October.

“This morning’s print is consistent with our outlook for nonfarm payroll growth of 200,000 and a one-tenth decline in the unemployment rate in Friday’s official employment report,” said analysts at Barclays.

Meanwhile, according to the Labor Department, unit-labour costs were revised upward to show a 1.8% quarter-on-quarter in the three months to September, while unit-labour costs rose 2% in the previous three months compared with the 1.8% decline that was initially reported.

As a result, unit-labour costs rose 3% year-on-year, compared with an original estimate for a 2% increase, while growth in productivity was revised upward to show a 2.2% quarter-on-quarter gain in the third quarter, compared with an estimate of a 1.6% gain. On a year-on-year basis, productivity rose 0.6%, slightly higher than the initial 0.4% reading.

In company news, Yahoo jumped 4.33% after reports that the internet giant may sell its core internet business, while Twitter slid 1.18% after co-founder Evan Williams sold shares.