New claims for unemployment benefits dropped more than expected last week to touch their lowest level in more than two years, suggesting the labor market recovery was gaining strength.

KEY POINTS: * Initial claims for state unemployment benefits fell 34,000 to a seasonally adjusted 388,000, the lowest reading since early July 2008, the Labor Department said on Thursday. * That was well below economists' expectations for 415,000. * The prior week's claims figure was revised modestly up to 422,000 from the previously reported 420,000. * A Labor Department official said there was nothing unusual in the state-level data and described the report as clean.

COMMENTS:

PETER JANKOVSKIS, CO-CHIEF INVESTMENT OFFICER AT OAKBROOK

INVESTMENTS LLC IN LISLE, ILLINOIS:

It's a pretty impressive number, dropping below 400,000 for the first time in quite a while. One thing to keep in mind is that we're going through the holiday season where there's a lot of temporary hiring takes place and I know that this data is typically adjusted for that but you never really know how good those adjustments are. So it will be interesting to see once we get past the holiday season if this holds up.

IAN LYNGEN, SENIOR GOVERNMENT BOND STRATEGIST, CRT CAPITAL

GROUP, STAMFORD, CONNECTICUT:

Overall, signs of an improving labor market but the year-end volatility of the series undermines its reliability and the (Treasuries) market is trading it that way -- selling off only slightly, finding support, and firming back from the lows.

HUGH JOHNSON, CHIEF INVESTMENT OFFICER OF HUGH JOHNSON ADVISORS

LLC IN ALBANY, NEW YORK:

The claims numbers are a good number, but they are very volatile and unpredictable, that's the main thing. The second thing is they are very consistent with the view that employment conditions are improving, but at a very anemic pace, so the December payroll number should be certainly better than the November number and that would be consistent with the view that the economy as measured by employment is improving but at a very slow pace. Even though this is a good number, even though the decrease is more than estimates to 388,000, it's not very good at this stage of a recovery.

ADAM SARHAN, CHIEF EXECUTIVE OF SARHAN CAPITAL IN NEW YORK:

This adds to the idea that the jobs picture is improving enough to justify the recent run we've seen in the market from a valuation standpoint. This is another feather in the cap of the idea of recovery, but futures haven't moved much, same as how they haven't moved much in the past two weeks. We had a big move in the first half of the month, and since then investors are happy and just want to protect those gains. They don't want to give anything back. All movement has been muted until next year.

MARKET REACTION: STOCKS: Stock index futures trim losses after the data. BONDS: U.S. Treasury bond prices extend losses. FOREX: The dollar trimmed its losses versus the yen.

Unemployment