US jobs shock creates doubt over Federal Reserve taper

A weak jobs report sent US government bond yields tumbling on Friday and created fresh uncertainty over the pace of the Federal Reserve’s tapering of its monetary stimulus programme.

The American economy created just 74,000 jobs in December, according to the Bureau of Labor Statistics. That was well below analysts’ expectations of a 200,000 gain and represented the smallest monthly rise in three years.

The report is in contrast with other recent economic indicators, such as consumer spending and factory output, that suggest the US economy is gathering strength.

While the unemployment rate dropped sharply to 6.7 per cent, down from 7 per cent the month before, this was due to 375,000 people dropping out of the labour market. The labour participation rate in the US now stands at 62.8 per cent, its worst in more than three decades.

Hours were also down slightly, with the average work week declining to 34.4 hours in December.

The disappointing news pushed the 10-year US Treasury yield down eight basis points to 2.88 per cent, as traders recalibrated their bets on the timing of the taper.

The American central bank announced a $10bn (£6bn) reduction in its monthly programme of asset purchases to $75bn last month, and financial markets had expected those reductions to continue steadily through this year in line with the brightening outlook.

“Clearly this latest news raises some uncertainty” said Paul Edelstein of IHS Global Economics. “The Fed might choose to wait for another data point on the jobs market to see if December was an aberration.”

Other analysts, however, predicted that the taper would continue. “Remember that the economy is likely to have grown with a 3 per cent annualised handle in the fourth quarter and the fiscal clouds have lifted,” said Simon Smith at the broker FX Pro. “As the Fed will say, tapering is not tightening, so the stance remains very accommodative.

The Fed will hold its next policy meeting at the end of the month. This will be the last meeting chaired by Ben Bernanke before Janet Yellen takes over. President Barack Obama announced yesterday that he will nominate Stanley Fischer, the former govenor of the Bank of Israel and vice chairman of Citigroup, to be Ms Yellen’s vice chair.

In Britain, the National Institute of Economic and Social Research estimated yesterday that the UK economy grew by 0.7 per cent in the final quarter of 2013, a slight slip from the 0.8 per cent expansion in the third quarter.

There were also two disappointing reports from the Office for National Statistics, which said manufacturing output failed to grow in November, while construction output dipped 4 per cent. This data is in stark contrast to survey readings for the two sectors, which pointed to strong growth.