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Data Boost Odds Fed Will Shave Bond Buys

The U.S. economy is picking up steam, surprisingly strong data Thursday signaled, making the start of Federal Reserve tapering this month all but certain.

New jobless claims last week fell to 323,000, the Labor Department said ahead of Friday's jobs report. The four-week average hit its lowest level since the economic recovery began in 2009.

The Institute for Supply Management's nonmanufacturing index unexpectedly rose 2.6 points in August to 58.6, its highest level since the end of 2005. The jobs, new orders and other gauges also showed accelerating growth.

Along with upbeat reports on manufacturing, auto sales and more, economists believe it's a virtual lock that policymakers will begin to curb the Fed's $85 billion-a-month bond buying program at their Sept. 17-18 meeting.

"Our economy is 80% services, so any time you can get the service economy cranking that's a good sign," said John Canally, an economist with LPL Financial, who believes GDP will grow at a 2% annual rate in Q3 and as much as 2.25% in Q4.

While Friday's employment figures will be closely watched, the Fed's course is set, said Jordan Levine, director of economic research at Beacon Economics. The consensus is for a gain of 180,000 jobs, which Levine characterized as solid, if not exciting.

"The economy is in recovery mode," he said. "The pace isn't necessarily anything to write home about, but it's progressing.

Stocks rallied only modestly as the 10-year Treasury yield hit 3% for the first time in two years. The 10-year rate closed 10 basis points higher at 2.99%.

Rising rates will likely cool the hot housing market and lending overall, Canally noted, but don't signal an end to the expansion.

"Rates are going up for the right reasons," he said. "That's usually a supportive environment for stocks." It would be worrisome if rates were rising on fears of a higher deficit or increasing inflation, he noted.

While mortgage rates have trended up recently, Levine said, they're still historically low.

Fed tapering won't be as painful as the market seems to expect, Canally argued, likening the extraordinary stimulus to driving at 85 miles per hour. "Now they're going 70. Tightening is slamming on the brakes. They're going to try and pump the brakes.

Canally expects upcoming overseas economic data to give even more ammunition for a Fed pullback. "Europe was a huge fear in the marketplace, and that's no longer on the table," he said. "China looks like it stopped getting worse."