The question is: did munis move if nobody was in to see them?

Treasuries sacrificed morning gains derived from a weak August employment report to end lower Friday, but the municipal market proved a harder call. One analyst said yields on highgrade municipal issues improved slightly, while dollar bond prices ended unchanged to up 1/8 point. The market overall had been up as much a 3/8 Friday morning, he said. Activity was moderate in the morning, but turned "absolutely dead" by afternoon, the analyst said. A few traders however, pegged the market lower. "Some people, I think, were paying attention to the Columbia inflation index," one trader said. Though he judged the market unchanged to down 1/4 point, the trader said mere was "nothing really to prove it." Despite the weakness he observed Friday, the trader sounded an optimistic note for this week.

"Technically, we are in a pretty decent situation," he said, adding, "Next week the calendar is nonexistent." In addition, figures last week showed "slightly positive" flows into municipal bond funds, he said.

A second trader judged the market down by 1/4 point, but said "there's just no way to verify that because there's been no active trading going on."

In the government market, the 30 year Treasury bond surrendered big morning gains to finish the day down 1/2 point to yield 7.48% In debt futures, the December municipal contract was down nearly 3/8 point to 90 1/32. Friday's December MOB spread was negative 392, compared with negative 397 on Thursday.

While the August employment report limped in under expectations, investors fear the pace of economic growth may not be slow enough to rein m inflation, according to John Lonski, senior economist at Moody's Investors Service.

"Investors believe that the employment report significantly understates the long-term pace of economic activity," Lonski said, "The smaller-than-expected increase by nonfarm payrolls in August is generally being viewed as a short-lived aberration."

The economist added that the September report could see bigger jobs growth now with prospects for health care legislation this year "having all but disappeared." The uncertainty that had been burdening hiring decisions has now been lessened, he said.

The Labor Department Friday reported a 179,000 increase in nonfarm payroll jobs, much lower than the 235,000 increase economists had projected.

Despite the weak jobs report, bonds lost ground Friday due to fears that inflation is on the rise, Lonski said. The economist added that the U.S. economy could be in for a bout of "stagration," during which "slower economic growth is accompanied by faster price growth," he said.

Among recent inflation flags, Lonski pointed to Columbia University's Center for International Business Cycle Research's leading inflation index.

Lakshman Achuthan, a research economist at the Center, said the index reached a five-year high last month, rising to a preliminary level of 111.4 in August from a revised 109.5 in July.

Particularly notable was the fact that all four components of the report showed inflation rising, he said.

The index also showed a smoothed annualized growth rate of 11.7% in August, which marked a 10-year high, Achuthan said.

"That growth rate places emphasis on the most recent value of the index, and is particularly useful in identifying turning points," he said.

Moody's Lonski also cited the Journal of Commerce's Industrial Materials Index, which has increased 11.8% from the end of August 1993 to the end of last month. Year to date, the index has increased 13.2%, Lonski said.

Also, Moody's Index of Industrial Metals Prices has increased 22.7% from Aug. 31, 1993 to Aug. 31 of this year, and 17.7% year to date.

Both the Journal of Commerce's and Moody's indexes are at their highest levels since October 1990, Lonski said.

While Friday's employment report is consistent with third-quarter gross domestic product growth of not more than 2.5%, Lonski economist warned that participants should not count on a slowing economy to keep inflation at bay.

He noted that motor vehicle production rose sharply in August. In addition, railroad freight traffic is at an all-time high, despite competition from other transportation alternatives, Lonski said. Over the past four weeks, rail shipments of chemicals were up 7%, motor vehicles were up 24%, coal was up 16%, and lumber was up 9%.

"The heaviest rail freight traffic on record reflects a still vigorous pace of manufacturing activity," he said. "I don't think growth is going to decline by what is necessary to reduce inflation."

Lonski added that an expected rebound by exports later in 1994 and throughout 1995 should not be overlooked.

"The foreign demand for U.S. [products] is bound to rise in response to the further strength of the European and Japanese economies as well as the now cheaper dollar exchange rate," the economist said.

In other news Friday, the 30-day visible supply of municipal bonds totaled $1.69 billion, up $90.1 million from Thursday. That comprised $1.18 billion of competitive bonds, up $97.7 million from Thursday, and $509 million of negotiated bonds, a 1994 low and down $7.6 million from Thursday. Friday's negotiated component was at the lowest level since May 28, 1992, when it was $297 million.

Also Friday, Standard & Poor's Blue List of municipal bonds declined $54.1 million, to $1.65 billion.

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