Treasury bonds, the dollar and shares all fell in reaction to a jump in housing starts and data showing a far stronger than expected rise in business activity.
Analysts reckon rapid growth will force the Federal Reserve to speed up interest rate rises.
However, a senior Fed banker said that the markets' analysis was flawed.
Jerry Jordan, president of the Federal Reserve Bank in Cleveland, speaking at an Institute of Economic Affairs conference in London, said: 'Growth is the economic dividend of sustained low inflation.' He rejected the view that the economic expansion posed the danger of raising inflation.
Wall Street analysts did not agree. Jerry Zukowski, a money markets economist at PaineWebber, said: 'The markets have to be cautious. I would not want to say that expansion we have seen would not point to higher inflation.'
The annual rate of new housing starts rose 4.4 per cent to 1.53 million last month, its highest so far this year. Economists had predicted a fall.
The Philadelphia Federal Reserve said a balance of 33.2 per cent of businesses reported an improvement in business conditions this month, up from 14.8 per cent in September.
In New York, the dollar at one point hit two-year lows against the mark and the pound, at DM1.4900 and dollars 1.6330 to pounds 1. It closed at DM1.4927 and dollars 1.6315. The Dow Jones Industrial Average Index, at one point off more than 40 points, closed 24.89 points lower at 3,911.15.Reuse content