NEW YORK (Reuters) - U.S. employers unexpectedly cut 85,000 jobs in December, government data showed on Friday, cooling optimism on the labor market’s recovery and keeping pressure on President Barack Obama.

KEY POINTS: * The Labor Department said November payrolls were revised to show the economy actually added 4,000 jobs in that month rather than losing 11,000 as initially reported. With revisions to October, however, the economy lost 1,000 more jobs than previously estimated over the two months. * The unemployment rate was unchanged at 10 percent in December.* Analysts polled by Reuters had expected nonfarm payrolls to be unchanged last month and the unemployment rate to edge up to 10.1 percent. * High unemployment is one of the toughest domestic challenges facing Obama. The administration’s success in getting people back to work will shape prospects for Obama’s own political future.

COMMENTS:

PIERRE ELLIS, SENIOR ECONOMIST, DECISION ECONOMICS, NEW YORK:

“It was disappointing, but does not destroy the idea that the economy is on a recovery track. It just makes the recovery look a little bit more gradual. The service industries in general did not improve as much as they did last month. The secondary indications remain neutral at worst. The workweek was flat. The income being generated is still a little bit positive. While layoffs may be shrinking rapidly as evident in the weekly new jobless claims figures but new hiring remains very hesitant.”

DAVID KATZ, CHIEF INVESTMENT OFFICER, MATRIX ASSET ADVISORS, NEW YORK:

“Basically the economy continues to take three steps forward and two steps back. The employment numbers have been moving in a better direction, here is a day when we take a step back. I wouldn’t read too much into it beyond the fact that this will be a slow employment recovery. Directionally, the economy is on a mend and we think the markets will continue to be a beneficiary of that in 2010.”

TORSTEN SLOK, SENIOR ECONOMIST, DEUTSCHE BANK, NEW YORK, NEW YORK:

“This report was worse than what we had expected. But at the same time, when looking at the last few months, the trend still shows an improvement. Of course it is disappointing that we did not see job growth, but this series is very volatile and we cannot make a strong judgment based on one month. The market was expecting a Fed rate hike in August and this report obviously does not support that view. Overall, the report is positive for bonds and negative for stocks.”

JOSEPH TREVISANI, CHIEF MARKET ANALYST, FX SOLUTIONS, RIDGEWOOD, NEW JERSEY:

“Despite the weaker than expected December jobs picture in the United States, rising European unemployment, weaker than expected EMU and German retail sales results and continuing sovereign debt issues in Europe should keep the dollar on a mild upswing in the first quarter. The American economy is clearly not going to burst out of the gate with growth and job creation but it will perform better than its major competitors in Europe and Japan and that will be enough for the currency markets; traders will take what they can get.”

BRUCE MCCAIN, CHIEF INVESTMENT STRATEGIST, KEY PRIVATE BANK, CLEVELAND, OHIO:

“For the economy I think the jobs report fits the picture that we have seen of a hesitant recovery.

“For the Fed it suggests that employment is going to be much more difficult to get back on track than at least the optimists suggest.

“For the Treasury market it takes a little bit of pressure off at the long end (where) bond investors have been coming to grips with the fear that recovery will also bring heightened inflation.”

KEITH HEMBRE, CHIEF ECONOMIST, FIRST AMERICAN FUNDS, MINNEAPOLIS, MINNESOTA:

“There’s probably some statistical noise around the extra week in November, maybe capturing some of the December numbers. Looking at the two months together, you’ve got a decline of about 40,000 on average. That would seem to fit with the pattern of less weakness in the labor market but yet not to the point where we’re totally stabilized and starting to add jobs again.

“Fed tightening is quite some ways off.

“It would seem that they would be getting ahead of themselves a little bit if the first time we see a positive print they are ready to start making policy adjustments.”

ROBERT MACINTOSH, CHIEF ECONOMIST, EATON VANCE CORP, BOSTON:

“The number for December was worse than had been expected but the revision to November to make it positive is probably a big deal. If you add it all up it is telling you that there is a slow but steady improvement going on. There is a slow, steady improvement that is so slow that you don’t need to worry about inflation.”

AMELIA BOURDEAU, SENIOR CURRENCY STRATEGIST, UBS, STAMFORD, CONNECTICUT:

“It was disappointing. The market had been looking for a flat to slightly positive result and investors had been wondering whether or not the market would price in rate hikes sooner than expected. That won’t be the case. So what we’re getting is a weak dollar reaction. I think we’ll see selective risk-seeking now, as this number will suggest the Fed won’t be hiking rates earlier than the second half.”

VASSILI SEREBRIAKOV, CURRENCY STRATEGIST, WELLS FARGO BANK, NEW YORK:

“The headline number is worse-than-expected and in our view this is more of a pause rather than a reversal in the outlook for the job situation. The breakdown was a bit more encouraging but altogether this report will probably work against the more optimistic expectations on the U.S. economy.

“It is negative for the dollar, and we are seeing it getting weaker. But we don’t expect to see a complete reversal in the dollar gains from last month based solely on this report. We need more data points.”

DAN COOK, SENIOR MARKET ANALYST, IG MARKETS, CHICAGO:

“It’s a surprise. I didn’t think we’d see something like this until February. I thought we’d have more temporary workers, and the other job indicators we had seemed fairly positive. I’d expect to see a bit of pressure today. Average workweek hours remain at a low level, which tells no one really has an incentive to hire.

“I thought we’d see the unemployment rate tick up, which it didn’t, though 10 percent still isn’t a good level. All in all, I really don’t think that we’ll see a big move by the end of the session because of this. Last month people had a hard time believing the loss of 11,000 number we had, no one thought that was accurate coming from the 100,000 level we had a few months ago. 85,000 isn’t a bad number considering where we were coming from a few months ago, but its still not where we want to be.”

WARD MCCARTHY, ECONOMIST, JEFFERIES & CO, NEW YORK:

“The nonfarm payroll number was weaker than expected in December; however November was revised up, suggesting that things are getting better and of course it was the first positive reading of the cycle.

“The Fed’s not going to change anything for a long time in the future and this just kind of keeps that on track.

“Treasuries should like it.”

MARKET REACTION: STOCKS: U.S. stock index futures turn negative BONDS: U.S. Treasury debt prices turn positive DOLLAR: U.S. dollar falls versus euro