Jobs data raise recession fears on Wall Street

Wall Street stocks fell on Friday after unemployment rose sharply and employers added far fewer jobs than expected last month raising fears the US economy is on the verge of tipping into recession.

Non-farm payrolls increased just 18,000 in December, compared with a revised 115,000 the previous month, the worst reading since August 2003. The payroll figure was much lower than an expected 70,000 increase.

Unemployment jumped from 4.7 per cent to 5 per cent, the highest rate since November 2005. Economists had expected an uptick to just 4.8 per cent.

The construction, manufacturing and retail sectors all saw job losses which were only partially offset by gains in the professional and technical services.

US markets are acutely sensitive to unemployment data as they are considered a leading indicator of a potential economic downturn.

"If you start to have an uptick in unemployment it can cause a domino effect and the Fed has to deal with that aggressively," Doug Roberts, chief investment strategist at Channel Capital Research, said.

"I think they're going to have to do something along the lines of [an interest rate cut of ] 50 basis points to get market confidence."

After the data was released, stock index futures sold off and treasury prices surged while the dollar retreated.

Less than an hour after the opening bell, the S&P 500 was down 1.1 per cent at 1,431.28. The Nasdaq Composite shed 1.6 per cent to 2,560.78 while the Dow Jones Industrial Average slipped below the 13,000 level, declining 0.9 per cent to 12,939.34.

Bond yields plunged as traders looked for safety in US Treasuries. The yield on the two-year Treasury note sank 11 basis points to 2.70 per cent while the 10-year Treasury note yield fell 5 bp to 3.84 per cent.

The dollar fell against the euro, trading 0.3 per cent lower at $1.4800. Against the yen the US currency slipped 1.1 per cent to Y108.08.

The futures market priced in a higher chance of a 50 basis point interest rate cut at the end of the month. Fed funds futures for February reached a contract high in price, reflecting a 3.89 per cent funds rate by the end of the month, down from 3.92 per cent on Thursday. The Fed funds rate currently stands at 4.25 per cent.

"The report raises the odds of a 50 basis point cut in January," Drew Matus, economist at Lehman Brothers, said.

European stocks turned negative after the employment data was released. The FTSE Eurofirst 300 index fell 1.1 per cent, the FTSE 100 lost 1 per cent, while the Cac 40 fell 1.4 per cent in France. Asian equity markets closed mainly higher with the notable exception of the Japan's Nikkei which plunged 4 per cent to its lowest close in 17 months.

Traders looked to position themselves more defensively and moved into "recession-proof" sectors including healthcare, utilities and consumer staples.

Among the few stocks trading to the upside were large-multi-national consumer companies including Procter & Gamble, up 0.2 per cent at $72.48 and Coca Cola, 0.5 per cent higher at $62. Investors have favoured these companies in recent months as they have a high proportion of international revenues, limiting their exposure to the US consumer.

US small cap stocks fell again continuing an abject performance in recent days. The Russell 2000 small cap index was down 1.3 per cent at 735.66 in early trade having closed lower for each of the last five sessions, sinking a total of 8.1 per cent.

The index outperformed the S&P 500 for the first time in eight years last year, finishing 2007 in negative territory, as traders bet that large companies with a high proportion of exports would better ride out a US economic downturn.

Bed, Bath & Beyond fell 8.8 per cent to $24.98 after the retailer forecast fiscal fourth-quarter earnings below Wall Street's expectations and said same-store sales would be flat. The shares closed 3.4 per cent lower at $27.40 on Thursday but sank 8 per cent in after-hours trading.

Boeing (NYSE:BA) outperformed on a poor day for equities after after it reported a record 1,413 commercial plane orders last year and delivered 441 jets, its best performance in six years. The shares slipped 0.7 per cent to $86.35.

Gold was trading $8.10 lower at $861.10 while crude oil prices slipped $1.28 to $97.90. Both commodities set new record highs on Thursday.

The S&P 500 rose as much as 0.7 per cent on Thursday before closing flat at 1,447.16 with a majority of stocks ending the session lower. The Nasdaq Composite fell 0.3 per cent to 2,602.68 while the Dow Jones Industrial Average rose 0.1 per cent to 13,056.72.