The market shrugged off decent news on the U.S. economy yesterday and prices ended higher as players began to set their sights on the November employment report.
The 30-year bond finished 1/2 point higher yesterday, to yield 6.25%.
The market sustained a modest correction as players digested Tuesday's sharp sell-off and took solace from the fact that economic reports released yesterday failed to deviate from expectations.
Instead, players looked ahead to the jobs report, which will provide the market with its first comprehensive view of the economy's performance last month.
Participants believe the market has reached a near-term bottom and that prices will hold in current ranges until investors see if the recent acceleration in economic activity is translating into job growth.
"Clearly the economy is on a higher growth path but the question is whether the employment sector is benefiting from that growth," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, Inc. in Chicago. "We'll find the answer in Friday's report."
Economists polled by The Bond Buyer generally expect a 180,000 increase in non-farm jobs. Wesbury comes in on the high-side of the range of forecasts, predicting an increase of 205,000.
The absence of an upward revision in the Commerce Department's third quarter gross domestic product report provided the market with little trading impetus yesterday. Third-quarter GDP was revised to a rise of 2.7% from a 2.8% increase.
Commerce also reported that construction spending was up a solid 2.5% in October, confirming strength in the housing and construction sectors of the economy.
Equally underwhelming in market impact was an as-expected increase in the National Association of Purchasing Management index. The NAPM index rose to 55.7 in November from 53.8 in October.
Economists said yesterday's reports did little more than confirm other recent signs of improvement in the economy and failed to alter their view that overall growth will post healthy increases in the fourth quarter of 1993.
"The reports didn't surprise the market to the upside as many had feared, and they showed more of the same," said Mary Dennis, an economist at Merrill Lynch Government Securities.
Overall, the fundamentals continue to paint an optimistic picture of economic growth. Pervasive sips of growth have put fixed-income investors on the defensive in recent weeks and placed increased emphasis on economic reports. While the market has already built in expectations for strong growth in the fourth quarter of 1993, observers say Treasuries remain extremely vulnerable to further hints of strength and higher inflation.
Inflation has yet to pose a significant threat, but observers believe the potential is there. The great debt market rally of 1993 was predicated on the belief that the overall inflation rate was moving lower. But in recent weeks, upward pressures in some inflation indicators have dealt a sobering blow to the bond market and supported the notion that inflation remains low, but not dead.
Keeping the market from testing recent lows is the belief that the current acceleration in economic activity will be short-lived and that growth will stall in the first and second quarters of 1994. Observers point to a number of factors that will tend to hinder any pickup in economic growth next year.
According to Donald Fine, chief market analyst at Chase Securities Inc., those factors include uncertainty over upcoming health care reform and higher taxes, ongoing corporate restructuring the scale-back in the defense industry, the weak commercial real estate market, and the lack of new and innovative consumer products.
In futures, the December contract ended up 11/32 to 115.27.
